Item 1. Business. ------ -------- THE COMPANY
GENERAL
The Company is a financial services company principally engaged, through its subsidiaries, in personal and commercial lines of property and casualty insurance, life and health insurance primarily marketed directly to older individuals, banking and lending, incentive services and manufacturing. The Company concentrates on profitability and maximizing cash flow in order to build long-term shareholder value, rather than emphasizing volume or market share. Shareholders' equity has grown from a deficit of approximately $7,657,000 at December 31, 1978 (prior to the acquisition of control of and significant ownership interest in the Company by both the Company's Chairman and President), to a positive shareholders' equity of approximately $907,856,000 at December 31, 1993, equal to a book value per common share of negative $.22 at December 31, 1978 and $32.54 at December 31, 1993, respectively. Income before income taxes and the cumulative effects of accounting changes for 1993 was $176,868,000, the highest in the history of the Company.
The Company's principal operations are its insurance businesses, where it is a specialty markets provider of property and casualty and life insurance products to niche markets. The Company's principal personal lines insurance products are automobile insurance, homeowners insurance, graded benefit life insurance marketed primarily to the age 50-and-over population and variable annuity products. The Company's principal commercial lines are property and casualty products provided for multi-family residential real estate, retail establishments, and taxicabs in the New York metropolitan area. For the year ended December 31, 1993, the Company's insurance segments contributed approximately 80% of total revenue and, at December 31, 1993, constituted approximately 81% of consolidated assets.
The Company's insurance subsidiaries have a diversified investment portfolio of securities, substantially all of which are issued or guaranteed by the U.S. Treasury or by U.S. governmental agencies or are rated "investment grade" by Moody's Investors Service Inc. ("Moody's") and/or Standard & Poor's Corporation ("S&P"). Investments in mortgage loans, real estate and non-investment grade securities represented in the aggregate less than 1% of the insurance subsidiaries' aggregate portfolio at December 31, 1993.
The Company's banking and lending operations primarily consist of making instalment loans funded by customer banking deposits ("Deposits") insured by the Federal Deposit Insurance Company (the "FDIC"). The Company has established a niche market for automobile loans to individuals with poor credit histories. Based on its experience with such loans, the Company concluded that excellent opportunities exist for a successful expansion of this business. Accordingly, during 1993 the Company increased, on a controlled basis, its investment in such loans. The Company intends to expand this business in 1994. The Company's incentive services operations consist primarily of trading stamp operations. The Company's manufacturing operations primarily manufacture products for the "do-it-yourself" home improvement market and for industrial and agricultural markets.
At December 31, 1993, the Company had aggregate minimum tax loss carryforwards of approximately $197,000,000. The amount and availability of tax loss carryforwards are subject to certain qualifications, limitations and uncertainties, including, with respect to its consolidated subsidiary, Phlcorp, Inc. ("Phlcorp"), tax sharing payments pursuant to a tax settlement agreement with the Internal Revenue Service and the Department of Justice.
The Company also has investments, including non-controlling equity interests representing more than 5% of the outstanding capital stock of several public companies. Additionally, the Company continuously
evaluates the retention and disposition of its existing operations and investigates possible acquisitions of new businesses in order to maximize its ultimate economic value to shareholders.
As used herein, the term "Company" refers to Leucadia National Corporation, a New York corporation organized in 1968, and its subsidiaries, except as the context otherwise may require.
Financial Information About Industry Segments ---------------------------------------------
Certain information concerning the Company's operations is presented in the following table.
INSURANCE OPERATIONS
GENERAL
The Company engages in the personal property and casualty and the life and health insurance businesses on a nationwide basis and specializes in the commercial property and casualty insurance business in the New York metropolitan area. The Company's principal insurance subsidiaries consist of the CP Group, Charter National Life Insurance Company ("Charter") and the Empire Group. The CP Group consists of Colonial Penn Life Insurance Company ("CPL"), Colonial Penn Franklin Insurance Company ("Franklin"), Colonial Penn Heritage Insurance Company ("Heritage"), Colonial Penn Insurance Company ("CPI") and Intramerica Life Insurance Company ("Intramerica"). The Empire Group consists of Empire Insurance Company ("Empire"), Empire's subsidiary, Allcity Insurance Company ("Allcity") and Colonial Penn Madison Insurance Company ("Madison"). In conducting its insurance operations, the Company focuses primarily on profitability and persistency rather than volume.
A.M. Best Company ("Best"), an independent rating agency, has rated CPL, Charter, and Empire "A" (excellent), Intramerica "A-" (excellent) and CPI, Franklin and Heritage "NA-5" (indicating a previously rated company which has experienced a significant change in ownership, management or book of business, as a result of which its operating experience may be interrupted). Demotech, Inc., an independent rating agency, has rated CPI, Franklin and Heritage "A" (exceptional). Ratings may be revised or withdrawn at any time.
Restructuring of CP Group
The Company's insurance operations were significantly increased as a result of the Company's acquisition of CPG on August 16, 1991. The Company acquired CPG for an aggregate cash purchase price of approximately $128,000,000, including costs. For the year ended December 31, 1992 and for the period from August 16, 1991 to December 31, 1991, CPG contributed approximately $131,757,000 and $59,995,000, respectively, to the Company's consolidated pre-tax income, including gains on sales of securities (approximately $23,543,000 and $16,323,000, respectively) and exclusive of financing costs. Due to changes in the Company's insurance operations it is not practicable to provide meaningful comparable information for CPG for 1993. At the acquisition date, after giving effect to a cash contribution by the seller prior to the closing of approximately $49,827,000, CPG had unaudited shareholder's equity, determined in accordance with generally accepted accounting principles ("GAAP"), of approximately $391,000,000 (or approximately $263,000,000 in excess of the purchase price) and the CP Group had combined unaudited statutory capital and surplus for regulatory purposes determined in accordance with statutory accounting principles ("SAP") of approximately $225,100,000. This acquisition was accounted for as a purchase and the consolidated financial statements included in this Report include the operations of CPG since August 16, 1991.
Historically, the CP Group marketed most of its insurance products directly to individuals without the use of commissioned agents through "direct response marketing" methods. Direct response marketing includes any form of marketing in which a company and a customer deal directly with each other rather than through an insurance agent. Direct response marketing methods include print advertising, radio and television advertising, direct mail, telemarketing and customer referral programs. Typical direct response marketing campaigns utilize a variety of these methods in a planned sequence. The costs of certain of these marketing efforts were substantial and the Company believes were not justified by the CP Group's previous operating results. As a result, during the Company's restructuring of the CP Group, the CP Group substantially refined and reduced its marketing efforts. The Company believes that smaller and more focused direct response marketing campaigns have resulted in lower unit costs, resulting in more profitable operations, albeit with an initial substantial
reduction in new business. The Company believes that as a result of its restructuring efforts, which are complete, together with the Company's operating experience, the Colonial Penn P&C Group (as defined below) has become a low cost provider of automobile and homeowners insurance to its niche markets, enabling it to charge competitive rates, which should aid the Colonial Penn P&C Group in obtaining new business and retaining existing business. Furthermore, as a result of the Colonial Penn life insurance companies' favorable experience in obtaining new business, the Company has increased its direct response marketing of graded benefit life products, generating significant new premiums at acceptable acquisition costs.
The Company believes that its restructuring efforts described above have increased the CP Group's profitability without impairing service to existing policyholders.
PROPERTY AND CASUALTY INSURANCE
The Company's principal property and casualty insurance operations are conducted through CPI, Franklin and Heritage (collectively, the "Colonial Penn P&C Group") and through the Empire Group. The Colonial Penn P&C Group, which maintains its headquarters in Valley Forge, Pennsylvania, is licensed in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands and writes insurance throughout most of the United States. The Colonial Penn P&C Group has regional offices in Devon, Pennsylvania, Tampa, Florida and Phoenix, Arizona. The Empire Group is licensed in twenty- three states and operates primarily in the New York metropolitan area.
During the year ended December 31, 1993, approximately 80%, 13% and 7% of net earned premiums of the Company's property and casualty insurance operations were derived from personal and commercial automobile lines of insurance, commercial lines of insurance (other than automobile insurance) and personal lines of insurance (other than automobile insurance), respectively. Total property and casualty insurance net earned premiums for the year ended December 31, 1993 aggregated approximately $712,000,000, of which approximately $452,600,000 was attributable to the Colonial Penn P&C Group.
Set forth below is certain statistical information for the Company's property and casualty operations for each of the three years in the period ended December 31, 1993 prepared in accordance with GAAP and SAP. The Combined Ratio is the sum of the Loss Ratio and the Expense Ratio. A Combined Ratio below 100% indicates an underwriting profit and a Combined Ratio above 100% indicates an underwriting loss. The Loss Ratio is the ratio of losses and loss adjustment expenses incurred to net premiums earned. Incurred losses include a provision for claims which have occurred but have not yet been reported. The Expense Ratio is the ratio of underwriting expenses (policy acquisition costs, including commissions, and a portion of administrative, general and other expenses attributable to underwriting operations) to net premiums written, if determined in accordance with SAP, or to net premiums earned, if determined in accordance with GAAP. Certain accident and health insurance business, which is included in the statutory results of operations of the property and casualty insurance segment and is reflected in the SAP Combined Ratio, is reported in the life insurance segment for financial reporting purposes and therefore is not included in the GAAP Combined Ratios reflected herein. The Combined Ratio does not reflect the effect of investment income on the results of operations.
The Company believes, based on published reports, that the Colonial Penn P&C Group's SAP Expense Ratio for 1992, the last year for which annual industry data is available, is among the lowest in the industry.
The Colonial Penn P&C Group
The Colonial Penn P&C Group's primary business is providing private passenger automobile and homeowners insurance coverage to the age 50-and-over population. The Colonial Penn P&C Group's goal is to be one of the lowest cost providers to this market.
Substantially all of the policies are written for a one-year period. However, in many states CPI and Franklin offer a "guaranteed lifetime protection" provision in its automobile policies whereby, subject to certain exceptions, policyholders who are age 50 and older are guaranteed that CPI and Franklin will renew their policies at rates then in effect for the insured's appropriate classification.
Net earned premiums for the Colonial Penn P&C Group for the year ended December 31, 1993 were concentrated in the states listed below:
Prior to 1988, CPI wrote as primary insurer or as a reinsurer certain commercial property and casualty insurance business known as "Special Risks." The Special Risks business consisted of a variety of diverse commercial lines including, among other things, general corporate liability policies issued to public and corporate entities, residual value insurance on leased automobiles, collision insurance to car leasing and rental businesses and professional and directors and officers liability insurance. CPI had realized significant losses in the Special Risks business prior to the acquisition date and had provided for significant additional losses from time to time, both as to policy benefits and non-recoverable reinsurance receivables. The nature of most of this insurance involves exposures which can be expected to develop over a relatively long period of time before a definitive determination of ultimate losses and loss adjustment expenses can be established. As a result, losses with respect to this block are particularly difficult to predict accurately. Based in part upon a recently completed independent actuarial review, the Company believes that the policy reserves for the Special Risks block reflected in the consolidated balance sheet at December 31, 1993 (approximately $74,900,000, before reinsurance) are adequate. In evaluating and administering the Special Risks portfolio, the Company has used its experience gained from the management of certain of the WMAC Companies (as defined below), which also involves managing the run-off of a closed block of commercial property and casualty insurance business. The Company intends to manage the run-off of the Special Risks block and does not intend to offer this aspect of commercial lines insurance either as an insurer or reinsurer. The WMAC Companies are certain legal subsidiaries of Phlcorp which are or have been under the control of the Wisconsin Insurance Commissioner due to the rehabilitation and liquidation proceedings (which were initiated prior to the Company's acquisition of Phlcorp) of certain of Phlcorp's non-consolidated subsidiaries (the "WMAC Companies").
The Empire Group
The Empire Group provides personal insurance coverage to automobile owners and homeowners and commercial insurance primarily for residential real estate, restaurants, retail establishments, taxicabs (both medallion and radio-controlled) and several types of service contractors.
For the years ended December 31, 1993, 1992 and 1991, net earned premiums and commissions for the Empire Group aggregated approximately $259,400,000, $243,100,000 and $210,700,000, respectively. Substantially all of the Empire Group policies are written in New York for a one-year period; however, some policies are issued for three years with provision for re-rating the policy for premium purposes at each policy anniversary date. The Empire Group is licensed in New York to write all lines of insurance that may be written by a property and casualty insurer except residual value, credit, unemployment, animal and marine protection and indemnity insurance and ocean marine insurance.
The Empire Group has acquired blocks of private passenger automobile and commercial automobile assigned risk business from insurance companies required or volunteering to terminate such coverage. These contractual arrangements provide for fees to the Empire Group within parameters established by the New York Insurance Department. In addition, the Empire Group acts for a fee as a "servicing carrier," providing administrative services, including claims processing, underwriting and collection activities, for the New York Public Automobile Pool. This latter arrangement does not involve the assumption of any material underwriting risk by the Empire Group.
As is true with the Company's other insurance subsidiaries, the Empire Group's marketing strategy emphasizes profitability rather than volume. The business of the Empire Group is produced through general agents, local agents and insurance brokers, who are compensated for their services by payment of commissions on the premiums they generate. There are five general agents, one of which is owned by Empire, and approximately 426 local agents and insurance brokers presently acting under agreements with the Empire Group. These agents and brokers also represent other competing insurance companies.
Losses and Loss Adjustment Expenses
Liabilities for unpaid losses, which are not discounted (except for certain workers' compensation liabilities), and loss adjustment expenses ("LAE") are determined using case-basis evaluations, statistical analyses and estimates for salvage and subrogation recoverable and represent estimates of the ultimate claim costs of all unpaid losses and LAE through December 31 of each year. These estimates are subject to the effect of trends in future claim severity and frequency experience. Adjustments to such estimates are made from time to time to represent changes in loss experience (and are reflected in current earnings).
In the following table, the liability for losses and LAE of the Company's property and casualty insurance subsidiaries are reconciled for each of the three years ended December 31, 1993. Included therein are current year data and prior year development.
The Company's property and casualty insurance subsidiaries rely upon standard actuarial ultimate loss projection techniques to obtain estimates of liabilities for losses and LAE. These projections include the extrapolation of both losses paid and incurred by business line and accident year and implicitly consider the impact of inflation and claims settlement patterns upon ultimate claim costs based upon historical patterns. In addition, methods based upon average loss costs, reported claim counts and pure premiums are reviewed in order to obtain a consistent range of estimates for setting the reserve levels. For further input, loss reserve committees periodically
mix, claims management and legal climate. Such input sometimes leads to modifications of the statistical projections.
The Company's property and casualty insurance subsidiaries' liability for losses and LAE as of December 31, 1993 was $910,657,000 determined in accordance with SAP and $1,051,868,000 determined in accordance with GAAP. The reconciling differences principally relate to liabilities assumed by reinsurers, which are not deducted from GAAP liabilities (approximately $163,000,000) reduced by approximately $15,000,000, net, included in accounts other than property and casualty loss reserves for GAAP and approximately $6,000,000 for salvage and subrogation.
The tables below present the development of balance sheet liabilities for 1983 through 1993 and include periods prior to acquisition for each of the Empire Group and the Colonial Penn P&C Group. The adjusted liability line of the table indicates the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and LAE for claims that were unpaid at each annual balance sheet date, including provisions for losses estimated to have been incurred but not reported to the Company's property and casualty companies. The middle section of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims. The lower section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. Thus, for the year 1985, the Empire Group table indicates that an estimated $8,887,000 of losses remain unpaid as of December 31, 1993 (the difference between the currently estimated $155,727,000 of re- estimated liability for that year and the $146,840,000 paid through December 31, 1993).
The effect on income during the past three years of changes in estimates of the liabilities for losses and LAE is shown in the reconciliation table above.
The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. For example, the initial 1983 liability estimate indicated on the Empire Group table ($153,342,000) has been re-estimated during the course of the succeeding ten years, resulting in a re-estimated liability at December 31, 1993 of $131,556,000, or a redundancy of $21,786,000. If the re-estimation of liability exceeded the liability initially established, a cumulative deficiency would be indicated.
As noted in the Colonial Penn P&C Group table below, the loss and LAE development of the Colonial Penn P&C Group from 1985 through 1989 resulted in cumulative deficiencies, indicating that the established reserves for policy claims and LAE were less than subsequently determined to be necessary. The Colonial Penn P&C Group provided additional reserves related to prior years' claims of approximately $107,100,000 in 1990 and $35,100,000 in 1989. Prior to its acquisition by the Company, and in part as a result of the unfavorable loss development, the Colonial Penn P&C Group reviewed its loss ratio and experience on a state-by-state basis, and initiated procedures to improve underwriting standards, increase rates (subject to necessary regulatory approvals) and withdraw from certain states with unfavorable experience, where permissible, on financially acceptable terms. The Company used the knowledge and experience gained from managing Empire and certain of the WMAC Companies to review the adequacy of the Colonial Penn P&C Group reserves and concluded that the existing reserves were adequate.
The Company believes that the Empire Group's conservatism in establishing reserves and CP Group's conservatism and improved claims management procedures since acquisition have contributed significantly to the creation of the redundancies included in the tables below.
In evaluating this information, it should be noted that each amount shown for "cumulative redundancy (deficiency)" includes the effects of all changes in amounts for prior periods. For example, the amount of the redundancy (deficiency) related to losses settled in 1987, but incurred in 1983, will be included in the cumulative redundancy (deficiency) amount for 1983, 1984, 1985 and 1986. This table is not intended to and does not present accident or policy year loss and LAE development data. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on these tables.
Because of substantial differences in the development of reserves of the Colonial Penn P&C Group and the Empire Group, loss and LAE development data of the Colonial Penn P&C Group and the Empire Group are each presented separately.
LIFE INSURANCE
The Company's principal life insurance subsidiaries are Charter, CPL and Intramerica. For the year ended December 31, 1993, the Company's principal life insurance products were "Graded Benefit Life" and variable annuity insurance products. Through its various subsidiaries, the Company is licensed in all 50 states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands and generally writes its life and health products in most of the United States. Total direct life insurance in force as of December 31, 1993 was approximately $2.7 billion.
The following table reflects premiums earned on the Company's life and health insurance products (except investment oriented products) and premium receipts on variable annuity and other investment oriented products for each of the three years in the period ended December 31, 1993. Variable annuity and other investment oriented product premium receipts are not recorded as revenue under GAAP but are recorded in a manner similar to a deposit, and are included below.
Life and Health Insurance Products
Graded Benefit Life. "Graded Benefit Life" is a guaranteed-issue product. These modified-benefit, whole life policies are offered on an individual basis primarily to persons age 50 to 80, principally in face amounts of $350 to $10,000, without medical examination or evidence of insurability. Premiums are paid as frequently as monthly. Graded Benefit Life is marketed using direct response marketing techniques. New policyholder leads are generated primarily from television advertisements. Consistent with its present marketing program, the Company intends to concentrate its marketing efforts towards soliciting new policyholders where the cost is justified, upgrading existing policyholders' policy packages and obtaining referrals from existing policyholders. The Company believes that premiums on new business written in 1994 will exceed reductions due to death and lapses.
