SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15d OF THE SECURITIES EXCHANGE ACT 1934
For the fiscal year ended December 31, 1995 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
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value
-------------------------------
(Title of Class)
Series A Preferred Stock, $1,000 Stated Value
---------------------------------------------
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
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
----- -----
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the average high and low prices for shares of the
Company's Common Stock on March 12, 1996 as reported by the New York Stock
Exchange, was approximately $579,684,000.
On March 12, 1996, the registrant had outstanding 51,512,006 shares of common
stock, without par value, which is the Company's only class of common stock.
DOCUMENT INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement used in connection with the annual
meeting of shareholders of the registrant, to be held on May 21, 1996, are
incorporated herein by reference into Part III hereof.
Total Pages: 288
---
1
20TH CENTURY INDUSTRIES
1995 FORM 10-K ANNUAL REPORT
Table of Contents
Page
PART I
------
Item 1. Business.................................... 3
Item 2. Properties.................................. 24
Item 3. Legal Proceedings........................... 24
Item 4. Submission of Matters to a Vote of Security
Holders............................... 25
PART II
-------
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters........... 26
Item 6. Selected Financial Data..................... 28
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 30
Item 8. Financial Statements and Supplementary
Data.................................. 40
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial
Disclosure............................ 68
PART III
--------
Item 10. Directors and Executive Officers of the
Registrant............................ 68
Item 11. Executive Compensation...................... 68
Item 12. Security Ownership of Certain Beneficial
Owners and Management................. 68
Item 13. Certain Relationships and Related
Transactions.......................... 68
PART IV
-------
Item 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K................... 69
Signatures.................................. 78
PART I
------
2
ITEM 1. BUSINESS
GENERAL
20th Century Industries is an insurance holding company incorporated in
California. Executive offices are located at Suite 700, 6301 Owensmouth
Avenue, Woodland Hills, California 91367. The telephone number of the
Corporate Office is (818) 704-3700. The term "Company", unless the context
requires otherwise, refers to 20th Century Industries and its wholly-owned
subsidiaries, 20th Century Insurance Company and 21st Century Casualty
Company, both of which are property and casualty insurance companies licensed
in California.
The Company directly markets and underwrites private passenger
automobile liability and physical damage and personal excess liability
insurance through 20th Century Insurance Company and similarly markets private
passenger automobile liability and physical damage insurance through 21st
Century Casualty Company. Prior to an order by the California Department of
Insurance in June 1994 (see below), the Company marketed and underwrote
homeowners insurance through 20th Century Insurance Company and condominium
insurance through 21st Century Casualty Company.
The Company had been issuing homeowners policies through 20th Century
Insurance Company since 1982 and condominium policies through 21st Century
Casualty Company since 1989; however, an earthquake occurred in the San
Fernando Valley area of California on January 17, 1994 resulting in
unprecedented losses to the Company. In order to reduce the Company's
earthquake exposure, it ceased writing new homeowners and condominium
insurance and ceased renewing earthquake coverage endorsements in accordance
with an order by the California Department of Insurance in June 1994. The
Company continues to renew existing homeowner and condominium policies,
excluding earthquake coverage. The last earthquake coverages were terminated
in July 1995, and the last homeowners and condominium coverages will be term-
inated in July 1997.
In 1988, the Company expanded its product line to include the Personal
Excess Liability Policy ("PELP") to complement its existing automobile and
homeowners programs. Policies in force totaled 10,400 at December 31, 1995.
3
The Company limits its underwriting of private passenger automobile
insurance to those drivers defined by California statute as "Good Drivers."
The Company's automobile program has consistently and profitably (excluding
the Proposition 103 rollback and the earthquake impact in 1994) grown to
1,056,028 vehicles in force as of December 31, 1995. For a further discussion
regarding the impact of Proposition 103 and the earthquake losses, refer to
Notes 12 and 13 of the Notes to Consolidated Financial Statements.
