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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-7411
ALLCITY INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
New York 13-2530665
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
122 Fifth Avenue, New York, New York 10011
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 387-3000
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 Yes [X] No [ ]
On May 7, 1998, 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 - March 31, 1998 and December 31, 1997... 1
Consolidated Statements of Income - Three months ended March
31, 1998 and March 31, 1997....................................... 2
Consolidated Statements of Cash Flows - Three months ended
March 31, 1998 and March 31, 1997................................. 3
Consolidated Statements of Changes in Shareholders' Equity -
Three months ended March 31, 1998 and March 31, 1997............. 4
Notes to Interim Consolidated Financial Statements................ 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Interim Results of Operations..................... 7-9
PART II Other Information
Item 5. Other Information.......................................... 10
Item 6. Exhibits and Reports on Form 8-K........................... 10
Signature Page...................................................... 11
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CONSOLIDATED BALANCE SHEETS (Unaudited)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and par value amounts)
March 31, December 31,
1998 1997
(Unaudited)
ASSETS
Investments:
Available for sale at fair value (amortized cost
of $222,161 in 1998 and $268,091 in 1997) $223,231 $269,055
Held to maturity at amortized cost (fair value of $498
in 1998 and $497 in 1997) 485 485
Short-term 32,872 1,749
Equity securities available for sale 447 447
TOTAL INVESTMENTS 257,035 271,736
Cash 7,892 2,863
Agents' balances, less allowance for doubtful accounts
($1,531 in 1998 and $1,561 in 1997) 16,868 13,109
Accrued investment income 3,196 2,942
Reinsurance balances receivable 272,549 273,280
Prepaid reinsurance premiums 51,806 55,074
Deferred policy acquisition costs 7,388 7,079
Deferred income taxes 11,264 11,462
Other assets 3,506 2,704
TOTAL ASSETS $631,504 $640,249
LIABILITIES
Unpaid losses $358,703 $361,341
Unpaid loss adjustments expenses 55,007 56,185
Unearned premiums 90,146 90,807
Drafts payable 5,584 4,983
Due to affiliates 11,225 14,427
Unearned service fee income 4,402 4,539
Reserve for service carrier claim expenses 3,339 3,701
Reinsurance balances payable 3,111 4,825
Other liabilities 6,819 6,567
Surplus note 14,825 14,710
TOTAL LIABILITIES 553,161 562,085
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value; 7,368,420
Shares authorized; 7,078,625 shares issued and
outstanding in 1998 and 1997 7,079 7,079
Additional paid-in capital 9,331 9,331
Accumulated other comprehensive income
net of deferred taxes of $ 531 and $494 in 1998
and 1997, respectively 986 917
Retained earnings 60,947 60,837
TOTAL SHAREHOLDERS' EQUITY 78,343 78,164
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $631,504 $640,249
<FN>
See Notes to Interim Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and per share amounts)
Three months Ended
March 31,
1998 1997
REVENUES
Net earned premiums $18,844 $22,222
Net investment income 3,862 3,863
Service fee income 1,061 1,895
Net securities gains 242 17
Other income 159 111
24,168 28,108
LOSSES AND EXPENSES
Losses 15,685 17,124
Loss adjustment expenses 2,417 2,825
Other underwriting expenses less deferrals
of $3,989 in 1998 and $4,312 in 1997 2,101 2,757
Amortization of deferred policy acquisition costs 3,680 3,936
Interest on surplus note 116 149
23,999 26,791
INCOME BEFORE FEDERAL INCOME TAXES 169 1,317
FEDERAL INCOME TAXES
Current tax (benefit)/tax expense (102) 435
Deferred tax expense 161 26
59 461
NET INCOME $ 110 $ 856
Per share data, based on 7,078,625 average
shares outstanding in 1998 and 1997:
BASIC EARNINGS PER SHARE $ 0.02 $ 0.12
<FN>
See Notes to Interim Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands)
Three months Ended
March 31,
1998 1997
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 110 $ 856
Adjustments to reconcile net income to net
cash (used for) operations:
Provision for deferred tax expense 161 26
Amortization of deferred policy acquisition costs 3,680 3,936
Provision for doubtful accounts (30) 37
Net securities gains (242) (17)
Policy acquisition costs incurred and deferred (3,989) (4,312)
Net change in:
Agents' balances (3,729) (2,478)
Reinsurance balances receivable 731 (1,946)
Prepaid reinsurance premiums 3,268 1,497
Unpaid losses and loss adjustment expenses (3,816) 282