During late l993, the Company began offering certain policyholders a rider to their existing Graded Benefit Life policy. This "Accelerated Benefit Rider" pays a policy benefit if the policyholder is suffering from a terminal illness. Initial results are promising and the Company expects to offer this rider to additional policyholders on a limited basis. The Company is exploring the development of other new products.
Investment Oriented Products. During 1993, the principal investment oriented product offered by the Company's life insurance subsidiaries was a no-load variable annuity ("VA") product. The VA product is marketed as an investment vehicle to individuals seeking to defer, for federal income tax purposes, the annual increase in their account balance. Premiums from this VA product either are invested at the policyholders' election in unaffiliated mutual funds where the policyholder bears the entire investment risk or in a fixed account where the funds earn interest at rates determined by the Company. The Company's VA product is currently marketed in conjunction with a mutual fund manager. The Company is pursuing cooperative arrangements with other money managers to distribute its VA product.
Prior to 1991, the investment oriented products sold by the Company included, among others, single premium deferred annuity ("SPDA") and single premium whole life ("SPWL") products. During 1992, the Company concluded that the profitability of its existing blocks of SPDA and SPWL businesses were unlikely to achieve acceptable operating results in the future. For a discussion of the reinsurance of certain of these products, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Medicare Supplement. Medicare Supplement products are health insurance products primarily designed to supplement medicare benefits for the older population on an underwritten guaranteed renewable basis. Prior to l993, the Company's Medicare Supplement products were marketed primarily through insurance agents. As a result of recent federal and state legislation mandating standardization of Medicare Supplement products (thereby enhancing an individual's ability to compare various Medicare Supplement products), this market has become more competitive. The Company is no longer actively marketing Medicare Supplement products, but is offering renewals of its non- standardized products to its policyholders. National health care reforms are currently under consideration. It is not possible to predict whether any reforms will be enacted, and, if enacted, what effect such reforms might have on the Company's Medicare Supplement products.
INSURANCE OPERATIONS - GENERAL
Investments
Investment activities represent a significant part of the Company's insurance related revenues and profitability. Investments are managed by the Company's investment advisors under the direction of, and upon consultation with, the Company's several investment committees.
The Company's insurance subsidiaries have a diversified investment portfolio of securities substantially all of which are rated "investment grade" by Moody's and/or S&P or issued or guaranteed by the U.S. Treasury or by governmental agencies. The Company's insurance subsidiaries do not generally invest in less than "investment grade" or "non-rated" securities, real estate or mortgages, although the Company's insurance subsidiaries may from time to time make such investments in amounts not expected to be material. For additional information concerning the Company's investments, see "Notes to Consolidated Financial Statements."
The composition of the Company's insurance subsidiaries' investment portfolio as of December 31, 1993 and 1992 was as follows:
Reinsurance
The Company currently obtains reinsurance for certain of its life insurance policies and property and casualty insurance policies. Among the Company's major reinsurers (and their respective Best ratings) are General Reinsurance Corporation (A++), Lincoln National Life Insurance Co. (A+), Munich American Reinsurance Company (A++) and Hartford Fire Insurance Company (A+). Reinsurance is obtained for investment oriented products for face amounts in excess of $500,000 per life. The life insurance subsidiaries generally do not obtain reinsurance for the Graded Benefit Life products because these policies generally do not exceed $10,000 face amount. The Colonial Penn P&C Group obtained reinsurance for casualty risks in excess of $2,000,000 in 1993 ($1,000,000 in 1992). Most Colonial Penn P&C Group automobile policies do not have policy limits in excess of $100,000 per risk and $300,000 per accident. The Empire Group's maximum limit retained for workers' compensation was $500,000 from July 1, 1992 through December 31, 1993 and $200,000 from January 1, 1991 through June 30, 1992 and for other property and casualty lines, the maximum limit retained was $225,000 for 1993 and $175,000 for each of 1992 and 1991. Additionally, the Company's property and casualty insurance subsidiaries have entered into certain excess of loss and catastrophe treaties to protect against certain losses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policy liability, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded. The Company's reinsurance generally has been placed with certain of the largest reinsurance companies, which the Company believes to be financially capable of meeting their respective obligations. However, to the extent that any reinsuring company is unable to meet its obligations, the Company's insurance subsidiaries would be liable for the reinsured risks. Additionally, certain of CPI's Special Risks reinsurers have experienced financial difficulty and some are in rehabilitation proceedings. CPI has
established reserves, which the Company believes are adequate, for nonrecoverable reinsurance on its Special Risks block of insurance.
In 1992, 1993 and 1994, unusually severe natural disasters occurred, including Hurricane Andrew (1992), the Midwest floods and California fires (1993) and the Los Angeles Earthquake (1994). These events have resulted in unprecedented industry-wide losses. The Company's insurance subsidiaries also suffered losses as a result of certain of these occurrences, although reinsurance reduced the economic loss to the Company of Hurricane Andrew. However, as a result of the industry's losses, the Company has seen a notable decrease in the availability of catastrophe reinsurance at reasonable rates, particularly at low levels of deductibility. Although the Company has completed its 1994 reinsurance program at acceptable upper loss limits, the insurance subsidiaries in 1993 and 1994 were unable to obtain 1992 levels of deductibility at reasonable cost. Accordingly, the Company increased its retention of lower level losses. The Company did not incur catastrophic losses in excess of its retained limits in 1993 and to date in 1994. Further, in 1992 the Company did not incur losses in excess of its maximum reinsurance.
Competition
The insurance industry is a highly competitive industry, in which many of the Company's competitors have substantially greater financial resources, larger sales forces, more widespread agency and broker relationships, and more diversified lines of insurance coverage. Additionally, certain competitors market their products with endorsements from affinity groups, while the Company's products are for the most part unendorsed, which may give such other companies a competitive advantage.
VA products are subject to regulation both as insurance policies and as securities. As a result, the introduction of a VA product involves significant regulatory and administrative efforts over a substantial period of time. The Company expects sales of its no-load VA product to be cyclical, generally following the securities markets. The attractiveness of VA products as an investment vehicle is closely linked to the tax status of such products. Typically, increases in account values of VA products are not taxed until distributed in the form of either surrenders or annuity payments. The taxable portion of any such distribution is taxed as ordinary income.
The property and casualty insurance industry has historically been cyclical in nature, with periods of less intense price competi- tion and high underwriting standards generating significant profits, followed by periods of increased price competition and lower under- writing standards resulting in reduced profitability or loss. Price competition has been significant in recent years. The cyclicality and competitive nature of the property and casualty insurance business historically have contributed to significant industry-wide quarter-to- quarter and year-to-year fluctuations in underwriting results and net income. Its profitability is affected by many factors, including rate competition, severity and frequency of claims, interest rates, state regulation, court decisions and judicial climate, all of which are outside the Company's control.
Government Regulation
Insurance companies are subject to detailed regulation and supervision in the states in which they transact business. Such regulation pertains to matters such as approving policy forms and various premium rates, minimum reserves and loss ratio requirements, the type and amount of investments, minimum capital and surplus requirements, granting and revoking licenses to transact business, levels of operations and regulating trade practices. There can be no assurance that such regulatory requirements will not become more stringent in the future and have an adverse effect on the Company's operations. The majority of the Company's property
and casualty insurance operations are in states requiring prior approval by regulators before proposed rates may be implemented. Certain states have indicated that they may change the bases (e.g., age, sex and geographic location) on which rates traditionally have been established. Rates proposed for life insurance generally become effective immediately upon filing. Insurance companies are required to file detailed annual reports with the supervisory agencies in each of the states in which they do business, and are subject to examination by such agencies at any time. Due to the savings and loan crisis and the seizure by state insurance regulators of certain large financially unstable insurance companies, there has been some erosion of confidence in all financial institutions, including insurance companies. Increased regulation of insurance companies at the state level and new regulation at the federal level is possible, although the Company cannot predict the nature or extent of any such regulation.
The National Association of Insurance Commissioners ("NAIC") has adopted model laws incorporating the concept of a "risk based capital" requirement for insurance companies, although the model law is not intended to apply to property and casualty insurance companies until year end 1994 financial statements are available. Generally, Risk Based Capital ("RBC") is designed to measure the adequacy of an insurer's statutory capital in relation to the risks inherent in its business. The RBC formula is used by the states as an early warning tool to identify weakly capitalized companies for the purpose of initiating regulatory action.
The RBC formula develops a risk adjusted target level of statutory surplus for insurers by applying certain factors to various asset, premium and reserve items. Higher factors are applied to more risky items and lower factors are applied to less risky items. Thus, the target level of statutory surplus varies not only as a result of the insurer's size, but also on the risk profile of the insurer's operation.
The RBC model laws provide for four incremental levels of regulatory attention for insurers whose surplus is below the calculated RBC target. These levels of attention range in severity from requiring the insurer to submit a plan for corrective action to actually placing the insurer under regulatory control.
Each of the Company's insurance subsidiaries' RBC ratio as of December 31, 1993 substantially exceeded the minimum requirements.
The NAIC also has adopted various ratios for insurance companies which, in addition to the RBC ratio, are designed to serve as a tool to assist state regulators in discovering potential weakly capitalized companies. Generally, life insurance companies having three or more of such ratios outside their "normal" range may be indicative of a weakly capitalized company. Two of the Company's life insurance subsidiaries, Charter and CPL, had three or more "other than normal" NAIC ratios for the year ended December 31, 1993. Charter had five "other than normal" ratios in l993, four of which resulted from reinsurance of the SPWL block of business described under "Management's Discussion and Analysis of Financial Condition and Results of Operations," while CPL had four "other than normal" ratios in l993, three of which resulted from reinsurance transactions, including a transaction with an affiliate. The Company believes that there are no underlying problems or weaknesses at Charter or CPL and that, in view of the strong capital and RBC ratios of Charter and CPL and their strong and conservative investment portfolios, it is unlikely that material adverse regulatory action will be taken.
On November 8, 1988, California voters passed Proposition 103, an insurance initiative which requires a 20% rollback in insurance rates for policies written or renewed during the twelve month period beginning November 8, 1988 (the "rollback period") and provided that changes in insurance premiums after November 8, 1989 must be submitted for approval by the California Insurance Commissioner prior to implementation. While the Proposition has the most significant impact on automobile insurance, some of its provisions also apply to
other types of property and casualty insurance. In May 1989, the California Supreme Court held that insurance companies may not be deprived of a "fair return." In June 1991, the current California Insurance Commissioner issued revised regulations regarding the rollback period which established an allowable after-tax return of 10% for the rollback period. These regulations were held unconstitutional by the Los Angeles Superior Court in February 1993, because each insurer was entitled to an individual hearing to determine its fair level of profit. The California Insurance Commissioner has appealed this decision, which remains sub judice. The Company has not yet ---------- received any order or determination requiring it to refund any premiums collected. Based upon its operating results in the relevant years, the Company believes the Colonial Penn P&C Group should not be assessed for any rollback rebate and, if assessed a significant amount, intends to vigorously oppose such determination. Voluntary automobile net earned premiums in California represent approximately 8.9% of the Company's total property and casualty net earned premiums. Proposition 103 does not apply to premiums earned on involuntary coverage. It is possible that other states may attempt similar initiatives, although the Company is unable to predict whether and to what extent such regulation may be proposed or adopted.
In early 1990, New Jersey adopted new laws to depopulate the deficit-ridden Automobile Joint Underwriting Association (the "JUA"), the New Jersey insurance pool for high-risk drivers. The New Jersey statute, among other things, abolished the JUA, established the Market Transition Facility (the "MTF") as a temporary successor to the JUA, established quotas for depopulation of the MTF and required all automobile insurers to share in the losses of the MTF based on their depopulation share of the JUA, as set by the New Jersey Department of Insurance. The MTF deficit is currently estimated to be $917 million. Based on that amount, the Colonial Penn P&C Group would be assessed approximately $11,100,000. In February 1994, the Colonial Penn P&C Group paid approximately $5,300,000 of this possible assessment into a court mandated escrow account. The balance of this possible assessment has been provided for in the Company's December 31, 1993 balance sheet. The New Jersey Insurance Department has adopted regulations which would permit an insurer, with the approval of the Insurance Department, to recover amounts paid to the MTF through surcharges to policyholders; however, there can be no assurance that the Colonial Penn P&C Group would be permitted to surcharge its policyholders for all or even part of any assessment.
The Company's insurance subsidiaries are members of state insurance funds which provide certain protection to policyholders of insolvent insurers doing business in those states. Due to insolvencies of certain insurers in recent years, the Company's insurance subsidiaries have been assessed certain amounts which have not been material and are likely to be assessed additional amounts by state insurance funds. The Company believes that it has provided for all anticipated assessments and that any additional assessments will not have a material adverse effect on the Company's financial condition or results of operations.
BANKING AND LENDING
GENERAL
The Company's banking and lending operations primarily are conducted through its national bank subsidiary, American Investment Bank, N.A. ("AIB"); two wholly owned industrial loan corporations (the "ILCs"), American Investment Financial ("AIF") and Governor Financial ("GF"); and Transportation Capital Corp. ("TCC"), a small business investment company, which is a 99% owned subsidiary of the Company. AIB and the ILCs take money market and other non-demand deposits that are eligible for insurance provided by the FDIC within its applicable limitations. At December 31, 1993, AIB and the ILCs had Deposits of $173,365,000 compared to $186,339,000 at December 31, 1992. In January 1994, the deposits and certain
assets of GF were combined into AIF. AIB and AIF currently have several deposit-taking and lending facilities and an administrative office in the Salt Lake City area. TCC, which is not a significant subsidiary of the Company, makes collaterialized loans to operators of medallion taxicabs and limousines.
At December 31, 1993, the Company's consolidated banking and lending operations had outstanding loans (net of unearned finance charges) of $205,744,000 compared to $169,552,000 at December 31, 1992. The increase was financed primarily from proceeds of the sale of the Company's consumer loan offices sold in 1992. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations." At December 31, 1993, approximately 36% were loans to individuals generally collateralized by automobiles; approximately 26% were unsecured loans to individuals acquired from others in connection with investments in limited partnerships; approximately 23% were unsecured loans to executives and professionals; approximately 9% were loans to small business concerns collateralized principally by taxicab medallions and other personal property; approximately 5% of the loans were instalment loans to consumers, substantially all of which were collateralized by real or personal property; and approximately 1% were loans generally collateralized by non-residential real estate.
It is the Company's policy to charge to income an allowance for losses which, based upon management's analysis of numerous factors, including current economic trends, aging of the loan portfolio and historical loss experience, is deemed adequate to cover reasonably expected losses on outstanding loans. At December 31, 1993, the allowance for loan losses for the Company's entire loan portfolio was approximately $8,341,000 or 4.1% of the net outstanding loans, compared to approximately $6,973,000 or 4.1% of net outstanding loans at December 31, 1992.
The funds generated by the Deposits are primarily used to make instalment loans, including collateralized personal automobile loans to individuals who have difficulty in obtaining credit. These automobile loans are made at interest rates above those charged to individuals with good credit histories. In determining which individuals qualify for these loans, the Company takes into account a number of highly selective criteria with respect to the individual as well as the collateral to attempt to minimize the number of defaults. Additionally, the Company monitors these loans and takes prompt possession of the collateral securing such loans in the event of a default. For the three year period ended December 31, 1993, the Company generated an aggregate of approximately $100,754,000 of these loans (approximately $51,000,000 during 1993). At December 31, 1993, the allowance for loan losses for this portfolio was approximately $4,399,000 or 6% of net outstanding loans; actual loss experience has been approximately 1.4% per year of average outstanding loans. The Company is satisfied with the results of this loan portfolio and believes that there is an opportunity for successful growth in this niche market. The Company intends to expand its business in this area.
COMPETITION
The Company's lending operations compete with banks, savings and loan associations and credit unions, many of which are able to offer financial services on very competitive terms, credit card issuers and consumer finance companies. Additionally, substantial national financial services networks have been formed by major brokerage firms, insurance companies, retailers and bank holding companies. Some competitors have substantial local market positions; others are part of large, diversified organizations.
GOVERNMENT REGULATION
The Company's principal lending operations are subject to detailed supervision by state authorities, as well as federal regulation pursuant to the Federal Consumer Credit Protection Act and regulations promulgated
by the Federal Trade Commission. The Company's banking operations are subject to extensive federal and state regulation and supervision by, among others, the Office of the Comptroller of the Currency (the "OCC"), the FDIC and the State of Utah. AIB's primary federal regulator is the OCC, while the primary federal regulator for the ILCs is the FDIC. AIB and AIF have substantially similar assets. With FDIC approval on January 31, 1994, AIF purchased a substantial portion of the assets and assumed all of the deposit liabilities as well as a significant amount of the remaining liabilities of GF. Following this transaction, GF retained its ILC charter but terminated its FDIC insurance and thus its right under Utah law to accept deposits.
The Competitive Equality Banking Act of 1987 ("CEBA") places certain restrictions on the operations and growth of AIB and restricts further acquisitions of banks and savings institutions by the Company. CEBA does not restrict the growth of the ILCs as currently operated.
INCENTIVE SERVICES
GENERAL
For the year ended December 31, 1993, the Company's incentive services business was conducted by The Sperry and Hutchinson Company, Inc. ("S&H"). In early 1993, the Company contributed the net assets of S&H Motivation, Inc. ("SHM") to a new joint venture formed with an unrelated motivation services company and provided a $3,000,000 line of credit to the joint venture in exchange for a 45% equity interest in the joint venture. Operations of the motivation services business historically have not been significant and are not expected to be significant in the future.
S&H distributes Green Stamps to retailers under license agreements that give the retailer an exclusive franchise for a particular category of retail establishment in a particular geographic area. Customers of participating retailers receive Green Stamps when they purchase goods and services.
Since 1969, when annual sales for the trading stamp industry as a whole peaked, S&H's trading stamp business has been steadily declining. The Company believes that there is a substantial likelihood that the declining trend in trading stamp sales will continue. The Company has attempted, but has not succeeded in, developing new uses for its trading stamp business.
REDEMPTION RESERVE-LIQUIDITY
When trading stamps are sold, S&H receives cash and accrues as a liability the estimated obligation to deliver merchandise and/or cash associated with those stamps. Demands for redemption generally occur over a considerable period of time. The loss of customers usually results in an acceleration of redemptions and requires the expenditure of available funds to provide the merchandise and/or cash required for such redemptions.
At December 31, 1993 and 1992, the liability for unredeemed trading stamps reflected in the Company's consolidated balance sheets was approximately $58,541,000 and $74,964,000, respectively. The most recent statistical studies of trading stamp redemptions have indicated that the historical pattern of redemptions has changed and that the recorded liability for unredeemed trading stamps is in excess of the amount that ultimately will be required to redeem trading stamps outstanding. The amount of this excess may be different than indicated by these studies. Accordingly, the Company is amortizing the apparent excess over
a five year period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
COMPETITION
The Company's incentive services businesses compete primarily with other incentive companies and other forms of promotional and merchandising techniques other than trading stamps. Retail establish- ments, for example, frequently utilize store coupons, special advertising programs, games, extra services and related programs.