The Company believes it has been able to grow profitably by (1) adhering
to its strategy of marketing to responsible prospects with relatively
uncomplicated insurance needs, (2) selling directly to the customer, (3)
generating cost efficiencies by centralizing and streamlining its marketing,
underwriting and customer service processing, and (4) providing a rate
structure that the Company believes is among the lowest in the market it
serves.
LIMITS OF INSURANCE COVERAGE
The Company offers private passenger automobile bodily injury liability,
property damage liability, medical payments, uninsured motorist,
comprehensive, and collision insurance coverages. Policies are written for a
six-month term. Various limits of liability are offered with maximum limits
of $500,000 per person and $500,000 per accident. The most frequent bodily
injury liability limits are $100,000 per person and $300,000 per accident.
The 20th Century Insurance Company homeowners program utilized a
replacement cost insurance policy which covered the dwelling and its contents.
Program rules provided for a minimum dwelling amount of $50,000 and a maximum
dwelling amount of $500,000. Personal liability coverage limits of $100,000,
$200,000 and $300,000 were available. The 21st Century Casualty Company
condominium program utilized a replacement cost policy which covered the
condominium unit owner's contents up to the policy limits. Contents coverage
limits were offered between a minimum of $25,000 and a maximum of $250,000.
Limits for personal liability coverage of $100,000, $200,000 and $300,000 were
also available. These programs are being discontinued as previously discussed.
The PELP is written in 20th Century Insurance Company and provides
liability coverage with a limit of $1,000,000 in excess of the underlying
automobile and homeowners liability coverage. Minimum underlying automobile
limits of $100,000 per person and $300,000 per accident are required while
homeowners must have $100,000 personal liability coverage. The underlying
automobile coverage must be written by the Company.
4
MARKETING
The Company markets directly to the customer and writes its policies
without utilizing or engaging outside agents or brokers. The Company uses
direct mail, print and radio advertising to market its policies. The Company
continues to develop a substantial amount of its new business by referrals
from existing policyholders. During 1995, approximately 75% of 20th Century
new automobile business was obtained from referrals by current customers.
Automobile advertising outside the Los Angeles area resumed in the first
quarter, 1995, following a year in which advertising campaigns were cancelled
due to the January 17, 1994 Northridge Earthquake. Advertising in
metropolitan Los Angeles resumed in the third quarter. Requests for
automobile quotations in 1995 increased a substantial 28% over the prior year.
However, the conversion rate of new policies produced from these quotations
declined from historical averages largely as a result of a less competitive
pricing level following rate adjustments in October, 1994 and June, 1995.
The Company's marketing efforts continue to focus on the Sacramento, San
Francisco and San Jose areas in Northern California and the San Diego area in
Southern California. In 1995, approximately 30% of new business production
for the Company came from these areas.
The Company will expand its marketing efforts in 1996 in connection with
a new rating plan filed with the Department of Insurance in late 1995 which
became effective March 15, 1996.
UNDERWRITING
The rate regulatory system in California requires the prior approval of
rates. Within this regulatory framework, the Company establishes its
automobile premium rates based on actuarial analysis of its own historical
premium, loss and expense data. These data are compiled and analyzed to
establish overall rate levels as well as classification differentials. The
Company's rates are established at levels intended to generate underwriting
profits and vary for individual policies based on a number of rating charac-
teristics. These characteristics include driving record, number of years a
driver has been licensed, where the vehicle is garaged, annual mileage,
vehicle usage, value of the automobile and limits and deductibles selected.
5
The Company's risk selection guidelines are designed for the issuing of
statutorily defined "Good Drivers". This definition includes all drivers who
have been licensed more than three years and have had no more than one
violation point count under criteria contained in the California Vehicle Code.
These criteria include a variety of moving violations and at fault accidents
over $500.
Individuals inquiring about purchasing automobile insurance are
preliminarily screened by the Company's marketing representatives, and
individuals who meet the "Good Driver" criteria are sent applications within
two days. The applications contain a preliminary quote based upon the
information received. Returned applications are reviewed by the underwriting
department and information, such as driving record, is verified.
