-----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, PRxd7wDQgV3LajeO9WICMc9OgpWkVcjPCU65eKZ+QuANoIce4xK9SqgYvkA/A0iZ FvZcgGfJcS62a/R9i8r5eg== 0001015402-02-001410.txt : 20020425 0001015402-02-001410.hdr.sgml : 20020425 ACCESSION NUMBER: 0001015402-02-001410 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020425 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 21ST CENTURY INSURANCE GROUP CENTRAL INDEX KEY: 0000100331 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [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: 02620973 BUSINESS ADDRESS: STREET 1: 6301 OWENSMOUTH AVE STE 700 CITY: WOODLAND HILLS STATE: CA ZIP: 91367 BUSINESS PHONE: 8187043700 FORMER COMPANY: FORMER CONFORMED NAME: 20TH CENTURY INDUSTRIES DATE OF NAME CHANGE: 19950420 10-Q 1 doc1.txt 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 March 31, 2002 Commission File Number 0-6964 ------ 21ST CENTURY INSURANCE GROUP - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 95-1935264 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification number) 6301 OWENSMOUTH AVENUE WOODLAND HILLS, CALIFORNIA 91367 (Address of principal executive offices) (Zip Code) (818) 704-3700 (Registrant's telephone number, including area code) Web site: www.i21.com 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. Common Stock, Without Par Value Outstanding at April 22, 2002 (Title of Class) 85,382,753 shares 1
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 21ST CENTURY INSURANCE GROUP CONSOLIDATED BALANCE SHEETS MARCH 31, December 31, 2002 2001 AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA UNAUDITED - --------------------------------------------------------------------------------------------- ASSETS Fixed maturity investments available-for-sale, at fair value (amortized cost: $867,436 and $857,209) $ 859,963 $ 855,724 Cash and cash equivalents 23,749 28,909 - --------------------------------------------------------------------------------------------- Total investments and cash 883,712 884,633 Accrued investment income 12,355 11,733 Premiums receivable 78,561 75,559 Reinsurance receivables and recoverables 42,051 40,138 Prepaid reinsurance premiums 19,034 15,444 Deferred income taxes 94,298 96,216 Deferred policy acquisition costs 28,003 24,662 Software, property and equipment, at cost less accumulated depreciation of $71,286 and $66,462 178,439 178,672 Other assets 25,434 24,959 - --------------------------------------------------------------------------------------------- Total assets $1,361,887 $ 1,352,016 - --------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Unpaid losses and loss adjustment expenses $ 352,627 $ 349,290 Unearned premiums 236,875 236,473 Claims checks payable 39,353 36,105 Reinsurance payable 10,299 12,993 Other liabilities 65,893 57,849 - --------------------------------------------------------------------------------------------- Total liabilities 705,047 692,710 - --------------------------------------------------------------------------------------------- Stockholders' equity: Common stock, without par value; authorized 110,000,000 shares, outstanding 85,368,891 in 2002 and 85,361,848 in 2001 417,233 416,991 Retained earnings 250,330 248,635 Accumulated other comprehensive loss (10,723) (6,320) - --------------------------------------------------------------------------------------------- Total stockholders' equity 656,840 659,306 - --------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,361,887 $ 1,352,016 - --------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
2
21ST CENTURY INSURANCE GROUP CONSOLIDATED STATEMENTS OF INCOME Unaudited AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA Three Months Ended March 31, 2002 2001 - --------------------------------------------------------------- REVENUES Net premiums earned: Personal auto lines $215,111 $207,890 Homeowner and earthquake lines in runoff - 6,721 Net investment income 11,265 11,726 Realized investment gains 1,663 1,116 - --------------------------------------------------------------- Total revenues 228,039 227,453 - --------------------------------------------------------------- LOSSES AND EXPENSES Net losses and loss adjustment expenses: Personal auto lines 181,777 183,438 Homeowner and earthquake lines in runoff 6,858 11,198 Policy acquisition costs 26,558 24,126 Other operating expenses 3,901 5,488 - --------------------------------------------------------------- Total losses and expenses 219,094 224,250 - --------------------------------------------------------------- Income before federal income taxes 8,945 3,203 Federal income tax (expense) benefit (622) 1,719 - --------------------------------------------------------------- Net income $ 8,323 $ 4,922 - --------------------------------------------------------------- EARNINGS PER COMMON SHARE Basic $ 0.10 $ 0.06 - --------------------------------------------------------------- Diluted $ 0.10 $ 0.06 - --------------------------------------------------------------- See accompanying notes to consolidated financial statements.
