FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
[S]
Commission File Number 1-7411
[S]
ALLCITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
[S]
New York 13-2530665
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
335 Adams Street, Brooklyn, N.Y 11201-3731
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (718)422-4000
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 [ ]
On AugustMay 1410, 2000, there were 7,078,625 shares of Common Stock
outstanding.
ALLCITY INSURANCE COMPANY
INDEX
PART I Financial Information PAGE
Item 1. Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2000
and December 31, 1999 1
Consolidated Statements of OperationsIncome - Six months ended
June 30, 2000 and June 30, 1999 2
Consolidated Statements of Operations - Three months ended
June 30, 2000 and June 30, 1999 3
Consolidated Statements of Cash Flows - Six Three months
ended June 30, 2000 and June 30, 1999 4
Consolidated Statements of Changes in Shareholders' Equity -
SixThree months ended June 30, 2000 and June 30, 1999 .
5
Notes to Interim Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Interim Results of Operations 7-10
PART II Other Information
Item 5. Other Information. 10
Item 6. Exhibits and Reports on Form 8-K . 10
Signature Page 11
CONSOLIDATED BALANCE SHEETS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and par value amounts)
June 30, December 31,
2000 1999
ASSETS (Unaudited)
Investments:
Fixed Maturities:
Available for sale
(amortized cost of $139,530 in 2000
and $167,294 in 1999) $136,756 $163,495
Held to maturity
(fair value of $490 in 2000 and $476
in 1999) 492 492
Equity securities available for sale 255 255
Short-term 2,334 7,129
Other invested assets 36,078 33,875
TOTAL INVESTMENTS 175,915 205,246
Cash 108 644
Agents' balances, less allowance for
doubtful accounts ($1,836 in 2000 and
$1,812 in 1999) 5,764 6,115
Accrued investment income 2,618 3,041
Reinsurance balances receivable 197,251 230,193
Prepaid reinsurance premiums 19,494 22,282
Deferred policy acquisition costs 3,651 3,415
Deferred income taxes 10,278 9,938
Due from affiliates 3,961 -
Other assets 5,477 5,146
TOTAL ASSETS $424,517 $486,020
LIABILITIES
Unpaid losses $261,189 $307,075
Unpaid loss adjustments expenses 26,196 34,861
Unearned premiums 37,391 38,927
Due to affiliates - 7,476
Reinsurance balances payable 1,801 717
Other liabilities 9,682 9,397
Surplus note 16,152 15,851
TOTAL LIABILITIES 352,411 414,304
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value; 7,368,420
Shares authorized; 7,078,625 shares issued
and outstanding in 2000 and 1999 7,079 7,079
Additional paid-in-capital 9,331 9,331
Accumulated other comprehensive loss,
net of deferred tax benefits of $881 and
$1,240 in 2000 and 1999, respectively (1,637) (2,304)
Retained earnings 57,333 57,610
TOTAL SHAREHOLDERS' EQUITY 72,106 71,716
TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY $424,517 $486,020
See Notes to Interim Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and per share amounts)
Six Months Ended
June 30,
2000 1999
REVENUES
Net earned premiums $16,031 $24,978
Net investment income 6,534 6,179
Service fee income 118 1,166
Net realized securities losses (588) (472)
Other income 111 221
22,206 32,072
LOSSES AND EXPENSES
Losses 11,300 17,686
Loss adjustment expenses 3,722 4,464
Other underwriting expenses less deferrals
of $4,173 in 2000 and $4,589 in 1999 3,920 4,694
Amortization of deferred policy
acquisition costs 3,937 5,479
Interest on surplus note 302 271
23,181 32,594
LOSS BEFORE FEDERAL INCOME TAXES (975) (522)
FEDERAL INCOME TAXES
Current tax expense 2 60
Deferred tax benefit (700) (243)
(698) (183)
NET LOSS $ (277) $ (339)
Per share data, based on 7,078,625 average
shares outstanding in 2000 and 1999:
BASIC AND DILUTED LOSS PER SHARE $ (0.04) $ (0.05)
See Notes to Interim Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and per share amounts)
Three Months Ended
June 30,
2000 1999
REVENUES
Net earned premiums $ 7,954 $11,239
Net investment income 3,249 3,032
Service fee income 28 566
Net realized securities losses (367) (264)
Other income 43 109