The Company reviews many of its automobile policies at the time of
renewal and/or as changes occur during the policy period. The customer may
contact the Company to make changes, such as the addition or deletion of
drivers or vehicles, changes in the classification of drivers or usage of
vehicles, changes in garaging location and changes in coverages or limits.
Some mid-term changes may result in premium adjustments and some may result in
the policy being reunderwritten and eventually not renewed because of a
substantial increase in hazard.
SERVICING OF BUSINESS
The Company has successfully achieved operating savings and maintained
an extremely low expense ratio compared to industry norms because of its
efficient processing of all aspects of customer service. The Company
continues to design and implement effective systems, fully supported by
management information systems, to improve service and efficiency in the
marketing, policy service, underwriting and claims functions. As in the past,
the Company will increase its processing capabilities to meet growing workload
demands. The management information systems provide the information resources
and data processing capabilities which support the business and technical
needs of the Company. In addition to providing ongoing support, the systems
provide the strategic capabilities necessary to manage the Company's business.
The Company's electronic digital voice communications system facilitated more
than 27.7 million originations during 1995.
6
CLAIMS
Claims operations include the receipt and analysis of initial loss
reports, assignment of legal counsel and management of the settlement process.
Whenever possible, physical damage claims are handled through the use of
Company drive-in claims and vehicle inspection centers. The claims management
staff administers the claims settlement process and directs the legal and
adjuster components of that process. Each claim is carefully analyzed to
provide for fair loss payments, to comply with the Company's contractual
obligations and to minimize loss adjustment expense. Liability and material
damage claims are handled by specialists in each area.
The Company utilizes its legal staff to handle all aspects of claims
litigation, including trial, from offices in Brea, Ontario, Long Beach and
Woodland Hills. Staff attorneys handle more than 75% of all lawsuits. Suits
which may involve a conflict of interest are assigned to outside counsel.
Recognizing the need to provide its customers with convenient, local
service, the Company has established ten Division Service Offices in Los
Angeles, Orange, San Diego and Ventura Counties. Each Division Service Office
is a full service center, staffed with between seventy-five and one-hundred
employees who provide complete claims services from initial investigation to
final conclusion. In addition, the Company has thirteen drive-in claims
facilities in Los Angeles, Orange, San Diego and Ventura Counties. Each
drive-in facility is staffed with between two and five employees.
The Company also makes extensive use of its Direct Repair Program
("DRP") to expedite the repair process. The program involves agreements
between the Company and approximately 95 independent repair facilities
throughout Northern and Southern California. The Company agrees to accept the
estimate for damages prepared by the repair facility without the vehicle being
inspected by staff adjusters. The facilities selected undergo a screening
process before being accepted, and the Company maintains an aggressive
reinspection program to assure quality results. The customer benefits by
getting the repair process started faster, and the repairs are guaranteed for
as long as they own the vehicle. The Company benefits by not incurring the
overhead expense of a larger staff of appraisers and negotiating rates it
believes are beneficial. Currently over 25% of all damage repairs are handled
using the DRP method.
7
The Specialty Division is comprised of three vehicle inspection centers
located in Los Angeles and in Orange Counties. Each vehicle inspection center
is staffed with between fifteen and twenty employees who handle total losses,
total thefts and vehicles which are not driveable.
The Claims Services Division employs over 100 people who are responsible
for subrogation and medical payments claims for all programs and workers'
compensation claims arising under the homeowners policy.
The Homeowners Division processes all homeowners property claims on a
regional basis and is made up of three units of approximately twenty employees
each. The units are located in Monrovia, Santa Ana and Woodland Hills.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
The Company establishes reserves, or liabilities, for the future payment
of losses and loss adjustment expenses for claims, both reported and
unreported, which were incurred as of an accounting date. Such reserves are
estimates, as of a particular date, of the amount the Company will ultimately
pay for claims incurred as of the accounting date.
