-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VdMP2eMjhw/5gjIL2Z228IZmXsX4yOfF0miA6Z8kP+EfAa2u80KZu/yDbIWvLC4+ y7Kh8opXGG6pfBRzKQgN3w== 0000912057-97-027158.txt : 19970821 0000912057-97-027158.hdr.sgml : 19970821 ACCESSION NUMBER: 0000912057-97-027158 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: 20TH CENTURY INDUSTRIES CENTRAL INDEX KEY: 0000100331 STANDARD INDUSTRIAL CLASSIFICATION: 6331 IRS NUMBER: 951935264 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10828 FILM NUMBER: 97656394 BUSINESS ADDRESS: STREET 1: 6301 OWENSMOUTH AVE STE 700 CITY: WOODLAND HILLS STATE: CA ZIP: 91367 BUSINESS PHONE: 8187043700 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 30, 1997 Commission File Number 0-6964 ------ 20TH CENTURY INDUSTRIES - - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 95-1935264 - - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) SUITE 700, 6301 OWENSMOUTH AVENUE, WOODLAND HILLS, CALIFORNIA 91367 - - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (818) 704-3700 None -------------- - - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --------- ---------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 23, 1997 Common Stock, Without Par Value 51,613,861 shares 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 20TH CENTURY INDUSTRIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS A S S E T S JUNE 30, DECEMBER 31, 1997 1996 ----------- ------------- (UNAUDITED) (AMOUNTS IN THOUSANDS) Investments, available-for-sale, at fair value: Fixed maturities - Note 3 $ 1,044,857 $ 1,063,703 Equity securities 1,300 925 ------------ ----------- Total investments 1,046,157 1,064,628 Cash and cash equivalents 47,171 18,078 Accrued investment income 19,114 18,549 Premiums receivable 78,894 71,308 Reinsurance receivables and recoverables 72,910 79,183 Prepaid reinsurance premiums 44,247 33,020 Deferred income taxes - Note 4 165,252 190,857 Deferred policy acquisition costs 8,891 9,127 Other assets 30,104 29,005 ------------ ----------- $ 1,512,740 $ 1,513,755 ------------ ----------- ------------ ----------- See accompanying notes to financial statements. 2 20TH CENTURY INDUSTRIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) LIABILITIES AND STOCKHOLDERS' EQUITY JUNE 30, DECEMBER 31, 1997 1996 -------------- ------------- (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) Unpaid losses and loss adjustment expenses $ 473,553 $ 543,529 Unearned premiums 251,859 231,141 Bank loan payable 175,000 175,000 Claims checks payable 31,999 36,445 Reinsurance payable 33,464 19,730 Other liabilities 21,838 20,203 ---------- ---------- Total liabilities 987,713 1,026,048 ---------- ---------- Stockholders' equity Capital stock Preferred stock, par value $1.00 per share; authorized 500,000 shares, none issued Series A convertible preferred stock, stated value $1,000 per share, authorized 376,126 shares, out- standing 224,950 in 1997 and 1996 224,950 224,950 Common stock without par value; authorized 110,000,000 shares, out- standing 51,613,861 in 1997 and 51,520,006 in 1996 70,510 70,263 Common stock warrants 16,000 16,000 Unrealized investment gains (losses), net (2,233) 2,820 Retained earnings 215,800 173,674 ---------- ---------- Total stockholders' equity 525,027 487,707 ---------- ---------- $1,512,740 $1,513,755 ---------- ---------- ---------- ---------- See accompanying notes to financial statements. 3 20TH CENTURY INDUSTRIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------- -------------------------- 1997 1996 1997 1996 ----------- ----------- ---------- ----------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES: Net premiums earned $ 195,107 $ 225,068 $ 390,076 $ 457,696 Net investment income 18,400 18,776 36,235 37,465 Realized investment gains 471 1,310 1,543 3,898 ---------- ---------- ---------- --------- 213,978 245,154 427,854 499,059 LOSSES AND EXPENSES: Net losses and loss adjustment expenses 143,542 173,230 296,443 364,826 Policy acquisition costs 10,300 8,321 20,612 16,489 Other operating expenses 8,656 12,516 15,941 24,888 Loan interest and fees expense 3,322 3,483 6,615 7,048 ---------- ---------- ---------- --------- 165,820 197,550 339,611 413,251 ---------- ---------- ---------- --------- Income before federal income taxes 48,158 47,604 88,243 85,808 Federal income taxes - Note 4 16,651 15,676 29,864 28,297 ---------- ---------- ---------- --------- NET INCOME $ 31,507 $ 31,928 $ 58,379 $ 57,511 ---------- ---------- ---------- --------- ---------- ---------- ---------- --------- EARNINGS PER COMMON SHARE - Note 2 - - ----------------------------------- PRIMARY $ 0.44 $ 0.46 $ 0.81 $ 0.80 ---------- ---------- ---------- --------- ---------- ---------- ---------- --------- FULLY DILUTED $ 0.39 $ 0.41 $ 0.73 $ 0.73 ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------