10,907 14,682
LOSSES AND EXPENSES
Losses 5,508 8,345
Loss adjustment expenses 2,000 2,021
Other underwriting expenses less deferrals
of $1,787 in 2000 and $1,657 in 1999 2,061 2,427
Amortization of deferred policy
acquisition costs 2,047 2,423
Interest on surplus note 158 122
11,774 15,338
LOSS BEFORE FEDERAL INCOME TAXES (867) (656)
FEDERAL INCOME TAXES
Current tax expense/(benefit) 2 (15)
Deferred tax benefit (305) (215)
(303) (230)
NET LOSS $ (564) $ (426)
Per share data, based on 7,078,625 average
shares outstanding in 2000 and 1999:
BASIC AND DILUTED LOSS PER SHARE $ (0.08) $ (0.06)
See Notes to Interim Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands)
Six Months Ended
June 30,
2000 1999
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (277) $ (339)
Adjustment to reconcile net loss to net
cash (used for)/provided by operations:
Deferred tax benefit (700) (243)
Amortization of deferred policy acquisition
costs 3,937 5,479
Provision for doubtful accounts 24 54
Net realized securities losses 588 472
Policy acquisition costs incurred and deferred (4,173) (4,589)
Net changes in:
Agents' balances 327 1,168
Reinsurance balances receivable 32,942 30,498
Prepaid reinsurance premiums 2,788 9,099
Unpaid losses and loss adjustment expenses (54,551) (47,328)
Unearned premiums (1,536) (13,178)
Due to/from affiliates (11,437) 25,695
Reinsurance balances payable 1,084 (225)
Other 1,107 (1,156)
NET CASH (USED FOR)/PROVIDED BY OPERATING
ACTIVITIES (29,877) 5,407
NET CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale:
Acquisition of fixed maturities (6,377) (144,190)
Proceeds from sale of fixed maturities 32,322 134,680
Proceeds from maturities of fixed maturities 804 8,664
Net change in other invested assets (2,203) (1,080)
Net change in short-term investments 4,795 (836)
NET CASH PROVIDED BY/(USED FOR) INVESTING ACTIVITIES 29,341 (2,762)
NET (DECREASE)/INCREASE IN CASH (536) 2,645
Cash, at beginning of period 644 390
Cash, at the end of period $ 108 $ 3,035
See Notes to Interim Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except par value amounts)
Accumulated
Common Other
Stock Additional Comprehensive
$1 Par Paid-in Income/ Retained
Value Capital (Loss) Earnings Total
Balance, January 1, 1999 $7,079 $9,331 $ 449 $61,341 $78,200
Comprehensive loss
Net loss (339) (339)
Other comprehensive loss:
Net change in unrealized
gain (loss) on investments
(net of deferred tax benefit
of $1,363) (2,531) (2,531)
Less: reclassification of
net securities losses
included in net loss
(net of deferred tax benefit
of $134) 248 248
Comprehensive loss (2,622)
Balance, June 30, 1999 $7,079 $9,331 $ (1,834) $61,002 $75,578
Balance, January 1, 2000 $7,079 $9,331 $ (2,304) $57,610 $71,716
Comprehensive income:
Net loss (277) (277)
Other comprehensive income:
Net change in unrealized
loss on investments
(net of deferred tax
expense of $283) 526 526
Less: reclassification of
net securities losses
included in net loss
(net of deferred tax benefit
of $76) 141 141
Comprehensive income 390
Balance, June 30, 2000 $7,079 $9,331 $ (1,637) $57,333 $72,106
See Notes to Interim Consolidated Financial Statements.
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited interim consolidated financial statements, which
reflect all adjustments (consisting only of normal recurring items)
that management believes necessary to fairly present interim results
of operations, should be read in conjunction with the Notes to
Consolidated Financial Statements (including the Summary of
Significant Accounting Policies) included in the Company's audited
consolidated financial statements for the year ended December 31,
1999, which are included in the Company's Annual Report filed on
Form 10-K for such year (the "1999 10-K"). Results of operations
for interim periods are not necessarily indicative of annual results
of operations. The consolidated balance sheet at December 31, 1999
was extracted from the audited annual financial statements and does
not include all disclosures required by generally accepted
accounting principles for annual financial statements.