"Case basis" reserves are established for bodily injury liability and
uninsured motorist claims which are either expected to exceed $15,000 or are
older than two years. Such case reserves are based on the specific
circumstances, merits and relevant contractual policy provisions of the claim.
Case reserves for other bodily injury and uninsured motorists claims and
for all other coverages are established by an average case reserve value.
These average values are based on a periodic review of recent claims payments
for each coverage.
The Company supplements the case loss reserve estimates with loss
reserves estimated using actuarial methodologies. These reserves are designed
to provide for claims incurred but not reported to or recorded by the
Company as of the accounting date ("IBNR") and for changes over time in
individual case reserve estimates. The actuarial reserves are estimated using
actuarial techniques and the Company's own historical loss experience and are
reviewed each quarter.
8
The claims and legal costs estimated to settle incurred claims are
included in reserves for loss adjustment expenses. These reserves are
determined using actuarial techniques and the Company's own historical
experience.
Anticipated effects of inflation are implicitly considered in the
actuarial estimates of liabilities for loss and loss adjustment expenses.
Amounts reported are estimates of the ultimate net costs of settlement
which are necessarily subject to the impact of future changes in economic and
social conditions. Management believes that, given the inherent variability
in any such estimates, the aggregate reserves are within a reasonable and
acceptable range of adequacy. The methods of making such estimates and for
establishing the resulting reserves are continually reviewed and updated and
any adjustments resulting therefrom are reflected in earnings currently.
The Company does not discount to present value loss and loss adjustment
expense reserves expected to be paid in future periods.
The following table provides a reconciliation of beginning and ending
reserves for losses and loss adjustment expenses, net of reinsurance
recoverables, for the indicated periods to the gross amounts reported in the
Company's consolidated financial statements.
9
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---- ---- ----
(AMOUNTS IN THOUSANDS)
Reserves for losses and loss adjustment
expenses, net of reinsurance recover-
ables on unpaid losses, at beginning
of year $ 755,101 $ 574,619 $554,034
Incurred losses and loss adjustment
expenses, net of reinsurance:
Provision for insured events in the
current year, net of reinsurance 891,066 1,912,799 930,437
Decrease in provision for
insured events in prior years,
net of reinsurance (39,464) (84,453) (62,986)
---------- ---------- --------
Total incurred losses and loss
adjustment expenses, net of
reinsurance 851,602 1,828,346 867,451
---------- ---------- --------
Payments, net of reinsurance:
Losses and loss adjustment expenses
attributable to insured events in
the current year, net of reinsurance 534,414 1,302,988 519,232
Losses and loss adjustment expenses
attributable to insured events in
prior years, net of reinsurance 519,969 344,876 327,634
---------- ---------- --------
Total payments, net of reinsurance 1,054,383 1,647,864 846,866
---------- ---------- --------
Reserves for losses and loss adjustment
expenses, net of reinsurance recover-
ables on unpaid losses, at year end 552,320 755,101 574,619
Reinsurance recoverables on unpaid
losses, at year end 32,514 1,142 2,871
---------- ---------- --------
Reserves for losses and loss adjust-
ment expenses, gross of reinsurance
recoverables on unpaid losses and loss
adjustment expenses, at year end $ 584,834 $ 756,243 $577,490
========== ========== ========
As a result of changes in estimates of insured events in prior years,
the provision for losses and loss adjustment expenses decreased by
$39,464,000, $84,453,000 and $62,986,000 in 1995, 1994 and 1993, respectively,
due to a combination of improvements in the claims handling process,
unanticipated decreases in frequency and random fluctuations in severity. The
1995 decrease in provision for insured events of prior years is affected by a
$28 million net increase in losses related to the Northridge Earthquake.
10
The following table reconciles the reserves reported in the Company's
consolidated financial statements prepared in accordance with generally
accepted accounting principles ("GAAP") and those reported in the statements
filed with the California Department of Insurance in accordance with statutory
accounting practices ("SAP"). In 1994, the Company began to record estimated
recoveries for salvage and subrogation on a SAP basis. Prior to 1994, such
anticipated recoveries were recorded only on a GAAP basis.