3
21ST CENTURY INSURANCE GROUP CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Unaudited Accumulated Other Common Retained Comprehensive AMOUNTS IN THOUSANDS Stock Earnings Loss Total - -------------------------------------------------------------------------------------------------- Balance - January 1, 2002 $416,991 $ 248,635 $ (6,320) $659,306 Comprehensive income (loss) 8,323(1) (4,403)(2) 3,920 Cash dividends paid on common stock (6,829) (6,829) Other 242 201 443 - -------------------------------------------------------------------------------------------------- Balance - March 31, 2002 $417,233 $ 250,330 $ (10,723) $656,840 - -------------------------------------------------------------------------------------------------- (1) Net income. (2) Net change in accumulated other comprehensive income for the three months ended March 31, 2002, comprises net changes in minimum pension liability in excess of unamortized prior service costs of $202, unrealized losses on available-for-sale investments of $3,110 (net of income tax benefit of $1,675) and the reclassification adjustment for gains included in net income of $1,091 (net of income tax expense of $587). See accompanying notes to consolidated financial statements
4
21ST CENTURY INSURANCE GROUP CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited AMOUNTS IN THOUSANDS Three Months Ended March 31, 2002 2001 - ------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 8,323 $ 4,922 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 5,022 4,789 Amortization of restricted stock grants 119 1,417 Benefit for deferred income taxes 4,289 (1,150) Realized losses (gains) on sale of investments (1,678) 136 Federal income tax benefit (8,251) (3,114) Reinsurance balances (8,197) 2,046 Unpaid losses and loss adjustment expenses 3,337 (2,474) Unearned premiums 402 4,337 Claims checks payable 3,248 1,510 Other assets 827 (6,270) Other liabilities 7,932 12,869 - ------------------------------------------------------------------------ Net cash provided by operating activities 15,373 19,018 - ------------------------------------------------------------------------ INVESTING ACTIVITIES Fixed maturities available-for-sale Purchases (165,763) (114,035) Calls or maturities 3,213 1,190 Sales 153,329 125,610 Net purchases of property and equipment (4,606) (17,828) - ------------------------------------------------------------------------ Net cash used in investing activities (13,827) (5,063) - ------------------------------------------------------------------------ FINANCING ACTIVITIES Dividends declared and paid (6,829) (6,827) Proceeds from the exercise of stock options 123 250 - ------------------------------------------------------------------------ Net cash used in financing activities (6,706) (6,577) - ------------------------------------------------------------------------ Net (decrease) increase in cash (5,160) 7,378 Cash and cash equivalents, beginning of period 28,909 7,240 - ------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 23,749 $ 14,618 - ------------------------------------------------------------------------ See accompanying notes to consolidated financial statements.