See accompanying notes to financial statements. 4 20TH CENTURY INDUSTRIES AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
SIX MONTHS ENDED JUNE 30, 1997 CONVERTIBLE ------------------------------------------------------- PREFERRED COMMON UNREALIZED STOCK STOCK COMMON INVESTMENT $1 PAR VALUE WITHOUT STOCK GAINS RETAINED PER SHARE PAR VALUE WARRANTS (LOSSES), NET EARNINGS ------------ ----------- ---------- -------------- ---------- (AMOUNTS IN THOUSANDS) Balance at January 1, 1997 $ 224,950 $ 70,263 $ 16,000 $ 2,820 $ 173,674 Net Income 58,379 Cash dividends declared (15,284) Other 247 (5,053) (969) ---------- --------- --------- --------- ---------- Balance at June 30, 1997 $ 224,950 $ 70,510 $ 16,000 $ (2,233) $ 215,800 ---------- --------- --------- --------- ---------- ---------- --------- --------- --------- ----------
See accompanying notes to financial statements. 5 20TH CENTURY INDUSTRIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, -------------------------- 1997 1996 ----------- --------- (UNAUDITED) (AMOUNTS IN THOUSANDS) OPERATING ACTIVITIES: Net Income $ 58,379 $ 57,511 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 2,437 2,543 Provision for deferred income taxes 28,326 26,665 Realized gains on sale of investments (1,543) (3,898) Federal income taxes 1,491 (1,383) Reinsurance balances 8,781 (8,038) Unpaid losses and loss adjustment expenses (69,976) (51,028) Unearned premiums 20,718 (18,798) Claims checks payable (4,446) (8,378) Other (5,628) 9,560 ---------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 38,539 $ 4,756 6 20TH CENTURY INDUSTRIES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) SIX MONTHS ENDED JUNE 30, --------------------------- 1997 1996 ------------- ----------- (UNAUDITED) (AMOUNTS IN THOUSANDS) INVESTING ACTIVITIES: Investments available-for-sale: Purchases $ (357,450) $ (231,136) Called or matured - 13,451 Sales 369,544 208,334 Net purchases of property and equipment (6,256) (1,185) ---------- ---------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 5,838 (10,536) FINANCING ACTIVITIES: Dividends paid (15,284) (10,122) ---------- ---------- NET CASH USED IN FINANCING ACTIVITIES (15,284) (10,122) ---------- ---------- Net increase (decrease) in cash and cash equivalents 29,093 (15,902) Cash and cash equivalents, beginning of year 18,078 50,609 ---------- ---------- Cash and cash equivalents, end of quarter $ 47,171 $ 34,707 ---------- ---------- ---------- ---------- See accompanying notes to financial statements. 7 20th CENTURY INDUSTRIES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the consolidated financial statements and notes thereto included in the 20th Century Industries Annual Report on Form 10-K for the year ended December 31, 1996. 2. Earnings Per Common Share Earnings per common share are computed using the weighted average number of common share equivalents outstanding during the respective periods utilizing the modified treasury stock method in accordance with APB Opinion No. 15, "Earnings Per Share." The primary weighted average number of common share equivalents was 60,058,242 and 59,680,873 for the three and six months ended June 30, 1997, respectively, and 58,485,420 and 58,952,256 for the three and six months ended June 30, 1996, respectively. The fully diluted weighted average number of common share equivalents was 80,456,039 and 80,344,243 for the three and six months ended 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. Earnings Per Common Share (continued) June 30, 1997, respectively, and 78,604,029 and 78,806,625 for the three and six months ended June 30, 1996, respectively. The primary and fully diluted earnings per share amounts reflect a complex capital structure in which securities exist that allow for the acquisition of additional common stock through the exercise of conversion rights in these securities. Under the modified treasury stock method, the number of primary and fully diluted common share equivalents deemed to be outstanding generally tends to rise or fall with the market price of the underlying stock. 