DECEMBER 31,
-----------------------------------
1995 1994 1993
---- ---- ----
(AMOUNTS IN THOUSANDS)
Reserves reported on a
SAP basis $552,320 $755,101 $620,939
Adjustments:
Reinsurance recoverables on unpaid
losses and LAE 32,514 1,142 2,871
Estimated recovery for salvage
and subrogation - - (46,320)
-------- -------- --------
Reserves reported on a GAAP basis $584,834 $756,243 $577,490
======== ======== ========
The following table represents the development of GAAP balance sheet
reserves, net of reinsurance, for the years 1985 through 1995. The top line
of the table shows the reserves at the balance sheet date, net of reinsurance
recoverables on unpaid losses and loss adjustment expenses, for each of the
years indicated. Such net amounts represent estimated losses and loss
adjustment expenses unpaid as of the particular balance sheet date for claims
arising prior to the balance sheet date whether or not reported. The upper
portion of the table indicates the cumulative amounts paid as of successive
years with respect to that reserve liability. The lower portion of the table
indicates the re-estimated amount of the previously recorded reserves based on
experience as of the end of each succeeding year, including cumulative
payments made since the end of the respective year. The estimate changes as
more information becomes known about the frequency and severity of claims for
individual years. A redundancy (deficiency) exists when the original reserve
estimate is greater (less) than the re-estimated reserves at December 31, 1995.
Each amount in the following table includes the effects of all changes
in amounts for prior periods. The table does not present accident year or
policy year development data. Conditions and trends that have affected the
development of liabilities in the past may not necessarily occur in the
future. Therefore, it may not be appropriate to extrapolate future
deficiencies or redundancies based on the table.
11
AS OF DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
Reserves for
losses and loss
adjustment exp.$144,972 $206,266 $297,853 $391,748 $472,010 $525,220 $547,098 $554,034 $574,619 $755,101 $552,320
Paid (cumulative)
as of:
One year later 102,660 138,944 180,516 197,555 242,757 300,707 320,264 327,634 344,876 519,969
Two years later 139,652 187,448 238,947 271,163 328,606 391,970 401,019 403,434 423,713
Three years later 158,555 211,477 272,955 310,757 366,369 420,853 426,412 425,671
Four years later 168,627 226,550 289,901 326,495 377,980 429,791 433,642
Five years later 174,716 233,287 296,310 330,014 381,507 431,791
Six years later 176,744 235,367 297,764 330,879 382,230
Seven years later 176,947 235,510 298,098 331,433
Eight years later 176,968 235,515 298,649
Nine years later 176,995 235,813
Ten years later 176,895
Reserves re-
estimated as of:
One year later 156,341 227,848 294,504 357,220 402,706 473,974 473,209 491,048 490,166 715,637
Two years later 171,218 230,412 302,991 342,365 397,847 449,348 461,343 447,880 465,036
Three years later 173,717 237,587 304,925 340,760 389,559 442,508 440,198 438,726
Four years later 178,400 239,096 302,661 333,432 384,948 433,408 437,350
Five years later 178,651 237,528 298,764 332,100 382,331 432,370
Six years later 177,732 236,026 298,603 331,191 381,996
Seven years later 177,104 235,819 298,319 331,274
Eight years later 177,088 235,698 298,661
Nine years later 177,038 235,842
Ten years later 177,010
Redundancy
(Deficiency) $(32,038) $(29,576) $ (808) $ 60,474 $90,014 $92,850 $109,748 $115,308 $109,583 $ 39,464
12
Reconciliations for the indicated periods between (1) the net reserves
for losses and loss adjustment expenses at year end (the original reserve
estimate in the ten-year table on the previous page) and the related gross
reserves for losses and loss adjustment expenses on the balance sheet at year
end and (2) the net re-estimated reserves and the related gross re-estimated
reserves as of the end of the latest re-estimation period are as follows:
1994 1995
---- ----
(AMOUNTS IN THOUSANDS)
Gross Liability - End of Year $756,243 $584,834
Reinsurance Recoverable 1,142 32,514
Net Liability - End of Year 755,101 552,320
Gross Re-Estimated Liability - Latest $719,716