5 21ST CENTURY INSURANCE GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (Unaudited) NOTE 1. BASIS OF PRESENTATION - ------------------------------ The accompanying unaudited consolidated financial statements of 21st Century Insurance Group and subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") 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 GAAP 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. All material intercompany accounts and transactions have been eliminated. Operating results for the three-month period ended March 31, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Certain amounts in the 2001 financial statements have been reclassified to conform to the 2002 presentation. Effective January 1, 2002, the Company acquired American International Group, Inc.'s ("AIG") 51% interest in 21st Century Insurance Company of Arizona ("21st of Arizona") for $4.4 million, which approximated its GAAP book value. The Company previously held a 49% interest in 21st of Arizona, which writes personal auto exclusively in Arizona. Beginning in 2002, 21st of Arizona is reported on a consolidated basis. Prior to January 1, 2002, the Company's interest in and advances to 21st of Arizona were included in other assets in the consolidated balance sheet, and the Company's 49% equity in 21st of Arizona's net loss, which was immaterial in the first quarter of 2001, was included in net investment income in the Company's consolidated statement of income. NOTE 2. NORTHRIDGE EARTHQUAKE - -------------------------------- California SB 1899, effective from January 1, 2001, to December 31, 2001, allowed the re-opening of previously closed earthquake claims arising out of the 1994 Northridge Earthquake. The Company believes this law to be unconstitutional because it impairs contract rights by extending the normal contractual limitations period by more than six years. The Company has pursued its legal rights without success in the California courts and has submitted a writ to the United States Supreme Court. Despite the Company's challenge to the constitutionality of the law, claim reports have been accepted and losses adjusted and paid under a reservation of rights since the law took effect. The time period to make claims under SB 1899 ended on December 31, 2001. During the fourth quarter of 2001, the Company made an estimate of the loss payment and inspection cost portion of the potential liability created by this law. The Company continues to expense as incurred the legal defense costs associated with SB 1899 as it believes it is impracticable to make a reasonable estimate of the ultimate amount of such costs. The Company cautions that the recorded estimates for this event are subject to a greater than normal degree of uncertainty for a variety of reasons. For example, some of the claimants allege facts about earthquake damages that ostensibly occurred on January 17, 1994, but many of the claimants are represented by legal counsel who are acting to prevent access of Company personnel to inspect the 6 allegedly damaged property. Thus, in many cases, the best information currently available to the Company is several years old. As new information becomes available in the near term, the Company's estimate of its ultimate exposure may change by an amount that could be material. In addition, actual expenses for legal defense costs are susceptible to a wide range of outcomes depending on a variety of factors including plaintiff strategies, future judicial decisions, the percentage of cases which settle, and the period of time cases remain outstanding before settlement. Incurred loss and loss adjustment expenses related to SB 1899 totaled $1.3 million and $4.6 million in the first quarters of 2002 and 2001, respectively. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Investment grade bonds comprised 100% of the fair value of the fixed-maturity portfolio at March 31, 2002. Of the Company's total investments at March 31, 2002, and December 31, 2001, approximately 78% were invested in tax-exempt, fixed-income securities. As of March 31, 2002, the after-tax unrealized loss on investments was $4.8 million compared to an after-tax unrealized loss of $1.0 million as of December 31, 2001. Premiums receivable were $78.6 million at March 31, 2002, compared to $75.6 million at December 31, 2001, with the increase mainly being attributable to growth in the Company's customer base. Higher customer volume also contributed to increases in reinsurance recoverables, prepaid reinsurance premiums and deferred policy acquisitions costs. Unpaid losses and loss adjustment expenses increased $3.3 million in the first quarter of 2002 due to the effect of consolidating 21st of Arizona partially offset by payments relating to previously recorded losses for California Senate Bill 1899 ("SB 1899") (see discussion below under "Underwriting Results - Homeowner and Earthquake Lines in Runoff"). Other liabilities increased by $8.0 million mainly because of increases in premium taxes and operating accounts payable. Stockholders' equity and book value per share decreased to $656.8 million and $7.69 at March 31, 2002, compared to $659.3 million and $7.72 at December 31, 2001. The decrease was due to changes in accumulated other comprehensive income, primarily unrealized investment losses of $3.8 million, and dividends to shareholders of $6.8 million offset by net income of $8.3 million. LIQUIDITY AND CAPITAL RESOURCES The parent company's main sources of liquidity historically have been dividends received from its insurance subsidiaries and proceeds from issuance of debt or equity securities. The parent company currently has no debt outstanding. The parent's only equity security currently outstanding is its common stock, which has no mandatory dividend obligations. During 2002, the insurance subsidiaries have the capacity to