3. Investments The amortized cost, gross unrealized gains and losses, and fair values of fixed maturities as of June 30, 1997 are as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------ ---------- ---------- ----------- (AMOUNTS IN THOUSANDS) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 3,818 $ 50 $ 65 $ 3,803 Obligations of states and political subdivisions 87,643 2,367 69 89,941 Public Utilities 188,429 433 2,563 186,299 Corporate Securities 769,452 3,977 8,615 764,814 ----------- -------- --------- ---------- Total Fixed Maturities $ 1,049,342 $ 6,827 $ 11,312 $ 1,044,857 ----------- -------- ---------- ----------- ----------- -------- ---------- -----------
9 20th CENTURY INDUSTRIES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. Income Taxes Income taxes do not bear the expected relationship to pre-tax income primarily because of tax-exempt investment income. As of June 30, 1997, the Company has a net operating loss carryforward of approximately $335,000,000 and $193,000,000 for regular and alternative minimum tax purposes, respectively, and an alternative tax credit carryforward of $12,768,000. The net operating loss carryforwards will expire in 2009. Alternative minimum tax credits may be carried forward indefinitely to offset future regular tax liabilities. Federal income tax expense consists of: SIX MONTHS ENDED JUNE 30, ------------------------- 1997 1996 ---- ---- (AMOUNTS IN THOUSANDS) Current tax expense $ 1,538 $ 1,632 Deferred tax expense 28,326 26,665 -------- -------- $ 29,864 $ 28,297 -------- -------- -------- -------- 5. New Accounting Standard In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which is required to be adopted as of December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements, primary earnings per share will be replaced by a simpler calculation called "basic" earnings per share. This calculation will exclude all common stock equivalents and other dilutive securities (i.e. options, warrants and convertible 10 20th CENTURY INDUSTRIES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. New Accounting Standard (continued) instruments). Under the new standard, basic earnings per share would be $0.51 and $0.52 for the quarters ending June 30, 1997 and 1996, respectively, and $0.94 and $0.92, respectively, for the six month periods then ended. Under the new requirements, "diluted" earnings per share will replace the existing fully diluted earnings per share calculation. The new diluted earnings per share will include the effect of all dilutive instruments if they meet certain requirements. Under the new standard, diluted earnings per share would be $0.39 and $0.41 for the quarters ended June 30, 1997 and 1996, respectively, and $0.73 for each of the six month periods ended June 30, 1997 and 1996, respectively. 11 20th CENTURY INDUSTRIES AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition - - ------------------- The Company's strong performance in the first six months of 1997 reinforced the turnaround in unit growth in the core automobile business that began in the last quarter of 1996. The number of written vehicles increased by 42,324 in the first six months of 1997 compared to a decrease of 43,987 in the first half of 1996. As of June 30, 1997, the Company's insurance subsidiaries had a combined statutory surplus of $510.9 million, and a net written premium to surplus ratio of 1.5:1. In addition, during the second quarter, the Company's claims paying ability rating from Standard & Poors was upgraded to A- from BBB+, and its financial performance rating from A.M. Best was upgraded to A- from B+. Strong unit growth in the auto business remains the Company's priority for 1997. Through its aggressive marketing efforts and the introduction of rating plans that offer lower rates to its more profitable preferred customers and higher rates for drivers deemed to represent greater risks, the Company expects to achieve a more profitable customer mix of new business. Thus far, the Company's strategy for growth as well as continued downward trends in the frequency and severity of claims is producing the desired results: the combined ratio for the first six months of 1997 was 85.4 versus 88.7 for the same period last year. As of February 15, 1997, the Company began offering renewal of policies for 68,000 homeowner insurance customers. The Company