Re-Estimated Recoverable - Latest 4,079
Net Re-Estimated Liability - Latest 715,637
Gross Cumulative Redundancy (Deficiency) $ 36,527
OPERATING RATIOS
Loss and Expense Ratios
Loss and expense ratios are traditionally used to interpret the under-
writing experience of property and casualty insurance companies. Losses and
loss adjustment expenses are stated as a percentage of premiums earned as
losses may occur over the life of a particular insurance policy. Underwriting
expenses are stated as a percentage of premiums written for statutory
accounting practices and as a percentage of earned premiums for generally
accepted accounting principles purposes. Underwriting profit margins are a
reflection of the extent to which the combined loss and expense ratios are
less than 100%. The loss ratios, expense ratios (excluding loan interest and
fees), and combined ratios for the Company's subsidiaries, on a SAP and GAAP
basis, are shown in the following tables.
13
YEARS ENDED DECEMBER 31,
--------------------------------------------
Companywide - SAP 1995 1994 1993 1992 1991
- - ----------------- ---- ---- ---- ---- ----
Loss Ratio 88.7% 173.0% 88.0% 85.9% 88.2%
Expense Ratio 8.7 9.9 10.5 10.0 9.7
----- ----- ---- ---- ----
Combined Ratio 97.4% 182.9% 98.5% 95.9% 97.9%
===== ===== ==== ==== ====
YEARS ENDED DECEMBER 31,
-------------------------------------------
Companywide - GAAP 1995 1994 1993 1992 1991
- - ------------------ ---- ---- ---- ---- ----
Loss Ratio 88.4% 176.8% 87.6% 85.3% 86.0%
Expense Ratio 9.0 9.7 10.7 10.1 10.0
----- ----- ---- ---- ----
Combined Ratio 97.4% 186.5% 98.3% 95.4% 96.0%
===== ===== ==== ==== ====
The Northridge Earthquake contributed 85.1 and 2.9 percentage points on
both a GAAP and SAP basis to the 1994 and 1995 combined ratios, respectively.
Premiums to Surplus Ratio
The following table shows, for the periods indicated, the Company's
statutory ratios of net premiums written to policyholders' surplus. Since
each property and casualty insurance company has different capital needs, an
"appropriate" ratio of net premiums written to policyholders' surplus for one
company may not be the same as for another company. While there is no
statutory requirement applicable to the Company which establishes a
permissible net premium to surplus ratio, guidelines established by the
National Association of Insurance Commissioners provide that such ratio should
generally be no greater than 3 to 1 on a statutory basis.
The Company's 1994 net premiums written to policyholders' surplus ratio
was adversely affected by the Northridge Earthquake. The Company worked with
the California Department of Insurance to improve its surplus levels through
1994 and 1995. This resulted in bringing the ratio back down below 3 to 1 for
1995. For further discussion, see Management's Discussion and Analysis -
Financial Condition.
14
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
SAP 1995 1994 1993 1992 1991
--- ---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS, EXCEPT RATIO)
Net premiums written $958,614 $1,032,737 $1,021,902 $918,443 $833,194
Policyholders' surplus $358,474 $ 207,018 $ 582,176 $500,619 $406,655
Ratio 2.7:1 4.9:1 1.8:1 1.8:1 2.0:1
INVESTMENTS AND INVESTMENT RESULTS
The Company's investment guidelines emphasize buying high-quality fixed
income investments. Because of the net operating loss ("NOL")
carryforwards for tax purposes which resulted from the 1994 Northridge
Earthquake, the Company sold all of its appreciated tax-exempt fixed
maturity investments to generate realized gains and used some of the
proceeds to pay losses. The remainder of the proceeds were re-invested in
taxable government and corporate fixed maturity investments and commercial
paper. Until the NOL is substantially utilized, a portion of the Company's
investable cash will go into taxable securities. While the Company's
policy is generally to hold its investments until maturity, its ongoing
monitoring and evaluation of investment holdings and market conditions may,
from time to time, result in selected sales of investments prior to
maturity. The Company currently has designated all of its portfolio as
"available-for-sale". See Note 1 of the Notes to Consolidated Financial
Statements, "Investments."
