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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[S]
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 May 13, 1999, there were 7,078,625 shares of Common Stock outstanding.
ALLCITY INSURANCE COMPANY
[S]
INDEX
PART 1 Financial Information PAGE
Item 1. Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 1
Consolidated Statements of Income - Three months ended
March 31, 1999 and March 31, 1998 2
Consolidated Statements of Cash Flows - Three months
ended March 31, 1999 and March 31, 1998 3
Consolidated Statements of Changes in Shareholders' Equity
Three months ended March 31, 1999 and March 31, 1998 . 4
Notes to Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Interim Results of Operations 7
PART II Other Information
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature Page 12
i
CONSOLIDATED BALANCE SHEETS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and par value amounts)
March 31, December 31,
1999 1998
(Unaudited)
ASSETS
Investments:
Available for sale at fair value
(amortized cost of $168,372 in 1999
and $181,214 in 1998) $167,222 $181,905
Held to maturity at amortized cost
(fair value of $491 in 1999 and $498
in 1998) 499 502
Short-term 33,396 20,186
Other invested assets 31,847 31,446
TOTAL INVESTMENTS 232,964 234,039
Cash 944 390
Agents' balances, less allowance for
doubtful accounts ($1,838 in 1999 and
$1,817 in 1998) 12,229 10,015
Accrued investment income 1,785 3,662
Reinsurance balances receivable 270,628 295,994
Prepaid reinsurance premiums 32,496 37,691
Deferred policy acquisition costs 5,242 5,365
Deferred income taxes 11,774 11,101
Due from affiliates - 3,010
Other assets 4,707 4,437
TOTAL ASSETS $572,769 $605,704
LIABILITIES
Unpaid losses $365,155 $382,109
Unpaid loss adjustments expenses 35,394 52,123
Unearned premiums 58,412 63,972
Drafts payable 3,627 3,912
Due to affiliates 6,810 -
Unearned service fee income 1,801 2,240
Reserve for service carrier
claim expenses 1,484 1,730
Reinsurance balances payable 906 885
Other liabilities 6,641 5,233
Surplus note 15,449 15,300
TOTAL LIABILITIES 495,679 527,504
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value; 7,368,420
Shares authorized; 7,078,625 shares
issued and outstanding in 1999 and 1998 7,079 7,079
Additional paid-in-capital 9,331 9,331
Accumulated other comprehensive income,
net of deferred taxes of $(403) and $242
in 1999 and 1998, respectively (748) 449
Retained earnings 61,428 61,341
TOTAL SHAREHOLDERS' EQUITY 77,090 78,200
TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY $572,769 $605,704
See Notes to Interim Consolidated Financial Statements
1
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and per share amounts)
Three Months Ended
March 31,
1999 1998
REVENUES
Net earned premiums $13,739 $18,844
Net investment income 3,147 3,862
Service fee income 600 1,061
Net realized securities (losses)/ gains (208) 242
Other income 112 159
17,390 24,168
LOSSES AND EXPENSES
Losses 9,341 15,685
Loss adjustment expenses 2,443 2,417
Other underwriting expenses less
deferrals of $2,932 in 1999 and
$3,989 in 1998 2,267 2,101
Amortization of deferred policy
acquisition costs 3,056 3,680
Interest on surplus note 149 116
17,256 23,999
INCOME BEFORE FEDERAL INCOME TAXES 134 169
FEDERAL INCOME TAXES
Current tax expense/(benefit) 75 (102)
Deferred tax (benefit)/expense (28) 161
47 59
NET INCOME $ 87 $ 110
Per share data, based on 7,078,625 average
shares outstanding in 1999 and 1998:
BASIC AND FULLY DILUTED
EARNINGS PER SHARE $ 0.01 $ 0.02
[S]
See Notes to Interim Consolidated Financial Statements.