MANUFACTURING
The Company's manufacturing operations consist primarily of the manufacture of bathroom vanities and related products for the "do-it- yourself" market, through its General Marble division, and padding, absorbent, erosion control and proprietary plastic netting products for various industrial and agricultural uses, through its Fibers and Plastics divisions.
In 1990, the Company acquired a factory in North Carolina and in 1991 equipped it with state-of-the-art manufacturing machinery for its General Marble division. This facility was designed to enable the Company to improve the quality of its products, to manufacture certain of its products on a "ready-to-assemble" basis and to expand capacity. General Marble's products are sold through manufacturers' representatives primarily to home improvement centers. The inefficiencies and start up costs associated with bringing this facility to full production, together with pricing pressures, have adversely affected results of operations for this segment.
The Fibers and Plastics divisions manufacture and market padding, absorbent and erosion control products, which may be reinforced with plastic netting, for the furniture, automotive, erosion control and maintenance industries and thermoplastic netting used for a variety of purposes including, among other things, construction, packaging, agriculture, carpet backing and filtration.
The manufacturing operations are subject to a high degree of competition, generally on the basis of price, service and quality. Additionally, these manufacturing operations are dependent on cyclical industries, including the construction industry, which have been adversely effected by recent economic conditions. Through its various manufacturing divisions, the Company holds patents on certain improvements to the basic manufacturing processes and on applications thereof. The Company believes that the expiration of these patents, individually or in the aggregate, is unlikely to have a material effect on the business of its manufacturing operations.
OTHER OPERATIONS AND INVESTMENTS
The Company also owns non-controlling equity interests representing, at December 31, 1993, more than 5% of the outstanding capital stock of each of the following domestic public companies: Carmike Cinemas, Inc. ("Carmike") (approximately 9% of Class A shares), Jones Plumbing Systems, Inc. ("Jones") (approximately 21%), Jordan Industries, Inc. ("JII") (approximately 11%) and Olympus Capital Corporation (approximately 18%).
The Company owns interests in two foreign power companies: Compania Boliviana de Energia Electrica, S.A. - Bolivian Power Company Limited ("Bolivian Power") and through Canadian International Power Company Limited Liquidating Trust, The Barbados Light and Power Company Limited. The Company's investments in the power companies were recorded at an aggregate of approximately $5,208,000 at December 31, 1993. The shares of Bolivian Power are traded on the New York Stock Exchange. In November 1993, the Company sold 750,000 common shares of Bolivian Power in an underwritten public offering. The Company currently owns approximately 719,206 common shares of Bolivian Power, representing approximately 17% of Bolivian Power's outstanding common shares.
In 1990, the Company received the stock of certain of the WMAC Companies that had been under the control of the Wisconsin Insurance Commissioner. The Company is unable to predict when Commercial Loan Insurance Company ("CLIC") and WMAC Credit Insurance Corporation ("Credit"), two WMAC Companies which constitute substantially all of the WMAC Companies' remaining value expected from the assets under the control of the Wisconsin Insurance Commissioner, will be returned to its control. The Company estimates that the fair value to the Company of the net tangible assets yet to be received is approximately $32,800,000 in excess of their recorded carrying value at December 31, 1993.
A subsidiary of the Company is a partner in The Jordan Company and Jordan/Zalaznick Capital Company. These partnerships each specialize in structuring leveraged buyouts in which the partners are given the opportunity to become equity participants. John W. Jordan II, a director of the Company, is the managing partner of the two partnerships. Since 1982, the Company has invested an aggregate of $25,870,000 in these partnerships and related companies and, through December 31, 1993, has received approximately $62,398,000 (consisting of cash, interest bearing notes and other receivables) relating to the disposition of investments and management and other fees. At December 31, 1993, through these partnerships, the Company had interests in an aggregate of 15 companies (the "Jordan Associated Companies"), which are carried in the Company's consolidated financial statements at $13,620,000. The Jordan Associated Companies include JII, Carmike and Jones.
Item 2.


Item 2. Properties. ------ ---------- Through its various subsidiaries, the Company owns the following significant properties: an office building in Clayton, Missouri (approximately 66,000 sq. ft.), which is leased to unaffiliated parties; an office building in Valley Forge, Pennsylvania (approxi- mately 94,800 sq. ft.) located on land leased from a third party to a subsidiary of the Company; two offices in Salt Lake City, Utah (totaling approximately 74,000 sq. ft.); three multi-tenant office buildings in Indianapolis, Indiana (totaling approximately 444,000 sq. ft.) which are leased (or are available for lease) to unaffiliated parties; and a warehouse in Fort Worth, Texas (approximately 256,000 sq. ft.) that is leased to a third party. In addition, subsidiaries of the Company own nine facilities (totaling approximately 1,208,000 sq. ft.) primarily used for manufacturing and storage located in Georgia, New Jersey, New York, North Carolina, Pennsylvania, Wisconsin and Canada.
The Company's subsidiaries lease numerous manufacturing, warehousing, office and headquarters facilities. The facilities vary in size and have leases expiring at various times, subject in certain instances to renewal options. See Note 15 of Notes to Consolidated Financial Statements.
Item 3.
Item 3. Legal Proceedings. ------ ----------------- PHLCORP TENDER OFFER
Seven class action complaints were filed against the Company and others in connection with the Company's tender offer to purchase up to 5,200,000 common shares of Phlcorp, which expired in February 1988, and have been consolidated into one action in the United States District Court for the Southern District of New York (the "Southern District"), entitled In re PHLCORP Securities Tender Offer Litigation ------------------------------------------------ (Civil Action No. 88 Civ. 0306 (SS)) ("In Re Phlcorp"). ------------- The consolidated and amended class action complaint (the "Complaint") seeks damages (in an unspecified amount), imposition of a constructive trust and costs and disbursements of the action.
Several of the claims were dismissed in 1988 as a result of defendants' motion to dismiss. The remaining claims allege that defendants violated the Securities Exchange Act of 1934, as amended, by causing Phlcorp's directors to issue a recommendation to accept the Company's tender offer, which incorrectly represented that the directors' recommendation was based on a determination that the Company's offer was fair and that defendants breached their fiduciary duties in connection with the tender offer. A class of plaintiff minority shareholders, who owned shares of Phlcorp on January 21, 1988, has been certified.
Upon completion of discovery, with the exception of discovery of experts, defendants filed a motion for Summary Judgment. Prior to the time defendants' reply brief was due, the parties reached an agreement in principle for the settlement of the action. A stipulation of settlement was submitted to the Court for its approval on January 24, 1994. At a conference on February 2, 1994, the Court entered an order requiring (a) plaintiffs to mail notice of the proposed settlement to class members by February 22, 1994, (b) class members to submit any objections to the settlement by April 15, 1994 and (c) a hearing to determine whether the settlement should be approved to be held on April 29, 1994. Because of the settlement agreement, defendants withdrew their summary judgment motion, without prejudice to renew the motion in the event that the court does not approve the settlement.
Defendants believe that the material allegations of these complaints are without merit and, if not settled, intend to defend these actions vigorously.
EMPIRE TRANSACTIONS
Beginning in 1988, four separate actions were commenced in the Supreme Court, New York County relating to Empire's conversion from a mutual to a stock company, a 1988 reverse stock split, a subsequent odd lot cash tender offer and adoption of Empire's Section 7118 Plan in l991. Empire, Phlcorp and ten of Empire's directors are named as defendants in some or all of these actions.
While the Company believes the material allegations of these actions are without merit, these actions have been settled pursuant to Court approval. The settlement, which will become final during the second quarter of l994, unless appealed, will have no material effect on the Company.
PHLCORP MERGER
Three actions were filed by minority shareholders of Phlcorp in connection with the August 17, 1992 proposal by the Company to Phlcorp that the Company acquire all outstanding Phlcorp shares not already owned
by it and its subsidiaries and the October 12, 1992 public announcement that the Company and Phlcorp had reached an agreement in principle with respect to the merger of Phlcorp (then a 63.1% owned public subsidiary of the Company) with and into a wholly owned subsidiary of the Company (the "Phlcorp Merger"). The actions name the Company and/or Phlcorp and their directors as defendants. Two of the actions were brought in the Supreme Court of the State of New York, County of New York, and one was filed in the Pennsylvania Court of Common Pleas, Philadelphia County. The Pennsylvania action has been voluntarily discontinued.
The amended class action complaints in the New York action contain similar allegations, inter alia, that the Company, aided and abetted by its directors, breached its fiduciary duties purportedly owed to Phlcorp's minority shareholders by using its position as controlling shareholder of Phlcorp to effect the Merger on terms which do not reflect the true value of Phlcorp Shares, by failing to disclose material facts concerning Phlcorp's assets, businesses, and future prospects, and by timing the October 12 Proposal to coincide with an abnormally high stock price of Leucadia and an artificially depressed Phlcorp stock price. In addition, one of the New York actions asserts a derivative claim brought on behalf of Phlcorp for corporate waste under state law.
In November and December 1992, defendants moved to dismiss the New York actions. In early December 1992, plaintiffs' request for a preliminary injunction barring consummation of the Phlcorp Merger, was denied.
The parties have entered into settlement negotiations. On February 19, 1993, the court denied defendants' motions to dismiss the New York actions as moot in light of settlement negotiations. The court indicated that plaintiffs would be able to re-open the cases by way of an order to show cause if the cases are not in fact settled. On September 5, 1993, the parties entered into a memorandum of understanding to settle the matter subject to plaintiffs conducting confirmatory discovery and the court's approval of the settlement.
Defendants believe that the material allegations of these complaints are without merit and, if not settled, intend to defend these actions vigorously.
OTHER PROCEEDINGS
In addition to the foregoing, the Company and its subsidiaries are parties to legal proceedings that are considered to be either ordinary, routine litigation incidental to their business or not material to the Company's consolidated financial position.
The Company does not believe that any of the foregoing actions will have a material adverse effect on its consolidated financial position or consolidated results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. ------ --------------------------------------------------- Not applicable.
Item 10. Executive Officers of the Registrant. ------- ------------------------------------
All executive officers of the Company are elected at the organizational meeting of the Board of Directors of the Company held annually and serve at the pleasure of the Board of Directors. As of March 16, 1994, the executive officers of the Company, their ages, the positions held by them and the periods during which they have served in such positions were as follows:
Mr. Cumming has served as a director and Chairman of the Board of the Company since June 1978. In addition, he has served as a director of Bolivian Power since March 1987, as Chairman of the Board of Bolivian Power since September 1988 and as a director of Allcity since February 1988. Mr. Cumming has also been a director of Skywest, Inc., a Utah-based regional air carrier, since June 1986.
Mr. Steinberg has served as a director of the Company since December 1978 and as President of the Company since January 1979. In addition, he has served as a director of Bolivian Power since March 1987, as a director of Allcity since February 1988 and as a director of JII since June 1988.
Mr. Mara joined the Company in April 1977 and was elected Vice President of the Company in May 1977. He has served as Executive Vice President of the Company since May 1980 and as Treasurer of the Company since January 1993. Mr. Mara also served as Treasurer of the Company from April 1981 to April 1985.
Mr. Hershfield has served as Executive Vice President of the Company since July 1993 and prior thereto served as Vice President of the Company since April 1990. Mr. Hershfield has also served as a director of Bolivian Power since January 1992. From 1981 to April 1990, he served in a variety of executive positions with the Company's subsidiary, BRAE Corporation (formerly a public company), including President, Executive Vice President and Vice President.
Mr. Kiken, a certified public accountant, was employed by Coopers & Lybrand, certified public accountants, from 1969 until he joined the Company in October 1977 as Vice President and Comptroller.
Mr. Borden joined the Company as Vice President in August 1988 and has served in a variety of other capacities with the Company and its subsidiaries.
Mr. Hornstein joined the Company as Vice President in July 1983 and has also served as Secretary of Bolivian Power since July 1988.
Ms. Klindtworth has been employed by the Company since July 1960 and was appointed Assistant Secretary in May 1973. She has served as Secretary of the Company since February 1976, as Vice President- Corporate Administrator of the Company since January 1990 and prior thereto had served as Assistant Vice President-Corporate Administrator of the Company since February 1979.
Mr. Miller has served as Vice President of the Company since January 1989. He has also served as Executive Vice President of a subsidiary of the Company for more than the past five years.
Mr. Orlando, a certified public accountant, has served as Vice President of the Company since January 1994. Mr. Orlando served in a variety of capacities with the Company and its subsidiaries since 1987, including serving as Chairman of S & H.
Mr. Sherman has served as Vice President of the Company since August 1992. For the five years prior, he served in a variety of capacities with the Company and its subsidiaries.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related ------------------------------------------------- Stockholder Matters. -------------------
(a) Market Information. ------------------
The common shares of the Company (the "Common Shares") are traded on the New York Stock Exchange and Pacific Stock Exchange under the symbol LUK. The following table sets forth, for the calendar periods indicated, the high and low sales price per Common Share on the consolidated transaction reporting system, as reported by the Dow Jones Historical Stock Quote Reporter Service. On January 8, 1993, the Company effected a two-for-one stock split of the Common Shares in the form of a 100% stock dividend (the "Stock Split"). The dividend was paid to shareholders of record immediately following the close of business on December 31, 1992. Per share amounts set forth in this Report have been adjusted to reflect the Stock Split.
(b) Holders. ------- As of March 16, 1993, there were approximately 6,918 record holders of the Common Shares.
(c) Dividends. --------- The Company declared and paid on December 15, 1993, a dividend of $.25 per Common Share and on December 31, 1992, a dividend of $.20 per Common Share. Prior thereto, the Company had not paid any cash dividends on the Common Shares since January 1, 1973. In connection with the Phlcorp Merger, the Company agreed to consider, but has not made any commitment to, paying annual dividends in the future. The payment of dividends in the future is subject to the discretion of the Board of Directors and will depend upon general business conditions, legal and contractual restrictions on the payment of dividends and other factors that the Board of Directors may deem to be relevant.
In connection with the declaration of dividends or the making of distributions on, or the purchase, redemption or other acquisition of Common Shares, the Company is required to comply with certain restrictions contained in certain of its debt instruments.
Item 6.
Item 6. Selected Financial Data. ------ ----------------------- The following selected financial data have been summarized from the Company's consolidated financial statements and are qualified in their entirety by reference to, and should be read in conjunction with, such consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations," below.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- and Results of Operations. -------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company. During each of the three years in the period ended ----------- December 31, 1993, the Company operated profitably and in the year ended December 31, 1991 net cash was provided from operations. For the years ended December 31, 1993 and 1992, in spite of increased earnings, net cash was used for operations. The 1992 net cash used principally resulted from a 1991 reinsurance transaction, which had the effect of reducing CPI's premium to surplus ratio for 1991, and the 1993 net cash used principally related to the transfer of blocks of insurance described below.
Principally as a result of the acquisition of the minority interest in Phlcorp (the "Phlcorp Minority Interest") on December 31, 1992 and the Company's continuing profitable operations, ratings of the Company's debt obligations were upgraded in 1993 by Moody's, S&P and Duff & Phelps Inc., three of the leading bond rating agencies, all of which rated the Company's senior debt as "investment grade." The Company believes the higher ratings have made it substantially easier to raise additional funds, including the offerings described below, on favorable terms. Ratings issued by bond rating agencies are subject to change at any time.
In February 1993, the Company sold $100,000,000 principal amount of its newly authorized 5 1/4% Convertible Subordinated Debentures due 2003 (the "Convertible Debentures") in an underwritten public offering. The Convertible Debentures are convertible into Common Shares at $57.50 per Common Share (an aggregate of 1,739,130 Common Shares), subject to anti-dilution provisions. In August 1993, the Company sold $100,000,000 principal amount of its newly authorized 7 3/4% Senior Notes due 2013 (at 99% of principal amount) in an underwritten public offering. The net proceeds of these offerings were added to working capital.
Principally as a result of the public offerings and increased cash flow from affiliates, including tax sharing payments, the Company and its non-regulated affiliates had aggregate cash and temporary investments of approximately $204,000,000 at February 28, 1994. Such funds are available for general corporate purposes, including acquisitions. However, the interest rate currently earned on such funds is less than the interest paid on the 1993 debt offerings. In addition, at February 28, 1994 the Company had available aggregate credit agreement facilities of $150,000,000. During 1994, the credit agreements were renewed and now expire in 1997. No amounts were outstanding at February 28, 1994 under these credit agreement facilities.
Effective as of January 1, 1993, as described more fully in Note 1(a) of Notes to Consolidated Financial Statements, the Company adopted SFAS 106 (postretirement benefits), SFAS 109 (income taxes), SFAS 112 (postemployment benfits), SFAS 113 (reinsurance) and EITF 93-6 (retrospectively rated reinsurance agreements). Although adoption of these statements resulted in an aggregate credit of $129,195,000 being reported as an element of net income for 1993 and an increase in shareholders' equity of $138,605,000, adoption of such statements will not affect cash flows, actual income taxes paid or the actual utilization of the Company's substantial tax loss carryforwards. However, adoption of SFAS 109 is likely to increase reported provisions for income taxes in most periods.
In addition, as of December 31, 1993, the Company adopted SFAS 115. SFAS 115 requires that most securities, other than those meeting the requirements for classification as "held-to-maturity," be carried on the consolidated balance sheet at market value, either through an adjustment to earnings (if classified as "trading securities") or through shareholders' equity (if classified as "available for sale"). The Company has classified substantially all of its investment portfolio as "available for sale," which resulted in an increase of shareholders' equity at December 31, 1993 of approximately $49,500,000. The Company believes SFAS 115 will result in
substantial fluctuations in reported shareholders' equity, but is unlikely to have a material effect on results of operations. For additional information with respect to the changes in accounting principles, see "Results of Operations," below and Notes to Consolidated Financial Statements.
During 1992, the Company concluded that the profitability of its existing SPDA and SPWL business was unlikely to achieve acceptable operating results in the future. Accordingly, principally starting in the fourth quarter of 1992, the Company offered certain of its existing SPDA policyholders the opportunity to exchange their policies for SPDA policies of an unrelated insurer and entered into a reinsurance agreement (which closed in stages in 1992 and 1993) to reinsure certain blocks of SPDA business with a second unrelated insurer. In connection with the 1993 SPDA closing (which involved reinsurance of policies with account balances of approximately $47,187,000 on the date of closing in 1993), there was no significant net gain or loss. The Company is maximizing the return on any remaining SPDA policies by reducing crediting rates to the minimum permitted. As a result, the Company believes that a substantial portion of the remaining SPDA policyholders will terminate their policies over a period of time.