15
The following table summarizes investment results for the periods and as
of the dates shown:
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
Average invested assets
(at amortized cost;
includes cash and
cash equivalents) $1,193,202 $1,259,871 $1,384,926 $1,273,168 $1,161,816
Net investment income:
Before income taxes 81,658 84,761 97,574 94,255 90,043
After income taxes 56,597 68,629 87,915 85,442 79,706
Average annual return
on investments:
Before income taxes 6.8% 6.7% 7.1% 7.4% 7.8%
After income taxes 4.7% 5.4% 6.3% 6.7% 6.9%
Net realized investment
gains after income taxes 6,634 40,010 10,874 7,589 6,030
Net increase (decrease)
in unrealized gains
on fixed maturity
investments after
income taxes 73,286 (134,660) 39,863 12,832 24,838
The investment portfolio decreased substantially in 1994 as a result of
the sale of investments to generate realized capital gains to offset the
severe losses caused by the Northridge Earthquake. The lower return on
investments is a result of selling older securities with higher yields and
re-investing in taxable securities with lower current yields. In addition,
available cash was invested in commercial paper which yielded a lower
interest rate than that earned on the fixed maturity investments portfolio.
16
The following table sets forth the composition of the investments and
cash and cash equivalents of the Company at the dates indicated.
DECEMBER 31,
----------------------------------------------------------------------
1995 1994 1993
----------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
Type of Security COST VALUE COST VALUE COST VALUE
- - ---------------- ---------- --------- ---------- ---------- ---------- ----------
Fixed Maturities:
U.S. Treasury Secur-
ities and obliga-
tions of U.S. Govern-
ment corporations
and agencies $ 68,283 $ 69,711 $ 240,690 $ 232,678 $ 6,258 $ 6,777
Obligations of
states and politi-
cal sub-divisions 219,026 222,844 292,723 261,614 1,273,231 1,399,173
Public utilities 182,828 191,224 147,241 139,173 11,060 11,935
Corporate secur-
ities 604,884 641,769 322,177 307,941 131,467 149,876
---------- ---------- ---------- ---------- --------- ---------
Total Fixed Maturities 1,075,021 1,125,548 1,002,831 941,406 1,422,016 1,567,761
Common Stock 539 1,564 539 768 - -
Nonredeemable
Preferred Stock - - - - 539 539
---------- ---------- ---------- ---------- ---------- ---------
Total Investments 1,075,560 1,127,112 1,003,370 942,174 1,422,555 1,568,300
---------- ---------- ---------- ---------- ---------- ----------
Cash and Cash
Equivalents 50,609 50,609 249,834 249,834 17,894 17,894
---------- ---------- ---------- ---------- ---------- ----------
Total Investments
and Cash and Cash
Equivalents $1,126,169 $1,177,721 $1,253,204 $1,192,008 $1,440,449 $1,586,194
========== ========== ========== ========== ========== ==========
In 1994, the Company implemented Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". For a further discussion of this standard, refer to Note 1 of
the Notes to Consolidated Financial Statements, "Investments".
17
COMPETITION
The property and casualty insurance market is highly competitive and is
comprised of a large number of well capitalized companies, many of which
operate in a number of states and offer a wide variety of products. Several
of these competitors are larger and have greater financial resources than the
Company. Based on published statistics, the Company is the fifth largest
writer of private passenger automobile insurance in California.