Unearned premiums (661) 1,633
Drafts payable 601 (712)
Due to affiliates (3,202) (11,225)
Unearned services fees (137) 655
Reserve for servicing carrier claim expense (362) (301)
Reinsurance balances payable (1,714) (1,675)
Other (631) (1,215)
NET CASH USED FOR OPERATING ACTIVITIES (9,962) (14,959)
NET CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale:
Acquisition of fixed maturities (10,677) (27,433)
Proceeds from sale of fixed maturities 52,084 29,554
Proceeds from maturities of fixed maturities 4,707 1,006
Net change in short-term investments (31,123) 12,864
NET CASH PROVIDED BY INVESTING ACTIVITIES 14,991 15,991
NET INCREASE IN CASH 5,029 1,032
Cash, at beginning of period 2,863 2,232
Cash, at the end of period $ 7,892 $ 3,264
<FN>
See Notes to Interim Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except par value amounts)
Accumulated
Common Other
Share Additional Comprehensive
$1 Par Paid-in Income/ Retained
Value Capital (Loss) Earnings Total
Balance, January 1, 1997 $ 7,079 $ 9,331 $ (1,672) $ 60,920 $ 75,658
Comprehensive income:
Net income 856 856
Other Comprehensive income:
Net change in unrealized
(loss) on investments
(net of deferred benefit of $723) (1,342) (1,342)
Less: reclassification of net
securities gains included in
net income (net of tax $6) (11) (11)
Total Comprehensive income - - (1,353) 856 (497)
Balance, March 31, 1997 $ 7,079 $ 9,331 $ (3,025) $ 61,776 $ 75,161
Balance, January 1, 1998 $ 7,079 $ 9,331 $ 917 $ 60,837 $ 78,164
Comprehensive income:
Net income 110 110
Other Comprehensive income:
Net change in unrealized
gain on investments
(net of deferred tax of $122) 226 226
Less: reclassification of net
securities gains included in
net income (net of tax $85) (157) (157)
Total Comprehensive income - - 69 110 179
Balance, March 31, 1998 $ 7,079 $ 9,331 $ 986 $ 60,947 $ 78,343
<FN>
See Notes to Interim Consolidated Financial Statements.
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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, 1997, which are included in
the Company's Annual Report filed on Form 10-K for such year (the "1997
10-K"). Results of operations for interim periods are not necessarily
indicative of annual results of operations. The consolidated balance
sheet at December 31, 1997 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 1998 presentation.
3. As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Comprehensive Income" ("SFAS No.
130"), which establishes standards for the reporting and disclosure of
comprehensive income and its components (revenue, expenses, gains and
losses). SFAS No. 130 requires that all items required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income excludes
net investment gains. The new standard requires additional disclosures
in the consolidated financial statements and does not affect the
Company's financial position or results of operations.
-5-
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and interim financial reports issued to shareholders. SFAS
No. 131 also establishes standards for related disclosures about products
and services, geographic areas and major customers. In connection with
the adoption of SFAS No. 131, the Company has identified three
reportable segments based on products and services 1) automobile
lines; 2) commercial lines; and 3) miscellaneous and personal lines.
The financial position and operating results of the Company are not
expected to be materially affected by this statement.
In January, 1998, the Accounting Standards Ececutive Committee of
the American Institute of Certified Public Accountants issued Statement
of Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" ("SOP 97-3"), which is effective for
fiscal years beginning after December 31, 1998, and provides guidance
for determining when an insurance company should recognize a liability
for guaranty-fund and other insurance related assessments and how to
measure that liability. The Company is currently evaluating the impact
to its financial statements for the adoption of SOP 97-3.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS
No. 132") was issued in February, 1998 and revises current disclosure
requirements for employers' pensions and other retiree benefits. SFAS
No. 132 will have no effect on the financial position or results of
operations of the Company. SFAS No. 132 is effective for financial
statements as of and for the period ended December 31, 1998.
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Item 2:
Management's Discussion and Analysis of Financial Condition and Interim
Results of Operations
The following should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations'
included in the Company's 1997 10-K.