On June 23, 1993, the Company reinsured substantially all of its existing blocks of SPWL business with a subsidiary of John Hancock Mutual Life Insurance Company ("John Hancock"). In connection with the transaction, the Company realized a net pre-tax gain of approximately $16,700,000. Such net pre-tax gain consists of net gains on sales of investments sold in connection with the transaction (approximately $24,100,000), which are included in the caption "Net securities gains," reduced by a net loss of approximately $7,400,000 (principally the write-off of deferred policy acquisition costs of approximately $26,900,000 less the premium received on the transaction), which is included in the caption "Provision for insurance losses and policy benefits." Further, the Company may receive additional consideration based on the subsequent performance of this block of business. For financial reporting purposes, the Company will reflect the policy liabilities assumed by John Hancock (in policy reserves), with an offsetting receivable from John Hancock of the same amount (in reinsurance receivable, net), until the Company is relieved of its legal obligation to the SPWL policyholders.
During the first quarter of 1994, the Company and an equal partner agreed to acquire a 60% interest in Caja de Ahorro y Seguro S.A. ("Caja") for a purchase price of approximately $85,000,000, subject to final adjustment. Caja is a holding company whose subsidiaries are engaged in property and casualty insurance, life insurance and banking in Argentina. Caja has (unaudited) assets in excess of approximately $500,000,000. Reliable historical operating data for Caja is not available. The Company believes that Caja will not constitute a "significant subsidiary."
On August 16, 1991, the Company acquired CPG. As described in "Results of Operations," CPG has operated profitably and has been a substantial contributor to the Company's performance. Prior to the acquisition of CPG, particularly in 1989 and 1990, the property and casualty insurance operations of CPG had provided significant additional amounts for losses. At December 31, 1991, the Company stated it believed that the reserves established for the Colonial Penn P&C Group were adequate, including amounts applicable to the Special Risks business. Since acquisition, the claims and settlement experience of the acquired business has been satisfactory and the Company continues to believe (in part based on the recent report of an independent consulting actuary) that the reserves established for the Colonial Penn P&C Group, including the Special Risks business and amounts that may be assessed by California and New Jersey, are adequate.
The Company records trading stamp revenues and provides for the cost of redemptions at the time trading stamps are furnished to licensees. A liability for unredeemed trading stamps is estimated based on the cost of merchandise, cash and related redemption service expenses required to redeem the trading stamps which
are expected to be presented for redemption in the future. The Company periodically reviews the appropriateness of the estimated redemption rates based upon recent experience, statistical evaluations and other relevant factors. At December 31, 1993 and 1992, the liability for unredeemed trading stamps reflected in the Company's consolidated balance sheet was $58,541,000 and $74,964,000, respectively. The most recent statistical studies of trading stamp redemptions have indicated that the historical pattern of redemptions has changed and that the recorded liability for unredeemed trading stamps is in excess of the amount that ultimately will be required to redeem trading stamps outstanding. The amount of this excess may be different than indicated by these studies. Accordingly, the Company is amortizing the aggregate apparent excess over a five year period (starting in 1990 with respect to approximately $34,000,000 of such apparent excess and in 1991 with respect to approximately $28,000,000 of such apparent excess). Based upon the latest studies, the unamortized apparent excess was approximately $17,067,000 at December 31, 1993. The Company will continue to monitor current redemptions and estimates of ultimate redemptions.
The government of El Salvador and representatives of the Company had previously reached agreement as to the amount to be paid for the assets of an electric utility in El Salvador in which the Company had an interest. Pursuant to such agreement, on March 30, 1993, the Company received cash of approximately $5,300,000 and approximately $12,000,000 principal amount of 6% U.S. dollar denominated El Salvador Government bonds due in instalments through 1996. The gain recognized during 1993 was not material. As a result of receiving required prepayments and the sale of the bonds, the Company will report a pre- tax gain of approximately $8,458,000 in the first quarter of 1994.
In connection with the formation of JII on June 1, 1988, John W. Jordan II, a director and significant shareholder of the Company, acquired from the Company most of the Company's direct interest in JII in exchange for a zero coupon note which matured in 1993. On June 1, 1993 Mr. Jordan delivered to the Company 224,175 of the Company's Common Shares valued at $8,294,000 (the maturity value of the zero coupon note) as payment in full of the zero coupon note. The Common Shares were valued at $37.00 per share, the closing price of a Common Share on the New York Stock Exchange Composite Tape on May 24, 1993, the last full trading day prior to the authorization by the Company's Board of Directors of the agreement.
The Company is to receive the residual interest in CLIC and Credit from the Wisconsin Insurance Commissioner without additional consideration. The Company estimates that the value of the net tangible assets of such companies to the Company was approximately $32,800,000 in excess of their carrying amount at December 31, 1993. The underlying assets of such companies are principally invested in high quality interest earning securities. The timing for receipt of such assets is uncertain.
During 1993 and 1992, the property and casualty insurance industry suffered unprecedented losses from natural disasters, principally Hurricane Andrew in 1992 and snow storm and fire related losses in 1993. The Company's insurance subsidiaries also suffered certain of such losses, although as described below in "Results of Operations," reinsurance reduced the economic loss to the Company related to Hurricane Andrew. However, as a result of the industry's losses, the Company has seen a notable decrease in the availability of catastrophe reinsurance at reasonable rates, particularly at low levels of deductibility. Although the reinsurance programs were completed at acceptable upper loss limits (albeit at a somewhat increased cost), the insurance subsidiaries have been unable to obtain previous levels of deductibility at reasonable cost. Accordingly, for 1994 and 1993 the Company has increased its retention of lower level losses to $11,000,000. In 1992, the Company did not incur losses in excess of its maximum reinsurance. Further, the Company did not incur catastrophic losses in excess of its retained limits in 1993 and to date in 1994. In January 1994, Los Angeles experienced severe earthquakes. As a result, the Company suffered losses estimated at approximately $7,000,000 to $10,000,000. In addition, severe winter storms in 1994 resulted in unusually high losses.
New Jersey's insurance laws require all automobile insurers to share in the losses of the MTF based on their depopulation share of the JUA, as set by the New Jersey Department of Insurance. Although the amount of the MTF deficit has not yet been finalized, based on certain current estimates of the MTF deficit (which are subject to change), the Colonial Penn P&C Group would be assessed approximately $11,100,000. While the New Jersey Insurance Department has adopted regulations which would permit an insurer, with the approval of the Insurance Department, to recover amounts paid to the MTF through surcharges to policyholders, there can be no assurance that the Colonial Penn P&C Group would be permitted to surcharge its policyholders for all or even part of any future deficit assessment. The Colonial Penn P&C Group has provided for its portion of the estimated MTF losses.
The NAIC has adopted a model law incorporating the concept of a "risk based capital" ("RBC") requirement for insurance companies, although the model law is not intended to apply to property and casualty insurance companies until year end 1994 financial statements are available. Generally, RBC is designed to measure the adequacy of an insurer's statutory capital in relation to the risks inherent in the business. The RBC formula will be used by the states as an early warning tool to identify weakly capitalized companies for the purpose of initiating regulatory action. The RBC ratios of the Company's insurance subsidiaries as of December 31, 1993 were substantially in excess of the minimum requirements.
The Company and certain of its subsidiaries including Phlcorp and its subsidiaries, have substantial loss carryforwards and other tax attributes (see Note 13 of Notes to Consolidated Financial Statements). The amount and availability of tax loss carryforwards are subject to certain qualifications, limitations and uncertainties, including, with respect to Phlcorp and its subsidiaries, tax sharing payments pursuant to a tax settlement agreement with the Internal Revenue Service and the Department of Justice. In order to reduce the possibility that certain changes in ownership could impose limitations on the use of these carryforwards which could reduce their value to the Company, the Company's shareholders, at a special meeting held on December 30, 1992, imposed certain charter restrictions which generally restrict the ability of a person or entity from accumulating five percent or more of the Common Shares and the ability of persons or entities now owning at least five percent of the Common Shares from acquiring additional Common Shares. Upon implementation of SFAS 109, the Company recognized as an asset (net of reserves) certain of the benefits of such loss carryforwards and other tax attributes. However, the amount of the asset recognized only reflects the minimum Phlcorp tax loss carryforwards and assumes that certain proposed regulations affecting the use of Phlcorp's tax loss carryforwards are finalized without significant change. As described in the accompanying financial statements, significant additional amounts may be available under certain circumstances.
The Company's fixed maturity investments are generally "investment grade" or 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 Company believes that it provides for potential losses on its investments upon early indications that a decline in the market value of a particular security may be other than temporary. The cost and market/carrying value of the Company's investments in "non-rated" or less than "investment grade" rated securities was approximately $40,218,000 and $48,351,000 at December 31, 1993, respectively. At December 31, 1993, less than 1% of the insurance subsidiaries fixed maturity investment portfolio was rated by Moody's and/or S&P as less than "investment grade" or was not rated.
The Company continuously evaluates its existing operations and investigates possible acquisitions of new businesses and dispositions of businesses in order to maximize its ultimate economic value to shareholders. Accordingly, while the Company does not have any material arrangement, commitment or understanding with respect thereto, except as described in this Report, further acquisitions, divestitures, investments and changes in
capital structure are possible. The Company also believes based on discussions with commercial and investment bankers that it has the ability to raise significant additional funds under acceptable conditions for use in its existing businesses or for appropriate investment opportunities.
Parent. Leucadia National Corporation (the "Parent") is a ------ holding company whose assets principally consist of the stock of its several direct subsidiaries. As described below, its principal sources of funds are derived from its available cash resources, bank borrowings, public financings, repayment of advances, funds distributed from its subsidiaries as tax sharing payments, management and other fees, and borrowings and dividends from its regulated and non-regulated subsidiaries. It has no substantial recurring cash requirements other than payment of interest and principal on its debt, tax payments and expenses of its corporate offices.
The Parent maintains the principal borrowings for the Company and its non-banking subsidiaries and has provided working capital to certain of its wholly owned subsidiaries. These borrowings have primarily been made on an unsecured basis from banks through various credit agreement facilities and term loans, and through public financings. As noted above, during 1993, the Company issued an aggregate of $200,000,000 principal amount of senior debt securities and subordinated convertible debt securities in underwritten public offerings. Although the Company had no specific use for such funds (the proceeds of the offerings were principally invested on a temporary basis), the Company believes that it was prudent to borrow long term funds at rates that were historically attractive. As a result of these offerings and other sources of funds, at February 28, 1994, the Company and its wholly owned non-regulated subsidiaries had cash and temporary investments of approximately $204,000,000.
There are no restrictions on distributions from the wholly owned non-regulated subsidiaries and therefore all cash available to these subsidiaries (including proceeds from sales of their investments in marketable securities) is available to the Parent. At December 31, 1993, a maximum of approximately $50,590,000 was available to the Parent as dividends from the regulated subsidiaries without regulatory approval. Additional amounts may be available to the Parent in the form of loans or cash advances from such regulated subsidiaries. The Parent (and Phlcorp) also receive tax sharing payments from their subsidiaries included in consolidated tax returns, including certain regulated subsidiaries. Because of the tax loss carryforwards available to the Parent (and Phlcorp) and current interest deductions, the amount paid by the Parent (and Phlcorp) for income taxes is substantially less than tax sharing payments received from the subsidiaries. In addition, the Company believes significant amounts are available from the regulated and non-regulated entities for services provided by the Parent. The Parent also has borrowed short-term funds from time to time from its regulated subsidiaries (as permitted by applicable regulations), although no amounts were outstanding at December 31, 1993 and no amounts were borrowed to date in 1994. Furthermore, as previously noted, the Parent has recently renewed its credit agreements which provide for aggregate credit agreement facilities of $150,000,000. No significant amounts were borrowed in 1993 or to date in 1994 under such agreements.
RESULTS OF OPERATIONS
CPG is included in results of operations from its date of acquisition, August 16, 1991. For the year ended December 31, 1992, CPG contributed revenues of approximately $836,552,000 (including net gains on sales of securities of approximately $23,543,000) and contributed approximately $131,757,000 to consolidated pre-tax income (exclusive of financing costs). For the period from August 16, 1991 to December 31, 1991, CPG contributed revenues of approximately $359,088,000 (including net gains on sales of securities of approximately $16,323,000) and contributed approximately $59,995,000 to consolidated pre-tax income (exclusive of financing costs). Due to changes in the Company's insurance operations it is not practicable to
provide meanful comparable information for CPG for 1993. Except as disclosed herein, the material changes in results of operations for the year ended December 31, 1992 compared to the preceding year result from the acquisition of CPG.
Premium receipts on investment oriented products of the life insurance subsidiaries (which are not reflected as revenues) were approximately $88,312,000 in 1993, $68,035,000 in 1992 and $43,164,000 in 1991. The principal investment oriented product sold during the three year period ended December 31, 1993 was a tax-advantaged VA product marketed directly to consumers. Increases in premium receipts in 1993 and 1992 may in part result from Federal tax law changes anticipated in 1992 and enacted in 1993. Substantially all other life insurance earned premiums relate to the CPG operations.
Earned premium revenues of the life and health insurance operations were approximately $181,800,000 for 1993 compared to $233,700,000 for 1992. The decrease reflected the termination of certain assumed life and health reinsurance contracts which had revenues of approximately $28,750,000 for 1992 and minimal profitability (except for termination gains of approximately $6,200,000 recognized in 1992). In addition, earned premium revenues decreased as a result of the run-off of the agent sold medicare supplement business, which the Company ceased marketing at December 31, 1992 due to inadequate profitability.
During 1993, based on its experience since acquisition, the Company concluded that it would be able to generate significant new premiums for its Graded Benefit Life business at acquisition cost levels that result in adequate profitability. Accordingly, starting in 1993, the Company increased its marketing efforts with respect to this product.
Earned premium revenues and commissions of the property and casualty insurance operations of the Empire Group were approximately $259,400,000 in 1993, $243,100,000 in 1992 and $210,700,000 in 1991. The increases (as compared to the preceding year) are principally due to increases in certain premium rates (4.3% in 1993 and 6.2% in 1992) and increased premium volume (2.4% in 1993 and 9.2% in 1992).
Earned premium revenues of the Colonial Penn property and casualty insurance operations were approximately $452,600,000 in 1993 and $456,000,000 in 1992. Earned premiums in 1993 reflect an increase in involuntary auto insurance resulting from assigned risk business. The 1993 decline in other business was anticipated and is principally the result of the substantial reduction in marketing costs incurred prior to acquisition, which the Company believes were not justified by prior operating results. As described more fully elsewhere herein, the Colonial Penn property and casualty insurance operations are using other means to market their products. The Company believes its present marketing efforts have resulted in new business which to some degree offsets the normal attrition of existing business. The Company believes that it is likely that new business generated in 1994 will be greater than business lost through normal attrition, although there can be no assurance that this will be achieved.
Manufacturing revenues and cost of goods sold in 1993 and 1992 increased slightly from amounts from the preceding year. Manufacturing gross profit was substantially unchanged in 1993 and lower in 1992 than 1991. The decline in 1992 was due to certain manufacturing inefficiencies and start up costs associated with the Company's new bathroom vanity manufacturing facility, under-utilization of facilities in part due to general unfavorable economic conditions and pricing pressures. These inefficiencies contributed to the manufacturing operations having a small loss in 1991 and a substantially larger loss in 1993 and 1992. Although the new manufacturing plant decreased its inefficiencies in 1993, the plant continues to operate at unacceptable efficiency levels. During 1993, the Company instituted actions that it believes should improve efficiency to acceptable levels in 1994 and 1995, although there can be no assurance as to that effect.
Trading stamps revenues were lower in 1993 and 1992 than the preceding year principally due to the loss of business of certain customers. The Company believes the historical decline in usage of trading stamps will continue. The Company provided the liability for unredeemed trading stamps based on the estimate that approximately 75% of stamps issued in each of 1993, 1992 and 1991 ultimately will be redeemed. The gross profit rate was higher in 1992 than in 1991 principally due to lower merchandise costs. In early 1993, the Company contributed the net assets of its motivation services business to a new joint venture formed with an unrelated motivation services company in exchange for a 45% equity interest in the joint venture. The joint venture is recorded on the equity basis of accounting. Results of operations of the motivation services business have historically not been significant and are not expected to be significant in the future.
Finance revenues reflect the level of consumer instalment loans. In 1992 the Company sold at a profit substantially all of its consumer loan development offices, which had aggregate consumer instalment loans at the time of sale of approximately $68,500,000. As expected, the operating profit applicable to this segment increased in 1993 as the offices sold in 1992 operated at a loss. Based on its experience since 1988 in providing automobile collateralized loans to individuals with poor credit histories, during 1993 the Company concluded that there were excellent opportunities for successful expansion of this business. Accordingly, on a controlled basis, the Company increased its investment in such loans. Such loans approximated $73,321,000 at December 31, 1993 and $47,890,000 at December 31, 1992. The Company expects to further increase such loans in 1994.
Investment and other income decreased in 1993 compared to 1992. The decrease was the result of a lower level of investments due to disposition of the SPWL and SPDA business and lower interest rates. Exclusive of CPG, investment and other income decreased in 1992 compared to 1991. The investment earnings of the non-CPG insurance subsidiaries were lower in 1992 compared to the prior year in part due to a reduction in Charter's investment portfolio to fund a substantial portion of the CPG purchase price. The estimated average yield to maturity of bonds and notes in the Company's investment portfolio was lower at December 31, 1993 and 1992 than at the preceding year end. The decreased yield resulted in part from the reinvestment of sales proceeds at the generally prevailing lower interest rates. Further, other income in 1991 includes approximately $9,359,000 related to the resolution of certain pre-acquisition contingencies related to Cambrian, a consolidated subsidiary. The $12,981,000 gain in 1993 from the sale of a portion of the investment in Bolivian Power and the $12,128,000 gain in 1992 from sale of the consumer loan development offices is reflected in other income.
Net securities gains (losses) in each of the three years ended December 31, 1993 were as follows (in thousands):
The proceeds from sales of investments were primarily reinvested at the generally lower prevailing interest rates. Since these reinvestment rates were, in certain instances, lower than had previously been expected on certain fixed rate annuity policies issued by the life insurance subsidiaries, in 1993 and 1991 the Company provided approximately $6,800,000 and $8,800,000, respectively, which is included in results of operations under the caption, "Provision for insurance losses and policy benefits." In 1992, as a result of realizing securities gains and reinvestment of sales proceeds at the lower prevailing interest rates, and securities gains realized in connection with the termination or transfer of the SPDA business, the Company recalculated and eliminated deferred policy acquisition costs applicable to certain of its investment oriented products (including the SPDA policies), reviewed the expected and required return on certain fixed income products and, as a result, provided additional reserves of approximately $13,900,000, which is included in the caption "Provision for insurance losses and policy benefits" in 1992 results of operations. These reinvestment risks do not apply to the Company's currently offered variable investment oriented products.
The provision for insurance losses and policy benefits of the life and health operations decreased in the 1993 period compared to the 1992 period, principally due to lower earned premiums and insurance in force, (including the SPDA and SPWL business that was sold in late 1992 and 1993). However, the provision for insurance losses and policy benefits of the life and health operations for 1993 includes a net loss of approximately $7,400,000 (principally the write-off of deferred policy acquisition costs less the premium received) applicable to the SPWL business sold to John Hancock and additional provisions of approximately $6,800,000 applicable to certain fixed rate policies due to realization of securities gains and reinvestment of proceeds at the lower prevailing interest rates, as described more fully above.