is complying with California's requirement to offer earthquake coverage to those customers through a separate residential earthquake insurance policy underwritten and issued by American Home Assurance Company, a subsidiary of American International Group, Inc. (AIG). While the Company is not currently authorized to offer homeowner insurance to new 12 20th CENTURY INDUSTRIES AND SUBSIDIARIES ITEM 2. (CONTINUED) customers, continuing requests from current auto policy customers and other California residents make this an important strategic goal. Authority to sell new homeowner policies requires the approval of the California Insurance Commissioner. The Company has initiated discussions to obtain that authorization. The Company's reentry into the homeowners market is intended to complement its auto business and facilitate growth in that line. All the risks associated with these homeowner policies have been ceded to reinsurers since July 1, 1996. In June 1997, the Company recorded an after-tax provision of $4.39 million resulting from a punitive damage verdict on an earthquake-related lawsuit. The Company intends to appeal the verdict and hopes that it will be set aside or significantly reduced, although there are no assurances that the court will do so. The Company remains exposed to possible further upward development in the estimated cost to resolve certain claims stemming from the 1994 Northridge Earthquake. Although management believes current reserves are adequate, the outcome of future events could require changes in previous estimates. Invested assets as of June 30, 1997 were $1.0 billion. All investments in fixed maturities are investment grade. Of the Company's total investments at June 30, 1997, 6.1% at fair value were invested in tax-exempt state and municipal bonds and 93.9% were invested in taxable government, corporate and municipal securities. Loss and loss expense payments are the most significant cash flow requirements of the Company. The Company continually monitors loss payments to provide projections of future cash requirements. Cash flow from operations was more than sufficient to fund loss payments in the first half of 1997. 13 20th CENTURY INDUSTRIES AND SUBSIDIARIES ITEM 2. (CONTINUED) At July 1, 1997, the Company has a variable rate credit line available of $168.75 million, all of which is outstanding. Presently, interest is paid monthly; interest payments in 1997 totaled $7.6 million. At June 30, 1997, the Company had $225 million of preferred stock outstanding, bearing dividends of 9% per year payable quarterly in cash or in kind. Cash dividends of $10,122,750 were paid on the preferred stock in the first six months of 1997. Funds required by 20th Century Industries to pay dividends, debt obligations and holding company expenses are provided by the insurance subsidiaries. The ability of the insurance subsidiaries to pay dividends to the holding company is regulated by state law. In August 1996, 20th Century Insurance Company of Arizona began writing private passenger automobile policies in that state. As of June 30, 1997, insured vehicles totaled 7,235, an increase of 141% over the total at December 31, 1996. 20th Century Insurance Company of Arizona is a joint venture owned 51% by AIG and 49% by 20th Century Industries. The Company's investment in 20th Century Insurance Company of Arizona, (the operations of which, to date, have not been material), is accounted for by the equity method. The statistical and other information presented below do not include the activities of 20th Century Insurance Company of Arizona. 14 20th CENTURY INDUSTRIES AND SUBSIDIARIES ITEM 2. (CONTINUED) Results of Operations - - --------------------- UNITS IN FORCE Units in force for the Company's insurance programs as of June 30 were as follows: 1997 1996 ---- ---- Private Passenger Automobile (number of vehicles) 1,053,933 1,017,020 Homeowner and Condominium (number of policies) 64,056 165,703 Personal Excess Liability (number of policies) 10,293 10,396 --------- --------- Total 1,128,282 1,193,119 --------- --------- --------- --------- The overall decrease in units in force of 5.4% is attributable primarily to the decrease in homeowners and condominium policies. The Company's voluntary auto units in force increased by 3.0% compared to a year ago from 1,010,322 units in force at June 30, 1996 to 1,040,899 units in force at June 30, 1997. Voluntary auto units