2. Certain amounts for prior periods have been reclassified to conform
with the 2000 presentation.
3. Certain information concerning the Company's segments for the three
and six month periods ended June 30, 2000 and 1999 is as follows (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Net Earned Premiums
Small Business $ 1,425 $ 1,530 $ 2,844 $ 3,527
Mid-Market 3,305 3,631 6,337 7,989
Personal Lines (1) 3,224 6,078 6,850 13,462
Total Net Earned Premiums $ 7,954 $11,239 $16,031 $24,978
Losses Incurred
Small Business $ 765 $ 856 $1,518 $ 1,890
Mid-Market 2,144 3,005 4,734 6,241
Personal Lines (1) 2,599 4,484 5,048 9,555
Total Losses Incurred $ 5,508 $ 8,345 $11,300 $17,686
Loss Adjustment Expenses Incurred
Small Business $ 259 $ 217 $ 481 $ 435
Mid-Market 724 719 1,348 1,579
Personal Lines (1) 1,017 1,085 1,893 2,450
Total Loss Adjustment
Expenses Incurred $ 2,000 $ 2,021 $ 3,722 $ 4,464
[S]
(1) Includes assigned risk automobile business which the Company no
longer participates in effective January 1, 2000.
4. In June 1999, the Financial Accounting Standards Board issued
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective date
of FASB Statement No. 133 ("SFAS 133")", which will be effective for
fiscal years beginning after June 15, 2000. The Company is
reviewing the impact of the implementation of SFAS 133 on the
Company's financial position and results of operations.
Item 2.:
[S]
Management's Discussion and Analysis of Financial Condition and Results of
Interim Operations
[S]
The following should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the 1999 10-K.
[S]
LIQUIDITY AND CAPITAL RESOURCES
[S]
For the six month period ended June 30, 2000, net cash was used for
operations principally as a result of a decrease in premiums written and
the payment of claims. For the six month period ended June 30, 1999, net
cash was provided by operations principally due to the timing of
payments in connection with the settlement of balances payable to Empire
Insurance Company under the terms of the intercompany pooling agreement.
At June 30, 2000 and 1999, the yield on the Company's fixed
maturities portfolio was 6.8% and 5.6%, respectively, with an average
maturity of 2.0 years and 3.3 years, respectively. At June 30, 2000, a
significant portion of the Company's investment portfolio is invested in
issues of the U.S. Treasury and its governmental agencies with the
remainder primarily invested in investment grade corporate and
industrial issues.
The Company maintains cash, short-term and readily marketable
securities and anticipates that the cash flow from investment income and
the maturities and sales of short-term investments and fixed maturities
will be sufficient to satisfy its anticipated cash needs. During each
of the six month periods ended June 30, 2000 and 1999, the Company sold
certain securities at a net realized capital loss to meet short-term
cash flow needs. The Company does not presently anticipate paying
dividends in the near future and believes it has sufficient capital to
meet its currently anticipated level of operations.
[S]
INTERIM RESULTS OF OPERATIONS-SIX AND THREE MONTHS ENDED JUNE 30, 2000
COMPARED TO THE SIX AND THREE MONTHS ENDED JUNE 30, 1999.
[S]
Net earned premium revenues were $16,031,000 and $24,978,000 for the
six month periods ended June 30, 2000 and 1999, respectively, and
$7,954,000 and $11,239,000 for the three month periods ended June 30,
2000 and 1999, respectively. While earned premiums declined in almost
all lines of business, the most significant reductions were in assigned
risk automobile, voluntary private passenger automobile, commercial
package policies, homeowners and workers' compensation. As discussed in
the 1999 10-K, as a result of poor operating results, the Company is no
longer entering into new assigned risk contracts. Effective January 1,
2000, all policy renewal obligations have been assigned to another
insurance company. However, the Company remains liable for the claim
settlement costs for assigned risk claims that occurred during the policy
term. The decline in voluntary private passenger automobile resulted
from tighter underwriting standards, increased competition and the
Company's decision to no longer accept new policies from those agents who
historically have had poor underwriting results. The Company's
termination of certain unprofitable agents has also adversely affected
premium volume in other lines of business.