The provision for insurance losses and policy benefits of the life and health operations exclusive of CPG increased in 1992 compared to 1991 principally due to the growth in earned premiums and the additional amounts provided by the life insurance subsidiaries as a result of the realized securities gains described above. Further, the spread between amounts credited to policyholders by the life insurance subsidiaries and amounts earned on investments was reduced in 1992 as compared to 1991. As a result of the termination of certain reinsurance arrangements by the life insurance subsidiaries, approximately $6,200,000, representing amounts
provided for policyholder benefits that were no longer required, is reflected as a reduction in the provision for insurance losses and policy benefits for 1992.
The Company's property and casualty insurance operations combined ratios as determined under GAAP and SAP were as follows:
Year ended December 31, GAAP SAP ------ ------ 1993 96.9% 93.7% 1992 101.7%102.8% 1991 102.1%103.3%
For the Colonial Penn P&C Group, the severity of personal automobile claims was substantially more favorable in 1993 than in 1992 and the frequency of such claims was substantially more favorable in 1992 than in the prior year. The Company believes this experience reflects its improved underwriting procedures, emphasis on over 50 year old insureds and prior rate increases. In addition, the combined ratio and the provision for losses applicable to the property and casualty operations for 1993 were favorably affected due to settlement of prior years' claims at amounts less than had been provided. The overall loss experience of the Empire Group's property and casualty insurance subsidiaries was less favorable in 1992 than in 1991 primarily as a result of unfavorable loss experience in automobile lines and an approximately $3,000,000 retroactive assessment for a workers' compensation fund. The Company believes that as a result of the reduction in claims outstanding for the Colonial Penn P&C Group, there will be a reduced positive effect on future results of operations from settlement of claims at less than amounts previously provided in spite of providing loss reserves on current operations at very conservative levels.
The provision for insurance losses and policy benefits in 1993 and 1992 (including CPG) also includes catastrophe losses (net of reinsurance recoveries in 1992) estimated at an aggregate of approximately $10,900,000 in 1993 and $12,300,000 in 1992 (including amounts related to Hurricane Andrew in 1992). In addition, in 1992, the Company provided approximately $1,000,000 to reinstate certain reinsurance coverage which was exhausted in connection with Hurricane Andrew.
Interest expense principally reflects the level of external borrowings outstanding during the period and, in each year compared to the preceding year, the effect of lower interest rates. Interest expense in 1992 also reflects a lower level of intercompany borrowings from Phlcorp during 1992, which resulted in increased interest charges of approximately $4,880,000 in 1992 compared to 1991. Additionally, interest expense reflects the level of Deposits at AIB and the ILCs. Generally, interest rates on Deposits are lower than on other available funds. Interest on Deposits was approximately $9,001,000 in 1993, $11,954,000 in 1992 and $15,138,000 in 1991. The Company estimates that in 1993, the interest expense on its borrowings which were invested in temporary investments exceeded interest earned by approximately $2,500,000.
Selling, general and other expenses in 1991 includes costs applicable to development by the trading stamps subsidiary of a database marketing program of approximately $8,237,000 (including close down costs). In 1991 the Company discontinued development of the program due to a lack of acceptance by food manufacturers.
Minority interest in 1992 and 1991 was principally applicable to the Phlcorp Minority Interest. On December 31, 1992, the Company acquired the Phlcorp Minority Interest in exchange for approximately 4,408,000 Common Shares.
Income before income taxes and the effects of accounting changes was $176,868,000 in 1993, $143,553,000 in 1992 and $95,030,000 in 1991. The amount for 1993 was the highest in the history of the Company.
The provision for income taxes for 1993 was calculated under SFAS 109 which does not reflect the benefit from utilization of tax loss carryforwards. The provisions for income taxes for 1992 and 1991 have been reduced for the benefit from utilization of tax loss carryforwards. The provision for income taxes for 1993 was reduced by approximately $8,315,000 as a result of tax law changes and a reduction in the valuation allowance applicable to certain deferred tax assets. The Company estimates that if the 1993 tax provision had been calculated as it was in 1992 and 1991, such provision would have been lower by, and net income (exclusive of amounts applicable to changes in accounting principles) would have been higher by approximately $42,614,000 (or $1.46 per primary earnings per share and $1.38 per fully diluted earnings per share).
The provisions for income taxes for 1992 and 1991 principally consist of state income taxes, the federal alternative minimum income tax, federal income taxes applicable to the life insurance subsidiaries which cannot utilize the Company's tax loss carryforwards and United Kingdom income taxes applicable to Cambrian. The 1991 provision reflects credits of approximately $5,400,000, resulting from the favorable outcome of certain prior years' United Kingdom income tax matters. As noted above, the tax provisions for 1992 and 1991 reflect the benefit from utilization of accounting and tax loss carryforwards, including capital loss carryforwards.
The number of shares used to calculate primary earnings per share was 29,270,000, 24,435,000 and 23,704,000 for 1993, 1992 and 1991, respectively. The number of shares used to calculate fully diluted earnings per share was 30,743,000, 24,516,000 and 23,916,000 for 1993, 1992 and 1991, respectively. The increase in 1993 was principally caused by the acquisition of the Phlcorp Minority Interest and, with respect to fully diluted per share amounts, the effect of the assumed conversion of the 5 1/4% Convertible Debentures. The increase in the number of shares utilized in calculating per share amounts in 1992 compared to 1991 was principally caused by the exercise of options to purchase common shares and the increase in the market price per common share.
Item 8.

Item 8. Financial Statements and Supplementary Data. ------ ------------------------------------------- Financial Statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 14(a) below.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure. ------ ---------------------------------------------------- Not applicable.
PART III
Item 10.


Item 10. Directors and Executive Officers of the Registrant. ------- -------------------------------------------------- The information to be included under the caption "Nominees for Election as Directors" in the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A of the 1934 Act in connection with the 1994 annual meeting of shareholders of the Company (the "Proxy Statement") is incorporated herein by reference. In addition, reference is made to Item 10 in Part I of this Report.
Item 11.
Item 11. Executive Compensation. ------- ---------------------- The information to be included under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. ------- -------------------------------------------------------------- The information to be included under the caption "Present Beneficial Ownership of Common Shares" in the Proxy Statement is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions. ------- ---------------------------------------------- The information to be included under the caption "Executive Compensation - Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. ----------------------------------------
(a)(1)(2) Financial Statements and Schedules. ---------------------------------- Report of Independent Certified Public Accountants . . . . . . . . . . . . . . . Financial Statements: Consolidated Balance Sheets at December 31, 1993 and 1992 . . . . . . . . Consolidated Statements of Income for the years ended December 31, 1993, 1992 and 1991 . . . . . . . . . . . Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991 . . . . . Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1993, 1992 and 1991 . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . .
Financial Statement Schedules: Schedule I - Summary of Investments Other Than Investments in Affiliates . . . Schedule III - Condensed Financial Information of Registrant . . . . . . . . Schedule V - Supplementary Insurance Information . . . . . . . . . . Schedule VI - Schedule of Reinsurance . . . . . . . . . . . . . . . Schedule VIII - Valuation and Qualifying Accounts . . . . . . . . . . . Schedule IX - Short-Term Borrowings . . . . Schedule X - Schedule of Supplemental Information for Property and Casualty Insurance Underwriters . . . . .
(3) Executive Compensation Plans and Arrangements. --------------------------------------------- 1982 Stock Option Plan, as amended August 28, 1991 (filed as Annex B to the Company's Proxy Statement dated July 21, 1992). 1992 Stock Option Plan (filed as Annex C to the Company's Proxy Statement dated July 21, 1992). Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Ian M. Cumming (filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1983 (the "1983 10-K")). Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Joseph S. Steinberg (filed as Exhibit 10.15 to the Company's 1983 10-K). Agreement dated as of August 1, 1988 among the Company, Ian M. Cumming and Joseph S. Steinberg (filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (the "1991 10-K")). Agreement dated as of January 10, 1992 between Ian M. Cumming, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.7 to the Company's 1991 10-K). Agreement dated as of January 10, 1992 between Joseph S. Steinberg, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.8 to the Company's 1991 10-K). Agreement between Leucadia, Inc. and Ian M. Cumming, dated as of December 28, 1992 (filed as Exhibit 10.12(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (the "1992 10-K")). Escrow and Security Agreement by and among Leucadia, Inc., Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.12(b) to the 1992 10-K). Agreement between Leucadia, Inc. and Joseph S. Steinberg, dated as of December 28, 1992 (filed as Exhibit 10.13(a) to the 1992 10-K). Escrow and Security Agreement by and among Leucadia, Inc., Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.13(b) to the 1992 10-K). Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming (filed as Exhibit 10.17 to this Report). Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to this Report). Agreement between the Company and Ian M. Cumming dated as of December 28, 1993 (filed as Exhibit 10.19(a) to this Report). Escrow and Security Agreement by and among the Company, Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.19(b) to this Report). Agreement between the Company and Joseph S. Steinberg, dated as of December 28, 1993 (filed as Exhibit 10.20(a) to this Report). Escrow and Security Agreement by and among the Company, Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993 (filed as Exhibit 10.20(b) to this Report).
(b) Reports on Form 8-K. ------------------- Not applicable.
(c) Exhibits. -------- 3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to the Company's Current Report on Form 8-K dated July 14, 1993).*
3.2 By-laws (as amended) filed as Exhibit 4.5 to the Company's Registration Statement No. 33-57054).*
4.1 The Company undertakes to furnish the Securities and Exchange Commission, upon request, a copy of all instruments with respect to long-term debt not filed herewith.
10.1 1982 Stock Option Plan, as amended August 28, 1991 (filed as Annex B to the Company's Proxy Statement dated July 21, 1992).*
10.2 1992 Stock Option Plan (filed as Annex C to the Company's Proxy Statement dated July 21, 1992).*
10.3(a) Restated Articles and Agreement of General Partnership, effective as of February 1, 1982, of The Jordan Company (filed as Exhibit 10.3(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1986).*
10.3(b) Amendments dated as of December 31, 1989 and December 1, 1990 to the Partnership Agreement referred to in 10.3(a) above (filed as Exhibit 10.2(b) to the Company's 1991 10-K).*
10.3(c) Amendment dated as of December 17, 1992 to the Partnership Agreement referred to in 10.3(a) above (filed as Exhibit 10.3(c) to the 1992 10-K).*
10.3(d) Articles and Agreement of General Partnership, effective as of April 15, 1985, of Jordan/Zalaznick Capital Company (filed as Exhibit 10.20 to the Company's Registration Statement No. 33-00606).*
10.4 Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Ian M. Cumming (filed as Exhibit 10.14 to the 1983 10-K).*
10.5 Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Joseph S. Steinberg (filed as Exhibit 10.15 to the 1983 10-K).*
___________________
* Incorporated by reference.
10.6 Stock Purchase and Sale Agreement dated as of April 5, 1991, by and between FPL Group Capital Inc. and the Company (filed as Exhibit B to the Company's Current Report on Form 8-K dated August 23, 1991).*
10.7 Agreement dated as of August 1, 1988 among the Company, Ian M. Cumming and Joseph S. Steinberg (filed as Exhibit 10.6 to the Company's 1991 10- K).*
10.8 Agreement dated as of January 10, 1992 between Ian M. Cumming, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.7 to the Company's 1991 10-K).*
10.9 Agreement dated as of January 10, 1992 between Joseph S. Steinberg, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.8 to the Company's 1991 10-K).*
10.10(a) Agreement dated April 23, 1992 between AIC Financial Services, Inc. (an Alabama corporation), AIC Financial Services (a Mississippi corporation) and AIC Financial Services (a South Carolina corporation) (collectively, "Seller") and Norwest Financial Resources, Inc. (filed as Exhibit 10.10(a) to the 1992 10-K).*
10.10(b) Purchase Agreement between A.I.C. Financial Services, Inc., American Investment Bank, N.A., American Investment Financial and Terracor II d/b/a AIC Financial Fund, Seller, and Associates Financial Services Company, Inc., Buyer, dated November 5, 1992 (filed as Exhibit 10.10(b) to the Company's Registration Statement No. 33-55120).*
10.11(a) Agreement and Plan of Merger, dated as of October 22, 1992, by and among the Company, Phlcorp Acquisition Company and PHLCORP, Inc. (filed as Exhibit 5.2 to the Company's Current Report on Form 8-K dated October 22, 1992).*
10.11(b) Amendment dated December 10, 1992, to the Merger Agreement referred to in 10.11(a) above (filed as Exhibit 5.2 to the Company's Current Report on Form 8-K dated December 14, 1992).*
10.12(a) Agreement between Leucadia, Inc. and Ian M. Cumming, dated as of December 28, 1992 (filed as Exhibit 10.12(a) to the 1992 10-K).*
10.12(b) Escrow and Security Agreement by and among Leucadia, Inc., Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.12(b) to the 1992 10-K).*
10.13(a) Agreement between Leucadia, Inc. and Joseph S. Steinberg, dated as of December 28, 1992 (filed as Exhibit 10.13(a) to the 1992 10-K).*
___________________
* Incorporated by reference.
10.13(b) Escrow and Security Agreement by and among Leucadia, Inc., Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.13(b) to the 1992 10-K).*
10.14 Settlement Agreement between Baldwin-United Corporation and the United States dated August 27, 1985 concerning tax issues (filed as Exhibit 10.14 to the 1992 10-K).*
10.15 Acquisition Agreement, dated as of December 18, 1992, by and between Provident Mutual Life and Annuity Company of America and Colonial Penn Annuity and Life Insurance Company (filed as Exhibit 10.15 to the 1992 10-K).*
10.16 Reinsurance Agreement, dated as of December 31, 1991, by and between Colonial Penn Insurance Company and American International Insurance Company (filed as Exhibit 10.16 to the 1992 10-K).*
10.17 Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming.
10.18 Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg.
10.19(a) Agreement between the Company and Ian M. Cumming, dated as of December 28, 1993.
10.19(b) Escrow and Security Agreement by and among the Company, Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993.
10.20(a) Agreement between the Company and Joseph S. Steinberg, dated as of December 28, 1993.
10.20(b) Escrow and Security Agreement by and among the Company, Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993.
21 Subsidiaries of the registrant.
23 Consent of independent certified public accountants with respect to the incorporation by reference into the Company's Registration Statements on Form S-8 (File No. 2-84303), Form S-8 and S-3 (File No. 33- 6054), Form S-8 and S-3 (File No. 33-26434), Form S-8 and S-3 (File No. 33-30277).
___________________
* Incorporated by reference.
28 Schedule P of the 1993 Annual Statement to Insurance Departments of the Colonial Penn Insurance Company and Affiliated Fire & Casualty Insurers, the Empire Insurance Company, Principal Insurer, and Colonial Penn Madison Insurance Company.
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.
LEUCADIA NATIONAL CORPORATION
March 23, 1994 By: /s/ Norman P. Kiken ------------------------- Norman P. Kiken Vice President and Comptroller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the date set forth above.
Signature Title --------- -----
/s/ Ian M. Cumming Chairman of the Board ------------------------------ Ian M. Cumming (Principal Executive Officer)
/s/ Joseph S. Steinberg President and Director ------------------------------ Joseph S. Steinberg (Principal Executive Officer)
/s/ Norman P. Kiken Vice President and Comptroller ------------------------------ Norman P. Kiken (Principal Financial and Accounting Officer)
/s/ Paul M. Dougan Director ------------------------------ Paul M. Dougan
/s/ Lawrence D. Glaubinger Director ------------------------------ Lawrence D. Glaubinger
/s/ James E. Jordan Director ------------------------------ James E. Jordan
/s/ John W. Jordan II Director ------------------------------ John W. Jordan II
/s/ Jesse Clyde Nichols, III Director ------------------------------ Jesse Clyde Nichols, III
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of Leucadia National Corporation:
We have audited the consolidated financial statements and the financial statement schedules of LEUCADIA NATIONAL CORPORATION and SUBSIDIARIES listed in Item 14(a) of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LEUCADIA NATIONAL CORPORATION and SUBSIDIARIES as of December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
As more fully discussed in Note 1 to the consolidated financial statements, in 1993, the Company changed its method of accounting for Income Taxes, Postretirement Benefits Other than Pensions, Postemployment Benefits, Re-insurance of Short-Duration and Long- Duration Contracts, Multiple-Year Retrospectively Rated Contracts, and Certain Investments in Debt and Capital Securities, all as set forth in various pronouncements of the Financial Accounting Standards Board and the Emerging Issues Task Force.
COOPERS & LYBRAND
New York, New York March 17, 1994
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1993 and 1992 (Dollars in thousands, except par value)
The accompanying notes are an integral part of these consolidated financial statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1993, 1992 and 1991
The accompanying notes are an integral part of these consolidated financial statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1993, 1992 and 1991
The accompanying notes are an integral part of these consolidated financial statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, continued For the years ended December 31, 1993, 1992 and 1991
The accompanying notes are an integral part of these consolidated financial statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended December 31, 1993, 1992 and 1991
The accompanying notes are an integral part of these consolidated financial statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies: -------------------------------
(a) Changes in Accounting Policies: Effective as of January 1, 1993, ------------------------------ the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"), Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), Statement of Financial Accounting Standards No. 112 "Employers' Accounting for Postemployment Benefits" ("SFAS 112"), Statement of Financial Accounting Standards No. 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113") and Financial Accounting Standards Board's Emerging Issues Task Force Consensus No. 93-6 "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). As a result of adoption of SFAS 106, SFAS 109, SFAS 112 and EITF 93-6, the cumulative effects of such changes through January 1, 1993 were recorded as of the date of adoption and were principally reflected in results of operations as "Cumulative effects of changes in accounting principles." In addition, as a result of adoption of SFAS 109, certain acquired intangibles were reduced (for benefits of acquired tax loss carryforwards) and shareholders' equity was directly increased (as a result of prior stock transactions).
SFAS 106, SFAS 112 and EITF 93-6 had no material effect on income before cumulative effects of changes in accounting principles for 1993 and are unlikely to have a material effect on future results of operations.
Effective as of December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Adoption of SFAS 115 had no material effect on results of operations but did increase shareholders' equity by approximately $49,500,000 at December 31, 1993 as described more fully in Note 1(e).
(b) Consolidation Policy: The consolidated financial statements -------------------- include the accounts of the Company and all significant majority-owned subsidiaries. The Company's subsidiary, Phlcorp, Inc. ("Phlcorp") has several legal subsidiaries (the "WMAC Companies") which are, or were, under the control of the Wisconsin Insurance Commissioner (the "Commissioner"). These companies are not consolidated while under the control of the Commissioner.
Investments in certain other entities in which the Company owns less than 50% of the voting interest and has the ability to exercise significant influence are accounted for on the equity method of accounting. Amounts related to such companies have not been material.
Certain amounts for prior periods have been reclassified to be consistent with the 1993 presentation.
(c) Stock Split: On January 8, 1993, a two-for-one stock split was ----------- effected in the form of a 100% stock dividend. The financial statements (and notes thereto) give retroactive effect to the stock split for all periods presented.