[S]
2
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands)
Three Months Ended
March 31,
1999 1998
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 87 $ 110
Adjustment to reconcile net income to net
cash provided by/(used for) operations:
Benefit/provision for deferred income taxes (28) 161
Amortization of deferred policy acquisition
costs 3,056 3,680
Provision for doubtful accounts 21 (30)
Net realized securities losses/(gains) 208 (242)
Policy acquisition costs incurred and
deferred (2,932) (3,989)
Net changes in:
Agents' balances (2,235) (3,729)
Reinsurance balances receivable 25,366 731
Prepaid reinsurance premiums 5,195 3,268
Unpaid losses and loss adjustment
expenses (33,683) (3,816)
Unearned premiums (5,560) (661)
Drafts payable (285) 601
Due to affiliates 9,820 (3,202)
Unearned service fees (439) (137)
Reserve for servicing carrier claim
expense (246) (362)
Reinsurance balances payable 21 (1,714)
Other 3,576 (631)
NET CASH PROVIDED BY/(USED FOR) OPERATING
ACTIVITIES 1,942 (9,962)
NET CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale:
Acquisition of fixed maturities (49,721) (10,677)
Proceeds from sale of fixed maturities 57,239 52,084
Proceeds from maturities of fixed maturities 4,705 4,707
Net change in other invested assets (401) -
Net change in short-term investments (13,210) (31,123)
NET CASH (USED FOR)/PROVIDED BY INVESTING
ACTIVITIES (1,388) 14,991
NET INCREASE IN CASH 554 5,029
Cash, at beginning of period 390 2,863
Cash, at the end of period $ 944 $ 7,892
See Notes to Interim Consolidated Financial Statements
3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
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, 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 of $85) (157) (157)
Comprehensive income 179
Balance, March 31, 1998 $7,079 $9,331 $ 986 $60,947 $78,343
Balance, January 1,1999 $7,079 $9,331 $ 449 $61,341 $78,200
Comprehensive income:
Net income 87 87
Other comprehensive income:
Net change in unrealized
gain (loss) on investments
(net of deferred tax
benefitof $743) (1,380) (1,380)
Less: reclassification of
net securities losses
included in net income
(net of tax of $98) 183 183
Comprehensive income (1,110)
Balance, March 31, 1999 $7,079 $9,331 $ (748) $61,428 $77,090
[S]
See Notes to Interim Consolidated Financial Statements.
[S]
4
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, 1998, which are included in the Company's Annual Report filed
on Form 10-K for such year (the "1998 10-K"). Results of operations for
interim periods are not necessarily indicative of annual results of operations.
The consolidated balance sheet at December 31, 1998 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 1999 presentation.
3. In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information",
("SFAS No. 131"). At the time the Company adopted SFAS No. 131, the Company
had identified three reportable segments: 1) automobile lines; 2) commercial
lines; and 3) miscellaneous and personal lines. Beginning in 1999, the
Company's business was reorganized into three segments: 1) Small Business;
2) Personal Lines and Residual Markets; and 3) Mid-Market. Each of these
segments has separate management teams responsible for all marketing, sales
and underwriting decisions within their units. The reorganization is designed
to provide a greater degree of accountability for underwriting results and to
create a closer relationship with agents and customers of the Company. The
Small Business segment will primarily focus on commercial package products
for small businesses; the Personal Lines and Residual Market segment will
primarily concentrate on personal automobile and homeowners insurance; and
the Mid-Market segment
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will focus on commercial auto, commercial package and workers' compensation
insurance for larger accounts. Further segment information is provided in
Note 4 in this Report.
In January 1998, the Accounting Standards Executive 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 15, 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. In 1999,
the Company adopted SOP 97-3; the financial position and operating results of
the Company have not been materially affected.
4. Certain information concerning the Company's segments, as restated (see
Note 3 above) for the three month periods ended March 31, 1999 and 1998 is as
follows (in thousands):
1999 1998
Net Earned Premiums
Small Business $ 1,997 $ 1,466
Mid Market 4,358 6,244
Personal Lines &
Residual Markets 7,384 11,134
Total Net Earned Premiums $13,739 $18,844
Losses Incurred
Small Business $ 1,034 $ 1,322
Mid Market 3,236 5,668
Personal Lines &
Residual Markets 5,071 8,695
Total Losses Incurred $ 9,341 $15,685
Loss Adjustment Expenses
Incurred
Small Business $ 218 $ 187
Mid Market 860 468
Personal Lines &
Residual Markets 1,365 1,762
Total Loss Adjustment
Expenses Incurred $ 2,443 $ 2,417
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Item 2.:
[S]
Management's Discussion and Analysis of Financial Condition and Interim
Results of Operations
The following should be read in conjunction with the Management's Discussion
and Analysis of Financial Condition and Results of Operations included in the
1998 10-K.
LIQUIDITY AND CAPITAL RESOURCES
During each of the three month periods ended March 31, 1999 and 1998 the
Company operated profitably. For the three month period ended March 31,
1999, net cash was provided by operations principally due to the settlement
of balances receivable from Empire Insurance Company under the terms of the
intercompany pooling agreement. For the three month period ended March 31,
1998, net cash was used for operations principally due to decreased premium
writings and increased loss and loss adjustment expense payments relative to
collected premiums as a result of a program to reduce pending claims. For
the period ended March 31, 1999, cash provided by operations was principally
invested in short-term investments while cash required to fund operations for
the comparable 1998 period was provided from the maturity of investments
available for sale and short-term investments as well as the sale of fixed
maturity securities.