pay dividends to the parent aggregating approximately $20 million under current insurance regulations. Recent court rulings may subject certain dividends from the insurance subsidiaries to California State income tax. The Company believes the sources of funds referred to above will be adequate to meet its cash needs for dividends to shareholders or other purposes without receiving additional dividends from its insurance subsidiaries until this tax issue is resolved. If necessary, the Company believes it can access the capital markets should the need arise for additional capital to support its growth objectives, although it has no present intentions of doing so. The Company believes it has taken the proper actions to restore underwriting profitability in its core auto insurance operations and thereby enhance its liquidity. However, there can be no assurance that insurance regulators will grant future rate increases that may be necessary to offset increases in claims cost trends. Also, the resolution of Northridge Earthquake claims pursuant to California SB1899 possibly may require more outlays than the recorded estimates. As a result of such uncertainties, underwriting losses could recur in the future. Further, the Company could be required to liquidate investments to pay claims, possibly during unfavorable market conditions, which could lead to the realization of losses on sales of investments. Each of the foregoing uncertainties would create some degree of downward pressure on the insurance subsidiaries' statutory surplus, which in turn could negatively impact the Company's liquidity. 8 As of March 31, 2002, the Company's insurance subsidiaries had a combined statutory surplus of $374.9 million as compared to $393.1 million at December 31, 2001. The decrease was primarily due to transferring pension and payroll related obligations from the Parent to the insurance subsidiaries totaling $25.1 million, a $7.9 million decrease in deferred tax assets recognizable under statutory accounting practices, statutory net income of $11.8 million and the consolidation of $4.2 million of surplus from 21st of Arizona. The Company's ratio of net premiums written to surplus was 2.3 for the twelve month period ended March 31, 2002, compared to 2.2 for the year ended December 31, 2001. Cash and investments at the holding company were $30.2 million at March 31, 2002, as compared to $52.8 million at December 31, 2001. RESULTS OF OPERATIONS The Company reported net income for the quarter ended March 31, 2002, of $8.3 million, or $0.10 diluted earnings per share, on direct premiums written of $233.0 million, compared to net income of $4.9 million, or $0.06 diluted earnings per share, on direct premiums written of $236.9 million for the quarter ended March 31, 2001. Operating income (i.e., net income before realized investment gains or losses and excluding results of the homeowner and earthquake lines of business, which are in runoff) for the three months ended March 31, 2002, was $11.8 million, or $0.14 diluted earnings per share. This compares to 2001 first quarter operating income of $7.9 million, or $0.09 diluted earnings per share. The components of operating income follow (amounts in thousands): First Quarter Ended March 31, 2002 2001 - -------------------------------------------------------------------------- Pretax underwriting gain (loss) on personal auto lines $ 2,966 $(3,823) Investment income 11,265 11,726 Federal income tax (expense) benefit on above (2,409) 36 - -------------------------------------------------------------------------- Operating income $11,822 $ 7,939 - -------------------------------------------------------------------------- Underwriting Results - Personal Auto. Automobile insurance is the primary line of business written by the Company. The Company currently is licensed to write automobile insurance in 22 states compared to 21 states at the end of 2001. Vehicles insured outside of California accounted for less than 4% of the total in the first quarters of 2002 and 2001. The Company expects to explore expansion into new states in 2002. Direct premiums written in the first quarter of 2002 increased $1.9 million (0.8%) to $230.4 million from $228.5 million in the same period of 2001, primarily as a result of the inclusion of 21st of Arizona premiums effective January 1, 2002. Net premiums earned increased $7.2 million (3.5%) to $215.1 million from $207.9 million for the three months ended March 31, 2002, mainly due to the scheduled decrease in the cession rate under a quota share reinsurance treaty from 6% in 2001 to 4% in 2002 and the consolidation of 21st of Arizona. Compared to the same period in 2001, net incurred losses and loss adjustment expenses decreased $1.7 million (0.9%) to $181.8 million during the quarter ended March 31, 2002, from $183.4 million in the same period of 2001. The decrease is mainly due to the decline in the number of insured automobiles in California. The ratio of net underwriting expenses to net premiums earned was 14.1% for the three months ended March 31, 2002, and 13.6% for the same period last year. The increase was primarily due to growth in advertising expenditures. 