(d) Statement of Cash Flows: The Company considers short-term ----------------------- investments (generally investments with maturities of less than three months at the time of acquisition) as cash equivalents. As described in Note 2, on August 16, 1991, the Company acquired Colonial Penn Group, Inc. ("Colonial Penn") for cash of approximately $128,000,000. The acquired assets were recorded at an aggregate of
The accompanying notes are an integral part of these consolidated financial statements.
1. Significant Accounting Policies, continued: -------------------------------
approximately $1,950,000,000 (principally investments in securities) and the acquired liabilities were recorded at an aggregate of approximately $1,822,000,000 (principally policy reserves and unearned premiums).
Also, as described in Note 2, on December 31, 1992, the Company acquired the minority interest in Phlcorp (the "Phlcorp Minority Interest") for approximately 4,408,000 of the Company's Common Shares which were recorded at an aggregate of approximately $142,927,000, including costs. Because Phlcorp was a consolidated subsidiary, the Phlcorp Minority Interest (approximately $92,819,000) was eliminated and the difference between the consideration issued and the minority interest eliminated was principally allocated to investments in associated companies (approximately $11,022,000), amounts related to the WMAC Companies (approximately $16,847,000) and excess of purchase price over net assets acquired (approximately $22,277,000). The amount allocated to excess of purchase price over net assets acquired was eliminated as a result of the adoption of SFAS 109.
On June 1, 1993, the Company received 224,175 of the Company's Common Shares (valued at $8,294,000) in settlement of a zero coupon note due from John W. Jordan II, a Director of the Company and a significant shareholder. Based on the market price of the shares on the date the transaction was approved by the Board of Directors, the value of the shares received was equal to the maturity value of the note.
(e) Investments: Prior to December 31, 1993, investments were carried ----------- at amortized cost with respect to fixed maturities (other than those classified as held for sale) and policyholder loans. Investments were carried at market with respect to marketable equity securities of the insurance subsidiaries and options that did not meet the accounting definition of a hedge and at the lower of cost or market (in the aggregate) for other marketable equity securities.
Prior to adoption of SFAS 115, the Company classified a portion of the insurance subsidiaries' investment portfolios as "held for sale." Such investments were carried at the lower of cost or market. A substantial portion of the proceeds from disposition of the portfolio classified as held for sale were invested in other securities.
The Company adopted SFAS 115 on December 31, 1993. Under SFAS 115 marketable debt and equity securities are designated as i) "held to maturity" (carried at cost), ii) "trading" (carried at market with differences between cost and market being reflected in results of operations) or iii) if not otherwise classified, as "available for sale" (carried at market with differences between cost and market being reflected as a separate component of shareholders' equity, net of income tax effect). The adoption of SFAS 115 resulted in an increase in reported shareholders' equity of approximately $49,500,000. The Company does not expect that SFAS 115 will have a material effect on future results of operations, although the Company believes SFAS 115 is likely to result in substantial fluctuations in reported shareholders' equity.
The fixed maturity investments of the insurance subsidiaries (other than those classified as "trading") are made with the intention of holding such securities to maturity and the Company has the ability to do so.
Both prior and subsequent to adoption of SFAS 115, declines in market value below cost which are considered other than temporary are charged to results of operations. For determining realized gain or loss on securities sold, cost is based on average cost.
Net unrealized gain on investments at December 31, 1993 is net of deferred income taxes of $27,091,000.
(f) Property, Equipment and Leasehold Improvements: Property, ---------------------------------------------- equipment and leasehold improvements are stated at cost, net of accumulated depreciation and amortization (approximately $73,640,000 and $65,150,000 at
1. Significant Accounting Policies, continued: -------------------------------
December 31, 1993 and 1992, respectively). Depreciation and amortization are provided principally on the straight-line method over the estimated useful lives of the assets or, if less, the term of the lease.
(g) Income Recognition from Insurance Operations: Premiums on the -------------------------------------------- property and casualty insurance business are recognized as revenues over the term of the policy using the monthly pro rata basis.
The life insurance subsidiaries have had several investment oriented insurance products (collectively the "IOP products"), principally consisting of single premium whole life ("SPWL") products, a variable life ("VL") product, variable annuity ("VA") products and a single premium deferred annuity ("SPDA") product. IOP product premiums are reflected in a manner similar to a deposit; revenues reflect only mortality charges and other amounts assessed against the holder of the insurance policies and annuity contracts. Other life premiums are recognized as revenues when due. Health premiums are recognized as revenues over the premium paying period.
Premiums for the VA and VL products are directed by the policyholder to be invested generally in a unit trust solely for the benefit and risk of the policyholder. Such investments are considered a "separate account." Policyholder's accounts are charged for the cost of insurance provided, administrative and certain other charges. The amounts included in the balance sheet as policy reserves for the VA and VL products represent the current value of the policyholders' funds.
(h) Policy Acquisition Costs: Policy acquisition costs principally ------------------------ consist of direct response marketing costs, commissions, premium taxes and other underwriting expenses (net of reinsurance allowances). If recoverability of such costs is not anticipated, the amounts not considered recoverable are charged to operations. During the three years ended December 31, 1993, the Company has also written-off or reduced deferred policy acquisition costs in connection with dispositions of blocks of business or reinvestment of proceeds from security sales at the lower prevailing interest rates.
Policy acquisition costs applicable to the property and casualty insurance operations are deferred and amortized ratably over the terms of the related policies.
Policy acquisition costs applicable to IOP products are deferred and amortized as a level percentage of the present value of expected gross profits over the estimated life of each policy. The Company regularly compares its actual experience to the previously expected gross profit and reviews revised estimates of expected future gross profits. When significant changes occur, deferred policy acquisition costs are recalculated and the resultant adjustment is reflected in results of operations.
Policy acquisition costs applicable to other life insurance products are amortized over the expected premium paying period of the policies.
(i) Reinsurance: In the normal course of business, the Company seeks ----------- to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. The Company has also entered into reinsurance transactions in connection with dispositions of blocks of businesses. Reinsurance contracts do not necessarily relieve the Company from its obligations to policyholders.
Prior to January 1, 1993, losses, loss adjustment expenses and unearned premiums were stated net of reinsurance ceded, as were premiums earned and other underwriting expenses. Under SFAS 113, which was adopted as of January 1, 1993, the effects of certain reinsurance transactions are no longer deducted from the related asset or liability. As a result of adoption of SFAS 113, at December 31, 1993 certain assets (principally
1. Significant Accounting Policies, continued: ------------------------------- reinsurance receivables) and policy reserves were each greater by approximately $457,621,000, representing reinsured amounts that prior to the adoption of SFAS 113 would have been deducted from the related asset or liability. Under SFAS 113 and the prior accounting, appropriate provisions are made for uncollectible reinsurance receivables. Although SFAS 113 did not have a material effect on results of operations, it is likely to affect the way certain new reinsurance transactions or extensions or amendments of existing reinsurance contracts are reported.
(j) Policy Reserves and Unearned Premiums: Policy reserves and ------------------------------------- unearned premiums for life, health and traditional annuity policies are computed on a net level premium method based upon standard and Company developed tables with provision for adverse deviation and estimated withdrawals. Liabilities for unpaid losses and loss adjustment expenses applicable to the property and casualty insurance operations are determined using case basis evaluations, statistical analyses for losses incurred but not reported and estimates for salvage and subrogation recoverable and represent estimates of ultimate claim costs and loss adjustment expenses.
Effective as of January 1, 1993, the Company adopted EITF 93-6 which specifies the accounting for certain retrospectively rated reinsurance agreements. EITF 93-6 is applicable to a small number of per risk, excess of loss reinsurance policies entered into in the normal course of the Empire Insurance Company and subsidiaries' (the "Empire Group") property and casualty insurance business. As a result of the adoption of EITF 93-6, the Company (retroactive to January 1, 1993) reduced its policy reserves at January 1, 1993 by approximately $14,654,000 and recorded a credit of approximately $9,672,000 (net of income taxes of $4,982,000) which is included in the caption "Cumulative effects of changes in accounting principles." If the accounting specified by EITF 93-6 had been in effect in 1992 and 1991, the resulting increase in income before cumulative effects of changes in accounting principles for each of those years would not have been material.
(k) Trading Stamp Revenue and Liability for Unredeemed Trading Stamps: ----------------------------------------------------------------- The Company records trading stamp revenues and provides for the cost of redemptions at the time trading stamps are furnished to licensees. A liability for unredeemed trading stamps is estimated based upon the cost of merchandise, cash and related redemption service expenses required to redeem the trading stamps which are expected to be presented for redemption in the future. The Company periodically reviews the appropriateness of the estimated redemption rates based upon recent experience, statistical evaluations and other relevant factors. The most recent statistical studies of trading stamp redemptions have indicated that the historical pattern of redemptions has changed and that the recorded liability for unredeemed trading stamps is in excess of the amount that ultimately will be required to redeem trading stamps outstanding. Although the Company believes a significant change in redemption patterns has occurred, the amount of the excess may be different than indicated by these studies. Accordingly, the Company is amortizing the aggregate apparent excess over a five year period (starting in 1990 with respect to approximately $34,000,000 of such apparent excess and in 1991 with respect to approximately $28,000,000 of such apparent excess). As a result, after giving effect to related adjustments, cost of goods sold applicable to the trading stamp operations reflects a credit of approximately $11,900,000, $14,100,000 and $13,700,000 for the years ended December 31, 1993, 1992 and 1991, respectively. Based on the latest studies the unamortized apparent excess at December 31, 1993 was approximately $17,067,000. The Company provided the liability for unredeemed trading stamps based on the estimate that approximately 75% of stamps issued in each of the three years ended December 31, 1993 ultimately will be redeemed.
(l) Motivation Services Revenues: Motivation services revenues are ---------------------------- generally recorded when awards are redeemed or travel programs are completed. Customer deposits for travel programs and the Company's related costs are deferred until such programs are completed. In early 1993, the Company contributed the net assets of the motivation service business to a new joint venture formed with an unrelated motivation services company in exchange for a 45% equity interest in the joint venture. Results of operations of the motivation services business have historically not been significant and are not expected to be significant in the future.
1. Significant Accounting Policies, continued: -------------------------------
(m) Pension, Postemployment and Postretirement Costs: There are ------------------------------------------------ non-contributory trusteed pension plans, which cover certain employees, which generally provide for retirement benefits based on salary and length of service. The plans are funded in amounts sufficient to satisfy minimum ERISA funding requirements.
Certain subsidiaries provide health care and other benefits to certain eligible retired employees. The plans (most of which require employee contributions) are unfunded. Prior to January 1, 1993, the costs of such benefits were expensed generally as incurred, although liabilities for benefits were recorded in connection with certain acquisitions, including that of Colonial Penn and the Phlcorp Minority Interest. Effective as of January 1, 1993, the Company adopted SFAS 106 and SFAS 112 which require companies to accrue the cost of providing certain postretirement and postemployment benefits during the employees' period of service. The Company does not expect SFAS 106 and SFAS 112 to have a material effect on results of continuing operations exclusive of cumulative effects of changes in accounting principles.
(n) Income Taxes: The Company and its domestic subsidiaries, other ------------ than (i) Phlcorp and its subsidiaries prior to January 1, 1993 and (ii) the life insurance subsidiaries of Colonial Penn (acquired in 1991, as described below), file a consolidated federal income tax return. Prior to January 1, 1993, Phlcorp filed a consolidated federal income tax return with its subsidiaries that are not life insurance companies. The life insurance subsidiaries of Colonial Penn file separate or consolidated federal income tax returns. In addition, certain subsidiaries are subject to foreign income taxes.
The Company provides for income taxes using the liability method. Effective as of January 1, 1993, the Company adopted SFAS 109. Prior to adoption of SFAS 109, the benefit from utilization of tax loss carryforwards and future deductions was only recognized when utilized and under certain other limited circumstances. Under SFAS 109, the future benefit of certain tax loss carryforwards and future deductions is recorded as an asset (net of valuation allowance) and the provision for income taxes for periods ending after December 31, 1992 is not reduced for the benefit from utilization of tax loss carryforwards. Accordingly, the provision for income taxes for periods ended in 1993 is not comparable to provisions for income taxes for periods ended in 1992 and 1991. Under the liability method, deferred income taxes are provided at the statutorily enacted rates for differences between the tax and accounting bases of substantially all assets and liabilities and for carryforwards. A valuation allowance is provided (and periodically reevaluated) if deferred tax assets are not considered more likely than not to be realized.
(o) Translation of Foreign Currency: Foreign currency denominated ------------------------------- investments which are not subject to hedging agreements and currency rate swap agreements not meeting the accounting requirements for "hedges," are converted into U.S. dollars at exchange rates in effect at the end of the period. Resulting net exchange gains or losses were not material.
2. Acquisitions: ------------
Through November 1991, the Company owned approximately 66% of the outstanding common shares of Phlcorp. During 1991 outstanding warrants to acquire approximately 8% of Phlcorp's shares were exercised by other parties at an aggregate purchase price of approximately $14,782,000. After giving effect to certain purchases by the Company, the Company owned approximately 63% of Phlcorp's outstanding common shares at December 31, 1991 and throughout most of 1992. On December 31, 1992, pursuant to a merger agreement, Phlcorp merged with a subsidiary of the Company and became a wholly owned subsidiary of the Company (the "Merger"). Pursuant to the terms of the Merger, the Company issued .812 of a Common Share for each Phlcorp share not held by the Company or its subsidiaries (an aggregate of approximately 4,408,000 of the Company's Common Shares). The aggregate cost of acquiring the Phlcorp Minority Interest (principally based
2. Acquisitions, continued: ------------
on the market price of the Company's Common Shares on the day immediately prior to entering into an agreement in principle as to the terms of the transaction) was approximately $142,927,000.
The Company is a partner in The Jordan Company and Jordan/Zalaznick Capital Company, private investment firms whose principal activity is structuring leveraged buy-outs in which the partners are given the opportunity to become equity participants. John W. Jordan II, a director of the Company and a significant shareholder, is a Managing Partner of both firms. Since 1982, through such partnerships, the Company acquired interests in several companies (the "Jordan Associated Companies"), principally engaged in various aspects of manufacturing and distribution. The Company currently accounts for its interests in fourteen of the Jordan Associated Companies on the cost method of accounting and one company (which is not material to the Company) on the equity method of accounting. The investments acquired as a result of the partnership interests are considered Associated Companies.
On August 16, 1991, the Company, through its wholly owned subsidiary, Charter National Life Insurance Company ("Charter National"), completed the acquisition of Colonial Penn for an aggregate cash purchase price of approximately $128,000,000, including costs. The Company also made a subsequent $40,000,000 investment in Colonial Penn's principal property and casualty insurance subsidiary. Colonial Penn is a holding company, principally for life and property and casualty insurance companies specializing in direct marketing of personal lines of insurance primarily to individuals over the age of 50. Colonial Penn's principal property and casualty insurance subsidiary also previously wrote certain commercial property and casualty insurance.
At the acquisition date, after giving effect to a cash contribution by the seller prior to the closing of approximately $49,827,000, Colonial Penn had (unaudited) shareholder's equity, determined in accordance with generally accepted accounting principles, of approximately $391,000,000 (approximately $263,000,000 in excess of the purchase price). The allocation of the purchase price reflected the elimination of deferred policy acquisition costs, value of insurance in force and property and equipment, and additional amounts for employee severance, postretirement benefits, relocation, lease commitments, restructuring costs and additional reserves for policyholders' benefits. Colonial Penn is included in results of operations from its date of acquisition, August 16, 1991.
For the period from date of acquisition to December 31, 1991, Colonial Penn had revenues of approximately $359,088,000 (including net security gains of approximately $16,323,000) and contributed approximately $59,995,000 to consolidated pre-tax income (exclusive of financing costs). For the year ended December 31, 1992, Colonial Penn had revenues of approximately $836,552,000 (including net security gains of approximately $23,543,000) and contributed approximately $131,757,000 to consolidated pre-tax income (exclusive of financing costs). Due to changes in the Company's insurance operations, it is not practicable to provide meaningful comparable information for the acquired Colonial Penn operations for 1993. The following table provides certain unaudited consolidated pro forma results of operations data assuming the acquisition of Colonial Penn and the Phlcorp Minority Interest had occurred on January 1, 1991. (Amounts are in thousands, except per share amounts.)
2. Acquisitions, continued: ------------
The principal pro forma adjustments related to Colonial Penn reflected in the data above consist of elimination and/or reduction of (i) amortization and depreciation of deferred policy acquisition costs, value of insurance in force, goodwill and fixed assets, (ii) rent expense applicable to excess facilities and, (iii) with respect to 1991, income taxes. Such pro forma data also provides for the cost of financing the acquisition.
The effects of certain cost savings programs implemented by the Company since the acquisition of Colonial Penn are reflected only to the extent included in the consolidated historical results of operations. The reduction in new business solicitation effort which has been accomplished by the Company since the acquisition was expected to, and has, resulted in a substantial reduction in new business and premium revenues. Colonial Penn's annualized written premiums related to new business generated were approximately $24,563,000 for 1992 compared to $111,277,000 for 1991. However, the effect on operating earnings of such reduction in new business solicitation efforts cannot be reasonably estimated and is not reflected in the pro forma data above. Accordingly, such pro forma data should not necessarily be considered indicative of future results of operations or the results of operations that would have resulted if the acquisitions had actually occurred as reflected in the pro forma data.
3. Investments in Associated Companies: -----------------------------------
The Company owns or held part interests in the following foreign power companies: Compania de Alumbrado Electrico de San Salvador, S.A. ("CAESS"), Compania Boliviana de Energia Electrica, S.A. - Bolivian Power Company Limited ("Bolivian Power") and, through Canadian International Power Company Limited Liquidating Trust, The Barbados Light and Power Company Limited.
In March 1993, in settlement of claims related to El Salvador's 1986 seizure of CAESS's assets, the Company received cash of approximately $5,300,000 and approximately $12,000,000 principal amount of 6% U.S. dollar denominated El Salvador Government bonds due in instalments through 1996. The Company, which had an investment in CAESS of $8,188,000 at December 31, 1992, will recognize the gain on the cash basis. Payments of principal and interest are being made in accordance with their terms. Recognized gains in 1993 were not significant. During 1994, the Company disposed of the bonds and will report a pre-tax gain of $8,458,000 in first quarter 1994 results of operations.
During 1993 the Company sold 750,000 shares of Bolivian Power common stock in an underwritten public offering and realized a pre-tax gain of approximately $12,981,000, which is reflected in 1993 results of operations in the caption, "Investment and other income." At December 31, 1993, the Company owned 719,206 shares of Bolivian Power common stock.
The Company believes that it ultimately will receive the stock of two WMAC Companies, which are the only additional companies expected to be returned to the Company with significant value. However, the timing of such receipt is uncertain. The Company estimates that the fair value to the Company of the net tangible assets yet to be received is approximately $32,800,000 in excess of their recorded cost at December 31, 1993.