grew 36,137 (3.6%) in the first half of 1997, 16,586 (1.6%) of which occurred in the second quarter. This compared favorably to a decline in units of 42,481 (4.0%) for the first six months of 1996 and 20,998 (2.0%) for the second quarter of 1996. The growth in units in force met the Company's expectations and is the result of an aggressive marketing campaign, rate reductions 15 20th CENTURY INDUSTRIES AND SUBSIDIARIES ITEM 2. (CONTINUED) implemented in 1996 and, to some extent, new legislation to enforce the state's mandatory insurance law. The Company expects to continue this growth pattern through increased advertising, including a new television advertising campaign, and through the implementation of another 3.2% overall rate reduction in the fourth quarter of 1997. Assigned Risk units increased by 94.6% from the same period a year ago, from 6,698 units in force at June 30, 1996 to 13,034 units in force at June 30, 1997. The overall increase in Assigned Risk units was an expected response to the new legislation. Units in force for the Company's homeowner and condominium programs declined by 61.3% between June 30, 1996 and June 30, 1997 primarily because the Company was required by the California Department of Insurance to non-renew homeowner and condominium policies from July 1, 1996 until February 15, 1997. The decline in units slowed in 1997 to 28.0% and 8.6% for the first six months and the second quarter, respectively, as many of its remaining homeowners renewed their policies with the Company. 16 20th CENTURY INDUSTRIES AND SUBSIDIARIES ITEM 2. (CONTINUED) UNDERWRITING RESULTS Premium revenue and underwriting results for the Company's insurance programs were as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, -------------------------- ------------------------ 1997 1996 1997 1996 ---- ---- ---- ---- (AMOUNTS IN THOUSANDS) Gross Premiums Written Automobile $ 222,016 $ 226,785 $ 440,783 $ 463,080 Homeowners and Condo 15,999 16,919 24,604 31,896 PELP 617 616 1,110 1,091 ---------- ---------- ---------- ---------- Total $ 238,632 $ 244,320 $ 466,497 $ 496,067 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Premiums Earned Automobile $ 194,917 $ 212,200 $ 387,305 $ 431,923 Homeowners and Condo - 12,675 2,392 25,383 PELP 190 193 379 390 ---------- ---------- ---------- ---------- Total $ 195,107 $ 225,068 $ 390,076 $ 457,696 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Underwriting Profit (Loss) Automobile $ 41,259 $ 28,630 $ 65,807 $ 49,134 Homeowners and Condo (8,835) 2,131 (9,092) 1,903 PELP 184 239 364 455 ---------- ---------- ---------- --------- Total $ 32,608 $ 31,000 $ 57,079 $ 51,492 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
17 20th CENTURY INDUSTRIES AND SUBSIDIARIES ITEM 2. (CONTINUED) Net premiums earned for the second quarter decreased 13.3% to $195.1 million compared to the second quarter of 1996. The net decline of $30.0 million includes the effects of higher average vehicles in force of approximately $3.3 million, net reductions in auto rates of approximately $20.6 million and a reduction of $12.7 million in homeowner and condominium premiums due to non-renewals and ceded reinsurance premiums. Automobile Automobile insurance is the primary line of business written by the Company and has been consistently profitable. Approximately 50% of the Company's insured autos are located in Los Angeles County; however, the Company continues to expand its coverage throughout the state by aggressively marketing its business in Northern California and San Diego County. The Company's voluntary automobile program realized record underwriting profits of $41.8 million for the three months ended June 30, 1997 compared to $28.7 million for the comparable 1996 period. Underwriting profits for the first half of the year were $66.8 million compared to $49.1 million in the prior year. The improvement came despite decreases in gross premiums written of 4.0% and 6.5% in the second quarter and six months ended June 1997, respectively, versus the same periods last year. The impact of relatively dry weather, a continued strong decline in claim frequencies and severities and the attraction and retention of a higher percentage of more profitable, preferred customers all contributed to the improvement in underwriting results. While a growth in business generally indicates the need for an increase in incurred but not reported (IBNR) reserves, favorable