9 The combined ratios were 98.6% and 101.8% in the quarters ended March 31, 2002 and 2001, respectively. Rate Increases. On April 10, 2002, the Company received approval from the California DOI to implement, effective May 6, 2002, a 5.7% rate increase on its California personal auto lines. Investments Results. Compared to the same period in 2001, net pre-tax investment income decreased 4.6% for the quarter ended March 31, 2002, primarily because of a decrease of 2.9% in average invested assets. The decline in invested assets was due to funds being used for dividends to stockholders, the acquisition of 21st of Arizona and the purchase of software, property and equipment. The average annual pre-tax yield on invested assets for the three month period ended March 31, 2002, was 5.1%, compared to 5.2% for the same period in 2001. On an after-tax basis, the yields were 4.4% for the quarter ended March 31, 2002, compared to 4.6% for the same period in 2001. Homeowner and Earthquake Lines in Runoff. The Company has not written any earthquake coverage since 1994 and ceased writing new homeowner policies in September 2001. In the first quarter of 2002, the Company executed various transactions to exit from its homeowner line resulting in a one time after-tax charge of $3.7 million, and incurred legal defense costs in connection with California SB 1899, resulting in an after-tax charge of $0.9 million. Under a January 1, 2002, agreement with Balboa Insurance Company ("Balboa"), a subsidiary of Countrywide Credit Industries, Inc. ("Countrywide"), 100% of homeowner unearned premium reserves and future related losses are reinsured by Balboa. Obligations relating to the 1994 Northridge Earthquake are not covered by the agreements with Balboa. The Company began non-renewing homeowner policies expiring on February 21, 2002, and thereafter. Substantially all of these customers are expected to be offered homeowner coverage through an affiliate of Countrywide. FORWARD-LOOKING STATEMENTS The Company's management has made in this report, and from time to time may make in its public filings, press releases, and oral presentations and discussions, forward-looking statements concerning the Company's operations, economic performance and financial condition. Forward-looking statements include, among other things, discussions concerning the Company's potential, expectations, beliefs, estimates, forecasts, projections and assumptions. Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those anticipated by forward-looking statements due to a number of important factors including, but not limited to, those discussed elsewhere in this report and in the Company's other public communications, as well as the following: (a) the intensity of competition from other companies in the insurance industry; (b) the Company's experience with respect to persistency, underwriting and claims experience including revived claims under SB 1899; (c) the Company's ability to distribute and administer competitive services in a timely, cost-effective manner; (d) the Company's visibility in the marketplace and its financial and claims-paying ratings; (e) regulatory approval for rate increases and product changes; (f) the effect of changes in laws and regulations affecting the Company's business, including changes in tax laws affecting insurance products; (g) market risks related to interest rates; (h) the Company's ability to develop and deploy information technology and management information systems to support strategic goals while continuing to control costs and expenses; (i) the costs of defending litigation or regulating proceedings and the risk of unanticipated material adverse outcomes in such litigation or proceedings; (j) changes in accounting and reporting practices; and (k) the Company's access to adequate financing to support its future business. The Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss from adverse changes in market prices and interest rates. In addition to market risk, the Company is exposed to other risks, including the credit risk related to its financial instruments and the underlying insurance risk related to its core business. As of March 31, 2002, there have been no material changes in the Company's investment strategies, types of financial instruments held or the risks associated with such instruments which would materially alter the market risk disclosures made in the Company's Annual Statement on Form 10-K for the year ended December 31, 2001. The first column in the following table shows the financial statement carrying value of the Company's financial instruments. The Company's investment portfolio is carried at fair value. The second column shows the effect on the current carrying value and estimated fair value assuming a 100 basis point increase in market interest rates. The following sensitivity analysis summarizes only the exposure to market interest rate risk as of March 31, 2002. Estimated Fair Value at Adjusted Market Carrying Rates/Prices (Amounts in millions) Value Indicated Below * - -------------------------------------------------------------------------------- Fixed maturity investments available-for-sale $ 860.0 $ 796.7 * Adjusted interest rates assume a 100 basis point increase in market rates at March 31, 2002. 11 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the normal course of business, the Company is named as a defendant in lawsuits related to claim and insurance policy issues. Some of the actions request extra-contractual and/or punitive damages. The actions are vigorously defended unless a reasonable settlement appears appropriate. Except as disclosed in the Notes to Financial Statements, the Company does not believe the outcome of any pending legal proceedings will have a material adverse effect on its financial position, results of operations or cash flows. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (b) Reports on Form 8-K Items reported - Item 5, Other Events; Financial statements filed - None; Date of report - January 25, 2002. 12 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. 21ST CENTURY INSURANCE GROUP -------------------------------------- (Registrant) Date: April 25,2002 /s/ Bruce W. Marlow -------------------------------- -------------------------------------- BRUCE W. MARLOW President and Chief Executive Officer Date: April 25, 2002 /s/ Douglas K. Howell -------------------------------- -------------------------------------- DOUGLAS K. HOWELL Senior Vice President and Chief Financial Officer 13 -----END PRIVACY-ENHANCED MESSAGE-----