4. Insurance Operations: --------------------
SPWL and SPDA policies generally provide the policyholder with a declared rate of cash value increase for a specified initial period and subsequent annual rates as determined by the Company, generally subject to minimum rates; the policyholder is generally subject to early termination penalties designed to recover unamortized policy acquisition costs.
4. Insurance Operations, continued: --------------------
Premiums received on IOP products amounted to approximately $88,312,000, $68,035,000 and $43,164,000 for the years ended December 31, 1993, 1992 and 1991, respectively.
The changes in deferred policy acquisition costs and value of insurance in force were as follows (in thousands):
During 1992, the Company concluded that the profitability of its existing block of SPDA business was unlikely to achieve acceptable results in the future. Accordingly, principally starting in the fourth quarter of 1992, the Company offered certain of its existing SPDA policyholders' the opportunity to exchange their policies for SPDA policies of an unrelated insurer and entered into a reinsurance agreement (which closed in stages in 1992 and 1993) to reinsure certain blocks of SPDA business with a second unrelated insurer. As a result, during the fourth quarter of 1992, policies with an aggregate policyholders' account balance of approximately $196,648,000 were either terminated by the policyholder, transferred at the policyholder's request or transferred in a reinsurance transaction. In the 1993 transactions, which involved reinsurance of policies with account balances of approximately $47,187,000 on the date of closing, there was no significant gain or loss.
The Company is maximizing the return on any remaining SPDA policies by reducing crediting rates to the minimum permitted. As a result, the Company believes a substantial portion of the remaining SPDA policyholders will terminate their policies over a period of time.
On June 23, 1993, the Company reinsured substantially all of its existing SPWL business with a subsidiary of John Hancock Mutual Life Insurance Company ("John Hancock"). In connection with the transaction, the Company realized a net pre-tax gain of approximately $16,700,000 during 1993. Such net pre-tax gain consists of net gains on sales of investments sold in connection with the transaction (approximately $24,100,000), which are included in the caption "Net securities gains," reduced by a net loss of approximately $7,400,000 (principally the write-off of deferred policy acquisition costs of approximately $26,900,000 less the premium received on the transaction) which is included in the caption "Provision for insurance losses and policy benefits." Further, the Company may receive additional consideration based on the subsequent performance of this block of business.
Under SFAS 113, for financial reporting purposes, the Company will reflect the policy liabilities assumed by John Hancock (in policy reserves), with an offsetting receivable from John Hancock of the same amount (in reinsurance receivable, net), until the Company is relieved of its legal obligation to the SPWL policyholders. During 1993, the Company was legally relieved of SPWL policy liabilities of approximately $200,096,000.
During the three years ended December 31, 1993, the Company sold, at gains, substantial amounts of investments (including dispositions in connection with the actual or contemplated transfer of blocks of business) and, in certain cases, reinvested proceeds at the lower prevailing interest rates. Since certain of these rates
4. Insurance Operations, continued: --------------------
were lower than had previously been expected on certain fixed rate annuity policies, the Company provided additional reserves of approximately $6,800,000 in 1993, $2,700,000 in 1992 and $8,800,000 in 1991. In addition, because of the lower anticipated investment earnings, the Company also recalculated deferred policy acquisition costs and provided additional amounts for amortization of deferred policy acquisition costs of $2,100,000 in 1992.
The amount deducted from insurance loss and policy reserves for reinsured risks was approximately $179,391,000 at December 31, 1992.
The effect of reinsurance on premiums written and earned for the year ended December 31, 1993 is as follows (in thousands):
Recoveries recognized on reinsurance contracts were approximately $22,800,000 in 1993.
Net income and statutory surplus as determined in accordance with statutory accounting principles as reported to the domiciliary state of the Company's insurance subsidiaries are as follows (in thousands):
Certain insurance subsidiaries are owned by other insurance subsidiaries. In the data above, investments in such subsidiary-owned insurance companies are reflected in statutory surplus of both the parent and subsidiary-owned insurance company. As a result, at December 31, 1993 and 1992, statutory surplus of approximately $288,800,000 and $122,000,000, respectively, related to property and casualty operations is included in the statutory surplus of the life insurance parent and the property and casualty insurance subsidiary, and statutory surplus of approximately $42,200,000 and $38,000,000, respectively, related to life operations is included in the statutory surplus of the property and casualty insurance parent and the life insurance subsidiary. The insurance subsidiaries are subject to regulatory restrictions which limit the amount of cash and other distributions available to the Company without regulatory approval. At December 31, 1993, approximately $33,200,000 could be distributed to the Company without regulatory approval.
4. Insurance Operations, continued: --------------------
The Company's insurance subsidiaries are members of state insurance funds which provide certain protection to policyholders of insolvent insurers doing business in those states. Due to insolvencies of certain insurers in recent years, the Company's insurance subsidiaries have been assessed certain amounts and are likely to be assessed additional amounts by the state insurance funds. The Company has provided for all anticipated assessments and does not expect any additional assessments to have a material effect on results of operations.
The Colonial Penn property and casualty insurance subsidiaries are subject to a possible rate "roll-back" refund on California insurance premiums for certain pre-acquisition years. The amount of such roll-back refunds are to be determined by the California Insurance Commissioner. The Company has not been notified of the amount, if any, of such roll-back refund. Based on its operating results in the relevant years, the Company believes Colonial Penn should not be assessed for any roll-back refund and, if assessed a significant amount, intends to vigorously oppose such determination. In addition, New Jersey's insurance laws require all automobile insurers to share in the losses of the successor (the "MTF") to its insurance pool for high risk drivers (the "JUA"), based on their depopulation share of the JUA, as set by New Jersey. Although the amount of the MTF deficit has not yet been established, based on certain current estimates (which are subject to change) of the MTF deficit, Colonial Penn could be assessed approximately $11,100,000, which has been accrued. For 1993, voluntary automobile net earned premiums in California and New Jersey together represented approximately 10% of the Company's total property and casualty net earned premiums.
5. Investments: -----------
Certain information with respect to investments (other than short- term) at December 31, 1993 is as follows (in thousands):
5. Investments, continued: -----------
The amortized cost and estimated market value of investments classified as held to maturity and investments classified as available for sale at December 31, 1993 are as follows (in thousands):
The amortized cost and estimated market value of investments classified as held to maturity and investments classified as available for sale at December 31, 1993, by contractual maturity are shown below. Expected maturities are likely to differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
5. Investments, continued: -----------
Certain information with respect to investments (other than short- term) at December 31, 1992 is as follows (in thousands):
The amortized cost and estimated market value of fixed maturity investments (other than investments held for sale) at December 31, 1992 are as follows (in thousands):
The amortized cost and estimated market value of investments held for sale at December 31, 1992 are as follows (in thousands):
Gross unrealized gains and losses on the Company's marketable equity securities were $3,366,000 and $104,000, respectively, at December 31, 1992.
At December 31, 1993 and 1992 securities with book values aggregating approximately $55,145,000 and $39,469,000, respectively, were on deposit with various regulatory authorities.
5. Investments, continued: -----------
At December 31, 1993, the Company had common stock equity interests of 5% or more in the following domestic publicly owned non-consolidated companies, some of which are Associated Companies: Carmike Cinemas, Inc. (approximately 9% of Class A shares), Jones Plumbing Systems, Inc. (approximately 21%) and Olympus Capital Corporation (approximately 18%).
6. Receivables, Net: ----------------
A summary of trade, notes and other receivables, net at December 31, 1993 and 1992 is as follows (in thousands):
[FN] (a) Contractual maturities of instalment loan receivables at December 31, 1993 were as follows (in thousands): 1994 - $102,524; 1995 - $39,598; 1996 - $21,674; 1997 - $13,942 and 1998 and thereafter - $9,956. Experience shows that a substantial portion of such notes will be repaid or renewed prior to contractual maturity. Accordingly, the foregoing is not to be regarded as a forecast of future cash collections.
(b) On June 1, 1993, Mr. Jordan delivered to the Company 224,175 of the Company's Common Shares valued at $8,294,000 (the maturity value of the zero coupon note, after reflecting certain prepayments) as payment in full of the zero coupon note. The Common Shares were valued at $37.00 per share, the closing price of a Common Share on the New York Stock Exchange Composite Tape on the last full trading day prior to the authorization by the Company's Board of Directors of the agreement. Interest and other income recognized in connection with the note was $420,000 for 1993, $929,000 for 1992 and $819,000 for 1991.
During 1992, the Company sold substantially all of its consumer loan development offices (which offices had aggregate instalment loan receivables at the time of sale of approximately $68,500,000) and realized pre-tax gains of approximately $12,128,000 in connection with the sales. Such gains are included in 1992 results of operations in the caption, "Investment and other income."
Reinsurance receivables are net of allowance for doubtful accounts of approximately $83,825,000 and $43,799,000 at December 31, 1993 and 1992, respectively. Amounts due from reinsurers for 1993 were reclassified in accordance with SFAS 113 resulting in the apparent increase in the allowance for doubtful reinsurance receivables. Had the prior accounting been in effect, reinsurance receivables would have been reduced by approximately $457,621,000 at December 31, 1993. At December 31, 1993, reinsurance receivables, net includes approximately $322,351,000 due from a subsidiary of John Hancock.
7. Prepaids and Other Assets: -------------------------
At December 31, 1993 and 1992, a summary of prepaids and other assets is as follows (in thousands):
[CAPTION]
8. Trade Payables, Expense Accruals and Other Liabilities: ------------------------------------------------------
A summary of trade payables, expense accruals and other liabilities at December 31, 1993 and 1992 is as follows (in thousands):
9. Long-term and Other Indebtedness: --------------------------------
The principal amount, stated interest rate and maturity of long-term debt outstanding at December 31, 1993 and 1992 are as follows (dollars in thousands):
Credit agreements provide for aggregate contractual credit facilities of $150,000,000 at December 31, 1993 and bear interest based on the prime rate or LIBOR, plus commitment and other fees. Such credit facilities were renewed in 1994 to expire in 1997.
Approximately $16,717,000 of the manufacturing division's net property, equipment and leasehold improvements are pledged as collateral for the Industrial Revenue Bonds; and approximately $2,727,000 of other property is pledged for other indebtedness aggregating approximately $1,171,000.
The Company has interest rate swap agreements with a bank which expire in 1996, the practical effect of which is to convert the variable interest rate on $50,000,000 of indebtedness into fixed interest rate obligations at an interest rate of approximately 8%.
During 1989, the Company entered into long-term hedging transactions whereby substantially all currency rate risk related to the Swiss Franc Bonds for their remaining term was eliminated and the cost of which increased the cost of the issue to approximately 10.4%.
In February 1993, the Company sold $100,000,000 principal amount of its newly authorized 5 1/4% Convertible Subordinated Debentures due 2003 (the "Convertible Debentures") in an underwritten public offering. The Convertible Debentures are convertible into Common Shares at $57.50 per Common Share (an aggregate of 1,739,130 Common Shares), subject to anti-dilution provisions.
In August 1993, the Company sold $100,000,000 principal amount of its newly authorized 7 3/4% Senior Notes due 2013 (at 99% of principal amount) in an underwritten public offering.
The most restrictive of the Company's debt instruments requires maintenance of minimum Tangible Net Worth, as defined, and limit Indebtedness, as defined, to a percentage of Tangible Net Worth and Subordinated
9. Long-term and Other Indebtedness, continued: --------------------------------
Indebtedness, as defined. In addition, the debt instruments contain limitations on dividends, investments, liens, contingent obligations and certain other matters. As of January 1, 1994, cash dividends of approximately $180,600,000 could be paid under the most restrictive covenants.
The aggregate annual mandatory redemptions of debt during the five year period ending December 31, 1998 (exclusive of Credit Agreements) are as follows (in thousands): 1994 - $28,821; 1995 - $3,013; 1996 - $35,246; 1997 - $1,017; and, 1998 - $872.
10. Common Shares, Stock Options, Warrants and Preferred Shares: -----------------------------------------------------------
On July 14, 1993, the shareholders approved an increase in authorized Common Shares from 60,000,000 to 150,000,000.
The Board of Directors from time to time has authorized acquisitions of the Company's Common Shares. Pursuant to such authorization, during the three year period ended December 31, 1993, the Company acquired 496,031 Common Shares (282,409 in 1993, 110,800 shares in 1992 and 102,822 shares in 1991) at an average price of $30.26 per Common Share. The Common Shares acquired in 1993, include 224,175 Common Shares acquired from John W. Jordan II.
A summary of activity with respect to the Company's stock options for the three years ended December 31, 1993 is as follows:
The options were granted under plans that provide for the issuance of stock options and stock appreciation rights at not less than the fair market value of the underlying stock at the date the options or rights are granted. Options granted under these plans generally become exercisable in five equal annual instalments starting one year from date of grant; no stock appreciation rights have been granted.
At December 31, 1993 and 1992, options to purchase 221,996 and 243,904 Common Shares, respectively, were exercisable.
In January 1992, the Company redeemed certain Warrants (which previously had been granted to the Company's Chairman and President pursuant to shareholder approval) for an aggregate cash payment of
10. Common Shares, Stock Options, Warrants and Preferred Shares, ----------------------------------------------------------- continued:
approximately $14,700,000, which amount was charged to additional paid-in capital. In January 1992, pursuant to subsequent approval of the shareholders, warrants to purchase 800,000 Common Shares at $20.188 (the then market value of the Company's shares) per Common Share through January 10, 1997 were granted to each of the Company's Chairman and President. The warrants granted in 1992 became exercisable on April 1, 1993.
At December 31, 1993 and 1992, the Company's Common Shares were reserved as follows:
At December 31, 1993 and 1992, 6,000,000 preferred shares (redeemable and non-redeemable), par value $1 per share, were authorized.
Phlcorp, through November 1991, had warrants outstanding which were exercisable for Phlcorp common shares at $13.425 per Phlcorp common share. 1,203,318 of such warrants were exercised (1,176,093 in 1991, including 74,983 exercised by the Company) prior to their expiration in November 1991.
11. Cumulative Effects of Changes in Accounting Principles: ------------------------------------------------------ A summary of the amounts included in cumulative effects of changes in accounting principles and related per share amounts for the year ended December 31, 1993 is as follows (in thousands, except per share amounts):
12. Net Securities Gains: -------------------- The following summarizes net securities gains (losses) for each of the three years in the period ended December 31, 1993 (in thousands):
As a result of the realization of significant gains on sales of securities (including dispositions in connection with the termination or transfer of SPDA and SPWL business) and reinvestment of the proceeds of certain dispositions at the lower prevailing interest rates, the Company recalculated or eliminated deferred policy acquisition costs applicable to the IOP products and provided additional amounts for policyholder benefits applicable to certain fixed rate products as indicated above.
Proceeds from sales of fixed maturity investments (including securities held for sale) were approximately $1,171,574,000, $2,421,057,000 and $1,016,645,000 during 1993, 1992 and 1991, respectively. Gross gains of approximately $51,839,000, $70,551,000 and $50,797,000 and gross losses (including provisions for write-downs) of approximately $3,587,000, $24,501,000 and $23,677,000 were realized on those sales during 1993, 1992 and 1991, respectively.
13. Income Taxes: ------------
As a result of adoption of SFAS 109 in 1993 the future benefit of certain tax loss carryforwards and future deductions was recorded as an asset (net of valuation allowance) and the provision for income taxes for the year ended December 31, 1993 was not reduced for the benefit from utilization of tax loss carryforwards. Adoption of SFAS 109 at January 1, 1993 was principally reflected as follows (in thousands):
13. Income Taxes, continued: ------------
The principle components of the deferred tax asset at December 31, 1993 are as follows (in thousands):
The valuation allowance principally relates to certain acquired tax loss carryforwards, the usage of which is subject to certain limitations and certain other matters which may restrict the availability of reported tax loss carryforwards. In addition, the amounts reflected above are based on the minimum tax loss carryforwards of Phlcorp and assume that certain proposed regulations affecting the use of Phlcorp's tax loss carryforwards are finalized without significant change. As described more fully herein, substantial additional amounts may be available under certain circumstances.
The Company believes it is more likely than not that the recorded deferred tax asset will be realized; such realization will principally result from taxable income generated by profitable operations.
The provision for income taxes for each of the three years in the period ended December 31, 1993 was as follows (in thousands):
13. Income Taxes, continued: ------------
The table below reconciles the "expected" statutory federal income tax applicable to the actual income tax expense (in thousands).
The provision for income taxes for 1993 only was calculated under SFAS 109. Accordingly, the provisions for periods ended in 1993 are not comparable to provisions for periods ended prior to 1993.
In August 1993, the Omnibus Budget Reconciliation Act (the "OBRA") was enacted which, among other things, increased certain corporate income tax rates retroactive to the beginning of 1993. Under SFAS 109, deferred income taxes are calculated at the statutory rates scheduled to be in effect when the tax benefit is estimated to be realized. When changes in statutory income tax rates are enacted, current and deferred income taxes are recalculated and any resulting adjustment is reflected in the provision for income taxes in the period in which such legislation is enacted.
The valuation allowance applicable to the deferred income tax asset recorded upon adoption of SFAS 109 gave effect to the possible unavailability of certain income tax deductions. During the third quarter of 1993 certain matters were resolved and the Company reduced the valuation allowance, resulting in a reduction in the provision for income taxes for the year ended December 31, 1993.
The Company estimates that if SFAS 109 had not been adopted, the provision for income taxes for the year ended December 31, 1993 would have been lower by, and net income (exclusive of amounts applicable to changes in accounting principles) would have been higher by, approximately $42,614,000 (or $1.46 per primary earnings per share and $1.38 per fully diluted earnings per share).
As previously noted, the Company, certain of the Colonial Penn life insurance subsidiaries and Phlcorp prior to 1993 filed consolidated federal income tax returns with certain subsidiaries (including, with respect to Phlcorp, the WMAC Companies). Phlcorp is included in the Company's consolidated income tax return in 1993.
Phlcorp, in connection with its 1986 reorganization, entered into a tax settlement agreement (the "Tax Settlement Agreement") with the United States whereby, among other things, Phlcorp agreed that upon utilization of certain pre-reorganization tax loss carryforwards, it would pay 25% of any resultant tax savings to the government, subject to certain limitations. The Tax Settlement Agreement provides that the amount of pre-reorganization operating loss carryforwards will be calculated by a method which, among other things, gives
13. Income Taxes, continued: ------------
consideration to the outcome of certain ruling requests made by Phlcorp and provides that post-reorganization net operating losses will be utilized prior to pre-reorganization operating losses in calculating tax sharing payments. In 1991, the Internal Revenue Service ("IRS") issued a favorable ruling on certain rulings requested by Phlcorp. This ruling did not address all matters and, therefore, certain matters remain unresolved. In addition, in the past, the IRS has indicated that it disagrees with Phlcorp's reporting positions on certain post-reorganization deductions and has suggested that such positions violate the Tax Settlement Agreement. Because of these uncertainties, Phlcorp is unable to state with certainty the amount of its available carryforwards. However, Phlcorp believes that it has minimum tax operating loss carryforwards of between $143,000,000 and $302,000,000 at December 31, 1993. The expiration dates for Phlcorp's carryforwards will depend on the outcome of the matters referred to above, although it is unlikely such carryforwards will begin to expire before 1998.