development in older case reserves and the lower severity of new claims 18 20th CENTURY INDUSTRIES AND SUBSIDIARIES ITEM 2. (CONTINUED) have resulted in the Company making a smaller provision for IBNR reserves than in the past, favorably impacting the underwriting results. Assigned Risk units produced underwriting losses of $515,000 and $952,000 in the three and six month periods ending June 30, 1997, respectively, compared to underwriting losses of $40,000 and $303,000 for comparable periods in 1996. The increased underwriting losses reflect a 94.6% rise in the number of Assigned Risk vehicles over the same period last year, as new mandatory insurance enforcement legislation became effective January 1, 1997. Homeowners and Condominium In December 1996, the Company was granted authority to offer renewals on its existing homeowner policies beginning February 15, 1997. This renewal business is covered in full by quota share reinsurance agreements with three reinsurers, as follows:
REINSURER PARTICIPATION - - --------- ------------- National Union Fire Insurance Co. of Pittsburgh, PA (AIG subsidiary) 50% United States Fidelity & Guaranty Company 25% Risk Capital Reinsurance Company 25%
Earthquake coverage, which the Company is obliged to offer in conjunction with its homeowner policies, is provided through a subsidiary of AIG; no earthquake exposures are assumed by the Company. As of June 30, 1997, more than 55,000 policies had been renewed, which is 19 20th CENTURY INDUSTRIES AND SUBSIDIARIES ITEM 2. (CONTINUED) approximately 86.5% of those eligible. Homeowners and condominium policies in force on June 30, 1996 or renewed before July 23, 1996 (which do not include earthquake coverage) were ceded in full at equal percentages to United States Fidelity & Guaranty Company and Risk Capital Reinsurance Company. This coverage is effective until the underlying policies expire or are renewed. Because of the reinsurance agreements in place, the Company's exposure under these programs is limited and primarily relates to development on policies incepted prior to July 1, 1996. The underwriting losses for this line were $8.8 million and $9.1 million for the second quarter and six months ending June 30, 1997, respectively, compared to underwriting profits of $2.1 million and $1.9 million for the same periods in 1996. The 1997 underwriting losses reflect the provision for punitive damages on an earthquake-related lawsuit recorded in June, as previously mentioned. As a result of the 100% quota share agreements entered into as of July 1, 1996 and February 15, 1997, the Company's exposure to weather-related and disaster claims has been significantly reduced. Personal Excess Liability Units in force increased nominally from June 30, 1996 to June 30, 1997. Gross premiums written remained flat in the second quarter of 1997 compared to that of 1996 and increased slightly in the six month period ended June 30, 1997 compared to the prior year. Underwriting profits for this line can vary significantly with the number of claims, which occur infrequently. Personal Excess Liability business is subject to two quota share reinsurance agreements resulting in a net retention by the Company of approximately 36%. 20 20th CENTURY INDUSTRIES AND SUBSIDIARIES ITEM 2. (CONTINUED) Policy Acquisition and General Operating Expenses The Company's policy acquisition and general operating expense ratio continues to be one of the lowest in the industry. As a direct writer, the Company does not incur agent commissions and thus enjoys an expense advantage over most of its competitors. Net underwriting expenses for the second quarter and six months ending June 30, 1997 decreased by $1.9 million (9.0%) and $4.8 million (11.7%), respectively, compared to the same periods in 1996. These decreases reflect a reduction in general operating expenses due to the decline in the number of units in force and steps taken to achieve operating cost efficiencies, as well as a benefit from the ceding commission earned on reinsurance. Ceding commissions accounted for approximately $1.1 million and $1.8 million of the reduction in underwriting expenses in the second quarter and six months ending June 30, 1997, respectively, compared to the same periods a year ago. The ratio of net underwriting expenses (excluding loan interest and fees) to net premiums earned for the second quarter and six months ended June 1997 was 9.7% and 