At March 31, 1999 and 1998, the yield on the Company's fixed maturities
portfolio was 5.4% and 6.0%, respectively, with an average maturity of 2.8
years and 2.5 years, respectively. At March 31, 1999, 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 issues.
The Company maintains cash, short-term and readily marketable securities and
anticipates that the cash flow generated from investment income and the
maturities and sales of short-term investments and fixed maturities will be
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.
7
RESULTS OF OPERATIONS-THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1998.
[S]
Net earned premium revenues were $13.7 million and $18.8 million for the three
month periods ended March 31, 1999 and 1998, respectively. The decrease in
earned premiums principally relates to a decline in the number of assigned
risk automobile pool contracts acquired due to competition and the
depopulation of the assigned risk automobile pools, as well as a reduction
in certain personal and commercial lines of business, principally voluntary
private passenger, commercial automobile and commercial package policies,
due to tighter underwriting standards, reunderwriting, and increased
competition.
Service fee income was $0.6 million and $1.1 million for the three month
periods ended March 31, 1999 and 1998, respectively. The decrease is largely
the result of a decline in the number of assigned risk automobile pool
contracts acquired due to competition combined with lower premium volume due
to continued depopulation of the assigned risk pools.
Net investment income was $3.1 million and $3.9 million for the three month
periods ended March 31, 1999 and 1998, respectively. The decline was
principally the result of lower overall yields due to current market conditions,
and a lower invested asset base.
Losses incurred for the first quarter 1999 were 40% less than the first quarter
1998 generally as a result of the reduced reserve strengthening required for
prior accident years and lower current accident year loss ratios resulting
from product mix and improved underwriting.
The combination of other underwriting expenses and the amortization of deferred
policy acquisition costs for the first quarter 1999 was $5.3 million compared
to $5.8 million in 1998. The decrease is primarily related to the decline in
premium revenue.
8
Year 2000 and Information Technology Systems
The Company continues to evaluate its information technology systems to
determine the potential impact of the year 2000. The year 2000 issue is the
result of computer programs being written using two digits (rather than four)
to define the applicable year.
Any programs that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures.
As more fully described in the 1998 10-K, since 1996, the Company has been
evaluating its year 2000 readiness.
The Company's policy management system has been successfully migrated into
production for all new and renewal business. The Company's primary focus
during 1999 is to complete the migration of historical data to the policy
system. The Company expects this migration to be completed during the third
quarter of 1999. Additionally, computer equipment and software inventories
have been completed and upgrades are expected to be substantially completed
by the end of the second quarter.
Although a significant portion of the Company's current systems are year 2000
compliant, the Company formed a year 2000 readiness team to further increase
the Company's state of readiness. The team, which meets regularly, is
developing a contingency plan to address any actual failures that may occur
thereby minimizing any outages in operational functions. The Company expects
to complete this plan before the end of the second quarter of 1999.
The Company has made inquiries of third parties with whom it has material
relationships as to the year 2000 compliance of such third parties. Many of
such parties have reported plans to be fully compliant by the end of 1999 and
most had reported substantial progress at the end of 1998. However, at
this time the Company cannot predict the effect of the year 2000 issue on its
material third parties or the impact any deficiency in the year 2000
readiness of such parties could have on the Company.
9
Through March 31, 1999, expenses incurred by the Company in connection with
the year 2000 issue (excluding expenses related to the Company's acquisition
of new systems, which was not motivated by year 2000 concerns) did not exceed
$100,000. Based upon current information, the Company does not expect that
the year 2000 issue will have a material effect on its consolidated financial
position or consolidated results of operations.
Cautionary Statement for Forward-Looking Information
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 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 (including year 2000
compatibility), 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, the difficulty in identifying hardware and software that may not
be year 2000 compliant, the lack of success of third parties to
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adequately address the year 2000 issue, vendor delays and technical
difficulties affecting the Company's ability to upgrade or replace its
hardware and/or software for year 2000 compliance, 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 this 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
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
There were no reports on Form 8-K filed for the three
months ended March 31, 1999.
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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: May 14, 1999 By: /s/Francis M. Colalucci
Francis M. Colalucci
Executive Vice President, CFO and
Treasurer
(Principal Financial and Accounting
Officer)
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