At December 31, 1993 the Company had loss carryforwards for income tax purposes as follows (in thousands):
[CAPTION]
Limitations exist under the tax law which may restrict the utilization of the Phlcorp carryforwards subsequent to December 31, 1993 and an aggregate of approximately $25,000,000 of non-Phlcorp tax loss carryforwards. Further, certain of the future deductions may only be utilized in the tax returns of certain life insurance subsidiaries. These limitations were considered when providing the valuation allowance under SFAS 109.
Under certain circumstances, the value of the carryforwards available could be substantially reduced if certain changes in ownership were to occur. In order to reduce this possibility, the Company's shareholders at a special meeting held on December 30, 1992, approved certain charter restrictions which prohibit transfers of the Company's Common Stock under certain circumstances.
Under prior law, Charter National had accumulated approximately $19,561,000 of special federal income tax deductions allowed life insurance companies as of December 31, 1993 and the Colonial Penn life insurance subsidiaries had accumulated approximately $161,000,000 of such special deductions. Under certain conditions, such amounts could become taxable in future periods. Except with respect to amounts applicable to Colonial Penn's life insurance subsidiaries for which the seller has assumed such liability contractually, the Company does not anticipate any transaction occurring which would cause these amounts to become taxable. In connection with the IRS's examination of certain pre-acquisition tax returns of the Colonial
13. Income Taxes, continued: ------------
Penn life insurance companies, the IRS has asserted that approximately $93,025,000 of special federal income tax deductions allowed life insurance companies should have been reflected in taxable income in 1986, resulting in a tax (exclusive of interest and penalties) of approximately $42,792,000. As noted above, the seller is contractually liable for any such taxes (including interest and penalties). The seller has contested the IRS assessment.
14. Pension Plans and Other Postemployment and Postretirement Benefits: ------------------------------------------------------------------
Pension expense charged to operations included the following components (in thousands):
Settlement and curtailment gains (losses) of approximately ($292,000), ($366,000) and $1,154,000 were realized in the years ended December 31, 1993, 1992 and 1991, respectively.
The funded status of the pension plans at December 31, 1993 and 1992 was as follows (in thousands):
The plans' assets consist primarily of fixed income securities (principally U.S. government and agencies' bonds).
The projected benefit obligation at December 31, 1993 and 1992 was determined using an assumed discount rate of 7.0% and 7.5%, respectively, and an assumed compensation increase rate of 5.9% and 6.6%, respectively. The assumed long-term rate of return on plan assets was 7.3% and 7.5% at December 31, 1993 and 1992, respectively.
The Company also has defined contribution pension plans covering certain employees. Contributions and costs are a percent of each covered employee's salary. Amounts charged to expense related to such plans were $2,066,000, $2,106,000 and $2,491,000 for the years ended December 31, 1993, 1992 and 1991, respectively.
14. Pension Plans and Other Postemployment and Postretirement --------------------------------------------------------- Benefits, continued: --------
Several subsidiaries provide certain health care and other benefits to certain retired employees. The costs of such benefits prior to January 1, 1993 were expensed generally as incurred, although liabilities for benefits were recorded in connection with certain acquisitions, including that of Colonial Penn and the Phlcorp Minority Interest. SFAS 106 and SFAS 112 require companies to accrue the cost of providing certain postretirement and postemployment benefits during the employee's period of service. Amounts charged to expense related to such benefits were $2,594,000 in 1993 (principally interest), $1,527,000 in 1992 and $1,256,000 in 1991.
The accumulated postretirement benefit obligation at December 31, 1993 is as follows (in thousands):
The discount rate used in determining the accumulated postretirement benefit obligation was 7.0% at December 31, 1993. The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation were between approximately 8% and 15% for 1993 declining to an ultimate rate of between 5% and 8% by 2006.
If the health care cost trend rates were increased by 1%, the accumulated postretirement obligation as of December 31, 1993 would have increased by approximately $1,404,000. The effect of this change on the estimated aggregate of service and interest cost for 1993 would be immaterial.
15. Commitments: -----------
The Company and its subsidiaries rent office space and office equipment under non-cancelable operating leases with terms generally varying from one to fifteen years. Rental expense (net of sublease rental income) charged to operations was approximately $17,555,000 in 1993, $20,791,000 in 1992 and $13,934,000 in 1991. Aggregate minimum annual rentals (exclusive of real estate taxes, maintenance and certain other charges) and related minimum sublease rentals relating to facilities under lease in effect at December 31, 1993 were as follows (in thousands):
In connection with the sale of certain subsidiaries, the Company has made or guaranteed the accuracy of certain representations given to the acquirer. No material loss is expected in connection with such matters.
15. Commitments, continued: -----------
In addition, certain of the WMAC Companies that have been returned to the control of the Company have guaranteed the adequacy of certain other matters. The maximum amount of such contingencies is approximately $5,000,000 at December 31, 1993. The Company does not expect a material loss in connection with these guarantees.
The insurance subsidiaries and the banking subsidiaries are limited by regulatory requirements and agreements in the amount of dividends and other transfers of funds that are available to the Company. Principally as a result of such restrictions, the net assets of subsidiaries which are subject to limitations on transfer of funds to the Company were approximately $735,000,000 at December 31, 1993.
16. Litigation: ---------- The Company is subject to various litigation which arises in the course of its business. Based on discussions with counsel, management is of the opinion that such litigation will have no material adverse effect on the consolidated financial position of the Company or its consolidated results of operations.
17. Earnings Per Common Share: ------------------------- Earnings per common and dilutive common equivalent share was calculated by dividing net income by the sum of the weighted average number of Common Shares outstanding and the incremental weighted average number of Common Shares issuable upon exercise of warrants for the periods they were outstanding. The number of common and dilutive common equivalent shares used for this calculation was 29,270,000 in 1993, 24,435,000 in 1992 and 23,704,000 in 1991.
Fully diluted earnings per share was calculated as described above except that in 1992 the incremental number of shares utilized the year end market price for the Company's Common Shares, since the year end market price was above the average for the year. In addition, in 1993, the calculations assume the Convertible Debentures had been converted into Common Shares for the period they were outstanding and earnings increased for the interest on such debentures, net of the income tax effect. The number of shares used for this calculation was 30,743,000 in 1993, 24,516,000 in 1992 and 23,916,000 in 1991.
18. Fair Value of Financial Instruments: -----------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107"), requires disclosure of fair value information about certain financial instruments, whether or not recognized on the balance sheet. Where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In addition, SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Therefore, the aggregate fair value amounts presented do not purport to represent and should not be considered representative of the underlying "market" or franchise value of the Company. The methods and assumptions used to estimate the fair values of each class of the financial instruments described below are as follows:
(a) Investments: The fair values of marketable equity securities and fixed maturity securities are substantially based on quoted market prices, as disclosed in Note 5. It is not practicable to determine the fair value of policyholder loans since such loans generally have no stated maturity, are not separately transferable and are often repaid by reductions to benefits and surrenders.
(b) Cash and short-term investments: For short-term investments, the carrying amount approximates fair value.
18. Fair Value of Financial Instruments, continued: -----------------------------------
(c) Loans receivable of banking and lending subsidiaries: The fair value of loans receivable of the banking and lending subsidiaries is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities.
(d) El Salvador Government bonds receivable, net of deferred gain: The fair value of the bonds receivable at December 31, 1993 is based on estimated market prices.
(e) Separate and variable accounts: Separate and variable accounts assets and liabilities are carried at market value, which is a reasonable estimate of fair value.
(f) Investments in Associated Companies: The fair values of certain foreign power companies are principally estimated based upon quoted market prices. The fair value of CAESS at December 31, 1992 was estimated based upon the agreement with the government of El Salvador as to the amounts to be paid to the Company for the assets which were seized by the government.
The carrying value of the remaining investments in associated companies approximates fair value.
(g) The WMAC Companies: The fair value of the WMAC Companies is estimated based upon the Company's assessment of the fair value of their underlying net tangible assets to be received.
(h) Customer banking deposits: The fair value of customer banking deposits is estimated using rates currently offered for deposits of similar remaining maturities.
(i) Long-term and other indebtedness: The fair values of non-variable rate debt are estimated using quoted market prices, estimated rates which would be available to the Company for debt with similar terms and, with respect to the Swiss Franc Bonds, the cost to terminate the currency and interest rate hedging agreement. The fair value of variable rate debt is estimated to be the carrying amount.
(j) Investment contract reserves: SPDA reserves are carried at account value, which is a reasonable estimate of fair value. The fair value of other investment contracts is estimated by discounting the future payments at rates which would currently be offered for contracts with similar terms.
18. Fair Value of Financial Instruments, continued: -----------------------------------
The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1993 and 1992 are as follows (in thousands):
19. Segment Information: ------------------- For information with respect to the Company's business segments, see "Financial Information about Industry Segments" in Item 1 included elsewhere herein, which is incorporated by reference into these consolidated financial statements.
20. Other Results of Operations Information: ---------------------------------------
Investment and other income for each of the three years in the period ended December 31, 1993 consist of the following (in thousands):
During 1991, settlement of certain litigation related to Cambrian & General, a subsidiary, was approved and, accordingly, reserves which were no longer required were eliminated. In addition, payments on certain investments, which were carried at no value, were received in that year. As a result, during 1991, the Company recognized income of approximately $9,359,000.
20. Other Results of Operations Information, continued: ---------------------------------------
Taxes, other than income or payroll, included in operations amounted to approximately $36,839,000 (including $21,295,000 of premium taxes) for the year ended December 31, 1993, $35,051,000 (including $21,153,000 of premium taxes) for the year ended December 31, 1992 and $19,627,000 (including $9,321,000 of premium taxes) for the year ended December 31, 1991.
Advertising costs amounted to approximately $10,394,000, $9,578,000 and $10,623,000 for the years ended December 31, 1993, 1992 and 1991, respectively.
Research and development costs, principally applicable to development of a database marketing program by the trading stamp subsidiary prior to 1992, approximated $8,928,000 in 1991 and were not material in 1992 and 1993. During 1991, the Company decided to discontinue development of the database marketing program. Accordingly, amounts for 1991 include shutdown costs.
21. Subsequent Event: ---------------- During the first quarter of 1994, the Company and an equal partner agreed to acquire a 60% interest in Caja de Ahorro y Seguro S.A. ("Caja") for a purchase price of approximately $85,000,000, subject to final adjustment. Caja is a holding company whose subsidiaries are engaged in property and casualty insurance, life insurance and banking in Argentina. Caja has (unaudited) assets in excess of approximately $500,000,000. Reliable historical operating data for Caja is not available.
22. Selected Quarterly Financial Data (Unaudited): ---------------------------------------------
In 1993 and 1992, the total of quarterly per share amounts do not necessarily equal annual per share amounts.
SCHEDULE I - Summary of Investments - Other Than Investments in Affiliates LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES December 31, 1993 and 1992
SCHEDULE I - Summary of Investments - Other Than Investments in Affiliates, continued LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES December 31, 1993 and 1992
SCHEDULE III - Condensed Financial Information of Registrant LEUCADIA NATIONAL CORPORATION BALANCE SHEETS December 31, 1993 and 1992
See notes to this schedule.
SCHEDULE III - Condensed Financial Information of Registrant, continued: LEUCADIA NATIONAL CORPORATION STATEMENTS OF INCOME For the years ended December 31, 1993, 1992 and 1991
[CAPTION]
See notes to this schedule.
SCHEDULE III - Condensed Financial Information of Registrant, continued: LEUCADIA NATIONAL CORPORATION STATEMENTS OF CASH FLOWS For the years ended December 31, 1993, 1992 and 1991
See notes to this schedule.
SCHEDULE III - Condensed Financial Information of Registrant, continued: LEUCADIA NATIONAL CORPORATION NOTES TO SCHEDULE For the years ended December 31, 1993, 1992 and 1991
A. The notes to consolidated financial statements of Leucadia National Corporation and Subsidiaries are incorporated by reference to this schedule.
B. The statements of shareholders' equity are the same as those presented for Leucadia National Corporation and Subsidiaries.
C. Equity in the income of the subsidiaries is after reflecting income taxes recorded by the subsidiaries. In 1993, 1992 and 1991, there was no provision for income taxes provided by the parent company. Tax sharing payments received from subsidiaries were $64,566,000 in 1993, $38,773,000 in 1992, and $6,698,000 in 1991.
D. The deferred income tax asset of $114,001,000 at December 31, 1993 has not been allocated to the individual subsidiaries.
SCHEDULE V - Supplementary Insurance Information LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1993, 1992 and 1991
SCHEDULE VI - Schedule of Reinsurance LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1993, 1992 and 1991
SCHEDULE VIII - Valuation and Qualifying Accounts LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1993, 1992 and 1991
SCHEDULE IX - Short-Term Borrowings LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1993, 1992 and 1991
SCHEDULE X - Schedule of Supplemental Information for Property and Casualty Insurance Underwriters LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 1993, 1992 and 1991
EXHIBIT INDEX
Exhibit Exemption Number Description Indication ------- ----------- ----------
3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to the Company's Current Report on Form 8-K dated July 14, 1993).*
3.2 By-laws (as amended) (filed as Exhibit 4.5 to the Company's Registration Statement No. 33- 57054).*
4.1 The Company undertakes to furnish the Securities and Exchange Commission, upon request, a copy of all instruments with respect to long-term debt not filed herewith.
10.1 1982 Stock Option Plan, as amended August 28, 1991 (filed as Annex B to the Company's Proxy Statement dated July 21, 1992).*
10.2 1992 Stock Option Plan (filed as Annex C to the Company's Proxy Statement dated July 21, 1992).*
10.3(a) Restated Articles and Agreement of General Partnership, effective as of February 1, 1982, of The Jordan Company (filed as Exhibit 10.3(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1986).*
10.3(b) Amendments dated as of December 31, 1989 and December 1, 1990 to the Partnership Agreement referred to in 10.3(a) above (filed as Exhibit 10.2(b) to the Company's 1991 10-K).*
10.3(c) Amendment dated as of December 17, 1992 to the Partnership Agreement referred to in 10.3(a) above (filed as Exhibit 10.3(c) to the l992 10- K).*
10.3(d) Articles and Agreement of General Partnership, effective as of April 15, 1985, of Jordan/Zalaznick Capital Company (filed as Exhibit 10.20 to the Company's Registration Statement No. 33-00606).*
10.4 Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Ian M. Cumming (filed as Exhibit 10.14 to the 1983 10-K).*
10.5 Agreement made as of March 12, 1984 by and between Leucadia, Inc. and Joseph S. Steinberg (filed as Exhibit 10.15 to the 1983 10-K).*
10.6 Stock Purchase and Sale Agreement dated as of April 5, 1991, by and between FPL Group Capital Inc. and the Company (filed as Exhibit B to the Company's Current Report on Form 8-K dated August 23, 1991).*
10.7 Agreement dated as of August 1, 1988 among the Company, Ian M. Cumming and Joseph S. Steinberg (filed as Exhibit 10.6 to the Company's 1991 10-K).*
10.8 Agreement dated as of January 10, 1992 between Ian M. Cumming, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.7 to the Company's 1991 10-K).*
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* Incorporated by reference.
EXHIBIT INDEX
Exhibit Exemption Number Description Indication ------- ----------- ----------
10.9 Agreement dated as of January 10, 1992 between Joseph S. Steinberg, certain other persons listed on Schedule A thereto and the Company (filed as Exhibit 10.8 to the Company's 1991 10- K).*
10.10(a) Agreement dated April 23, 1992 between AIC Financial Services, Inc. (an Alabama corporation), AIC Financial Services (a Mississippi corporation) and AIC Financial Services (a South Carolina corporation) (collectively, "Seller") and Norwest Financial Resources, Inc. (filed as Exhibit 10.10(a) to the 1992 10-K).*
10.10(b) Purchase Agreement between A.I.C. Financial Services, Inc., American Investment Bank, N.A., American Investment Financial and Terracor II d/b/a AIC Financial Fund, Seller, and Associates Financial Services Company, Inc., Buyer, dated November 5, 1992 (filed as Exhibit 10.10(b) to the Company's Registration Statement No. 33- 55120).*
10.11(a) Agreement and Plan of Merger, dated as of October 22, 1992, by and among the Company, Phlcorp Acquisition Company and PHLCORP, Inc. (filed as Exhibit 5.2 to the Company's Current Report on Form 8-K dated October 22, 1992).*
10.11(b) Amendment dated December 10, 1992, to the Merger Agreement referred to in 10.11(a) above (filed as Exhibit 5.2 to the Company's Current Report on Form 8-K dated December 14, 1992).*
10.12(a) Agreement between Leucadia, Inc. and Ian M. Cumming, dated as of December 28, 1992 (filed as Exhibit 10.12(a) to the 1992 10-K).*
10.12(b) Escrow and Security Agreement by and among Leucadia, Inc., Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.12(b) to the 1992 10-K).*
10.13(a) Agreement between Leucadia, Inc. and Joseph S. Steinberg, dated as of December 28, 1992 (filed as Exhibit 10.13(a) to the 1992 10-K).*
10.13(b) Escrow and Security Agreement by and among Leucadia, Inc., Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1992 (filed as Exhibit 10.13(b) to the 1992 10-K).*
10.14 Settlement Agreement between Baldwin-United Corporation and the United States dated August 27, 1985 concerning tax issues (filed as Exhibit 10.14 to the 1992 10-K).*
10.15 Acquisition Agreement, dated as of December 18, 1992, by and between Provident Mutual Life and Annuity Company of America and Colonial Penn Annuity and Life Insurance Company (filed as Exhibit 10.15 to the 1992 10-K).*
10.16 Reinsurance Agreement, dated as of December 31, 1991, by and between Colonial Penn Insurance Company and American International Insurance Company (filed as Exhibit 10.16 to the 1992 10- K).* _________________________
* Incorporated by reference.
EXHIBIT INDEX
Exhibit Exemption Number Description Indication ------- ----------- ----------
10.17 Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming.
10.18 Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg.
10.19(a) Agreement between the Company and Ian M. Cumming, dated as of December 28, 1993.
10.19(b) Escrow and Security Agreement by and among the Company, Ian M. Cumming and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993.
10.20(a) Agreement between the Company and Joseph S. Steinberg, dated as of December 28, 1993.
10.20(b) Escrow and Security Agreement by and among the Company, Joseph S. Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of December 28, 1993.
21 Subsidiaries of the registrant.
23 Consent of independent certified public accountants with respect to the incorporation by reference into the Company's Registration Statements on Form S-8 (File No. 2-84303), Form S-8 and S-3 (File No. 33-6054), Form S-8 and S-3 (File No. 33-26434), Form S-8 and S-3 (File No. 33-30277).
28 Schedule P of the 1993 Annual Statement to P Insurance Departments of the Colonial Penn Insurance Company and Affiliated Fire & Casualty Insurers, the Empire Insurance Company, Principal Insurer, and Colonial Penn Madison Insurance Company.
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* Incorporated by reference.