The Company's loss ratios were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Loss and LAE Ratio:
GAAP 94.4% 92.2% 93.7% 88.7%
SAP 94.4% 92.2% 93.7% 88.7%
Expense Ratio:
GAAP 53.3% 39.2% 50.2% 37.1%
SAP 56.5% 46.2% 45.7% 38.2%
Combined Ratio:
GAAP 147.7% 131.4% 143.9% 125.8%
SAP 150.9% 138.4% 139.4% 126.9%
[S]
The loss ratios for the 2000 periods increased as compared to the
1999 periods due to reserve strengthening recorded for 1999 and prior
accident years and outsourcing expenses for claims handling. Although
the dollar amount of reserve strengthening was the same for the 2000
periods as compared to the 1999 periods, the reduction in earned premiums
in 2000 resulted in higher loss ratios on a percentage basis. The
current accident year loss ratios declined from the prior year due to
product mix and the expected benefits to be derived from the Company's
changes to underwriting and claims handling procedures. Expense ratios
for the 2000 periods increased as compared to the 1999 periods due to
reduced service fees, higher severance costs and overhead costs which,
although lower, have not declined proportionally with premiums.
The Empire Group, which includes the Company and its parent Empire
Insurance Company, continued its expense reduction program to more
closely align its expenses with its current volume of business. Through
June 30, 2000, staff reductions have resulted in the elimination of 150
job positions, representing approximately 29% of the Empire Group's
December 31, 1999 workforce. In certain instances, particularly in the
claims department, the cost savings from the reductions will be partially
offset by increased outsourcing expenses. The Empire Group will continue
to examine its overhead costs and additional reductions are likely to
occur in 2000.
Income taxes for the six month period ended June 30, 2000 reflect a
benefit of $358,000 for a change in the Company's estimated prior year's
federal tax liability.
[S]
Cautionary Statement for Forward-Looking Information
[S]
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Interim Operations may contain
forward-looking statements. Such forward looking statements are made
pursuant to the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements may
relate, but are not limited, to projections of revenues, income or loss,
capital expenditures, fluctuations in insurance reserves, plans for
growth and future operations, competition and regulation as well as
assumptions relating to the foregoing. Forward-looking statements are
inherently subject to risks and uncertainties, many of which cannot be
predicted or quantified. When used in this Management's Discussion and
Analysis of Financial Condition and results of Interim Operations, the
words "estimates", "expects", "anticipates", "believes", "plans",
"intends" and variations of such words and similar expressions are
intended to identify forward-looking statements that involve risks and
uncertainties. Future events and actual results could differ materially
from those set forth in, contemplated by or underlying the forward-
looking statements. The factors that could cause actual results to
differ materially from those suggested by
any such statements include, but are not limited to, those discussed or
identified from time to time in the Company's public filings,
including
general economic and market conditions, changes in domestic laws,
regulations and taxes, changes in competition and pricing environments,
regional or general changes in asset valuation, the occurrence of
significant natural disasters, the inability to reinsure certain risks
economically, the adequacy of loss reserves, prevailing interest rate
levels, weather related conditions that may affect the Company's
operations and changes in composition of the Company's assets and
liabilities through acquisitions or divestitures. Undue reliance should
not be placed on these forward-looking statements, which are applicable
only as of the date hereof. The Company undertakes no obligation to
revise or update these forward-looking statements to reflect events or
circumstances that arise after the date of Management's Discussion and
Analysis of Financial Condition and Results of Interim Operations or to
reflect the occurrence of unanticipated events.
[S]
Part II - Other Information
[S]
Item 5. Other Information
[S]
NONE.
[S]
Item 6. Exhibits and Reports on Form 8-K
[S]
a) Exhibits
The following exhibit is filed herewith:
Exhibit Number Description of Document
27 Financial Data Schedule
[S]
b) Report on Form 8-K
None.
SIGNATURE
[S]
Pursuant to the requirements 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.
[S]
ALLCITY INSURANCE COMPANY
Registrant
Date: Auguat 14, 2000 By: /s/Francis M. Colalucci
Francis M. Colalucci
Executive Vice President,CFO and
Treasurer
(Principal Financial Accounting
Officer)