LIQUIDITY AND CAPITAL RESOURCES
During each of the three month periods ended March 31, 1998 and 1997
the Company operated profitably although current year net income is
significantly less than in 1997. In 1998 and 1997, the Company
experienced negative cash flow from operations principally due to
decreased premium writings and increased loss and loss adjustment expense
payments as a result of a program to reduce pending claims. Cash
required to fund operations was principally provided from the maturity of
investments available for sale and short-term investments.
At March 31, 1998 and 1997, the yield on the Company's fixed
maturities portfolio was 6.0% for both periods with an average maturity
of 2.5 years and 2.7 years, respectively. At March 31, 1998, a
significant portion of the Company's investment portfolio is invested in
U. S. Government and its agencies and other investment grade corporate
and industrial investment issues.
The Company maintains cash, short-term and readily marketable
securities in an amount sufficient to satisfy its anticipated cash needs.
The Company does not presently anticipate paying dividends in the near
future and believes it has sufficient capital to meet its currently
anticipated level of operations.
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RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1997.
Net earned premium revenues were $18.8 million and $22.2 million for
the three month periods ended March 31, 1998 and 1997, respectively.
The decrease of $3.4 million, or 15% in earned premiums, principally
relates to the depopulation of the assigned risk automobile pools and a
reduction in certain commercial lines of business, principally voluntary
commercial automobile and workers' compensation, due to tighter
underwriting standards, reunderwriting, and increased competition.
The net income of the Company decreased compared to the three months
ended March 31, 1997 primarily due to reserve strengthening for prior
accident years and recording current accident year losses at higher
ratios. Also affecting current period net income was lower service fee
income. These items were partially offset by lower underwriting
expenses which was driven by lower premium volume.
Service fee income for the first quarter 1998 was $0.8 million, or
44%, less than the first quarter 1997. The decrease is largely the
result of reductions in earned fees due to lower premium volumes serviced
in the assigned risk pools related to increased competition ($0.7
million). As more fully described in the Company's 1997 10-K,
beginning in 1997, the Company has received diminishing amounts of
servicing fees for providing administrative and claims services for the
New York Public Automobile Pool ("NYPAP"). Effective February 28,
1998, the Company ceased serving as a servicing carrier for the NYPAP.
1998 results reflect lower net service fee income from the NYPAP of $ 0.1
million which is due to lower volume and the Company's aforementioned
cessation as a servicing carrier.
Net investment income was comparable in the three month periods ended
March 31, 1998 and 1997. Although average balances in 1998 were slightly
lower than in 1997, net investment income remained unchanged as a
slightly greater portion of the Company's assets were invested in higher
yielding long term securities thereby mitigating the impact of lower
balances.
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Losses incurred for the first quarter 1998 were $1.4 million, or 8%,
less than the first quarter 1997 generally as a result of the reduced
volume of business. Losses incurred reflect additional reserve
strengthening of $0.9 million for prior accident years in the private
passenger automobile, commercial assigned risk and workers' compensation
lines of business, which resulted from continued unfavorable claims
development. In addition, higher estimated loss ratios have been
used for the current accident year, primarily in the private passenger
automobile line due to increased claim frequency.
Loss adjustment expenses for the first quarter 1998 were $0.4
million, or 14%, less than the first quarter 1997. The decrease is
mainly attributable to the decrease in volume.
The combination of other underwriting expenses and the amortization
of deferred policy acquisition costs for the first quarter 1998 was $0.9
million, or 14%, lower than the first quarter 1997. This decrease is the
result of lower underwriting costs related to the reduction in earned
premium revenue in the first quarter of 1998.
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Part II - Other Information
Item 5. Other Information
During the quarter, Mr. Richard G. Petitt, a Director, Chairman of the
Board, President and Chief Executive Officer of the Company, announced his
retirement. Mr. Petitt will resign his positions as Chaiman of the Board,
President and Chief Executive Officer of the Company on or about October 1,
1998 and has agreed to continue his employment until the Company finds his
replacement. Mr. Petitt will continue to remain as an active Director on
the Board of the Company subsequent to his retirement.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
The following exhibit is filed herewith:
Exhibit Number Description of Document
Ex - 27* Financial Data Schedule
b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months
ended March 31, 1998.
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SIGNATURE
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.
ALLCITY INSURANCE COMPANY
Registrant
Date: May 13, 1998 By: Francis M. Colalucci
Francis M. Colalucci
Senior Vice President, CFO and Treasurer
(Principal Financial and Accounting
Officer)