9.4%, respectively, compared to 9.3% and 9.0%, respectively, for the same periods in 1996. The increase in the expense ratios is mainly due to the decline in premiums earned. INVESTMENT INCOME Net pre-tax investment income decreased 2.0% and 3.3% during the second quarter and six months ended June 1997, respectively, compared to the same periods in 1996. Average invested assets decreased 3.5% and 4.0% for the second quarter and six month periods ended June 30, 1997, respectively, as compared to the same periods last year, primarily due to the decline in premiums 21 20th CENTURY INDUSTRIES AND SUBSIDIARIES ITEM 2. (CONTINUED) written and the payment of earthquake-related claims. The average annual pre-tax yield on invested assets for the three and six month periods ended June 30, 1997 was 6.8% and 6.7%, respectively, compared to 6.7% and 6.6%, respectively, for the same periods of 1996. Realized gains on sales of investments decreased in the first six months of 1997 to $1.5 million from $3.9 million for the same period of 1996. Realized gains for the second quarter of 1997 decreased to $471,000 from $1.3 million for the same period last year. Unrealized after-tax gains on investments decreased $5.1 million since December 31, 1996 to a net unrealized after-tax loss of $2.2 million as of June 1997, primarily because of unfavorable conditions in the bond market. 22 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (b) Reports on Form 8-K There were no reports on Form 8-K filed for the three months ended June 30, 1997. 23 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 20TH CENTURY INDUSTRIES ----------------------- (Registrant) Date August 8, 1997 /s/ William L. Mellick ----------------- _______________________________ WILLIAM L. MELLICK President and Chief Executive Officer Date August 8, 1997 /s/ Robert B. Tschudy ----------------- __________________________________ ROBERT B. TSCHUDY Senior Vice President and Chief Financial Officer 24 EX-11 2 EXHIBIT 11 20TH CENTURY INDUSTRIES AND SUBSIDIARIES EXHIBIT 11: COMPUTATION OF EARNINGS PER COMMON SHARE
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1997 1996 1997 1996 ------------- ------------ ----------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Primary: Average shares outstanding 51,547 51,460 51,538 51,459 Net effect of dilutive stock warrants and options based on the modified treasury stock method using average market price 8,511 7,025 8,143 7,493 ------- -------- -------- -------- Totals 60,058 58,485 59,681 58,952 ------- -------- -------- -------- ------- -------- -------- -------- Net income $31,507 $31,928 $ 58,379 $ 57,511 Dividends on preferred stock (5,061) (5,061) (10,122) (10,122) ------- -------- -------- -------- Net income applicable to common stock $26,446 $26,867 $ 48,257 $ 47,389 ------- -------- -------- -------- ------- -------- -------- -------- Earnings per common share $ 0.44 $ 0.46 $ 0.81 $ 0.80 ------- -------- -------- -------- ------- -------- -------- --------
25 20TH CENTURY INDUSTRIES AND SUBSIDIARIES EXHIBIT 11: COMPUTATION OF EARNINGS PER COMMON SHARE (continued)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1997 1996 1997 1996 ------------- ------------ ----------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Fully diluted: Average shares outstanding 51,547 51,460 51,538 51,459 Net effect of dilutive stock warrants and options based on the modified treasury stock method using average market price 9,054 7,289 8,951 7,493 Assuming conversion of convertible preferred stock 19,855 19,855 19,855 19,855 ------- -------- -------- -------- Totals 80,456 78,604 80,344 78,807 ------- -------- -------- -------- ------- -------- -------- -------- Net income $31,507 $31,928 $ 58,379 $ 57,511 Net interest expense reduction - - - - ------- -------- -------- -------- Net income applicable to common stock $31,507 $31,928 $ 58,379 $ 57,511 ------- -------- -------- -------- ------- -------- -------- -------- Earnings per common share $ 0.39 $ 0.41 $ 0.73 $ 0.73 ------- -------- -------- -------- ------- -------- -------- --------
26 EX-27 3 EXHIBIT 27
7 6-MOS DEC-31-1997 JUN-30-1997 1,044,857 1,044,857 1,044,857 1,300 0 0 1,046,157 47,171 72,910 8,891 1,512,740 473,553 251,859 0 0 0 0 224,950 70,510 229,567 1,512,740 390,076 36,235 1,543 0 296,443 20,612 15,941 88,243 29,864 58,379 0 0 0 58,379 .81 .73 0 0 0 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----