While the Company competes with all private passenger automobile
insurers in the state, the Company is in more direct competition with other
major writers which concentrate on the larger good driver market than with
those which specialize in "non-standard", "high-risk" or other niche market
segments.
The Company's marketing and underwriting strategy is to appeal to
careful and responsible drivers who are willing to deal directly with the
Company in order to save a significant amount of money on their insurance
premium. As a result, the Company is able to maintain policy renewal rates
above the industry average.
By selling its products directly to the insured, the Company has
eliminated agent and broker commissions. The Company believes it provides the
same services as agents, but at a reduced cost. The Company also relies
heavily on its centralization of operations and its computerized information
services system to efficiently service its policyholders and claimants.
Consequently, the Company consistently operates with one of the lowest
underwriting expense ratios in the industry and is able to maintain its rates
among the lowest in the market it serves while still providing quality service
to its customers.
REINSURANCE
The Company purchases reinsurance to reduce its loss in the event of a
catastrophe or from infrequent, large individual claims. A reinsurance trans-
action occurs when the Company transfers or cedes a portion of its exposure
from direct business written to a reinsurer which assumes that exposure for a
premium. The reinsurance cession does not legally discharge the Company from
its liability for a covered primary loss, but provides for reimbursement from
the reinsurer to the Company for the ceded portion.
18
The Company reviews the financial condition of its reinsurers with its
reinsurance intermediary at annual treaty renewal. Participants with
financial difficulties, if any, can be removed at that time. The Company is
presently not aware of any of its reinsurers experiencing financial
difficulties.
In connection with an investment agreement in 1995 with American
International Group, Inc. ("AIG"), each of the Company's insurance
subsidiaries entered into a five-year quota share reinsurance agreement with
an AIG affiliate covering all ongoing lines of business. Under this contract,
10% of each subsidiary's premiums earned and losses incurred in connection
with policies incepted during the period January 1, 1995 through December 31,
1999 are ceded. At the end of the five-year period, the AIG affiliate may
elect to renew the agreement annually for four years at declining coverage
percentages. A ceding commission of 10.8% was earned by the insurance
subsidiaries for 1995 and, thereafter, a commission is paid at a rate equal to
their actual underwriting expense ratio.
The Company maintains a catastrophe reinsurance program to provide
coverage through the run-off period of its remaining homeowners policies. The
program currently in place provides coverage for the period from July 1, 1995
through June 30, 1996 for a total annual premium of approximately $13 million.
Coverage under these treaties is provided by a number of domestic, foreign and
London market companies in two layers as follows:
Catastrophe Company Reinsurance
Loss Layer Retention Amount
----------------- ----------- -----------
first $ 10,000,000 $ 7,750,000 $ 2,250,000
next $ 90,000,000 $ 4,500,000 $ 85,500,000
The Company has a homeowners' excess-of-loss reinsurance treaty with
General Reinsurance Corporation. In this excess treaty, the reinsurer's limit
is $650,000 in excess of the Company's retention of $300,000 per risk, subject
to a maximum reinsurer's limit of $1,300,000 per occurrence. This treaty will
be cancelled as of May 1, 1996.
The Company has a quota share reinsurance treaty for the PELP whereby
60% of premiums and losses are ceded to the reinsurer.
19
REGULATION
The Company and its subsidiaries are subject to regulation and
supervision by the California Department of Insurance ("DOI") which has broad
regulatory, supervisory and administrative powers, related primarily to:
1. licensing of insurance companies and agents,
2. prior approval of rates, rules, and forms,
3. standards of solvency,
4. nature of, and limitations on, insurance company investments,
5. periodic examination of the affairs of insurers,
6. annual and other periodic reports of the financial condition and
results of operations of insurers,
7. the establishment of accounting rules regarding loss and loss
adjustment expense and other reserves, and
8. the issuance of securities by insurers.
Regulation by the DOI is designed principally for the benefit of
policyholders. The DOI conducts periodic examinations of the Company's
insurance subsidiaries.
In January 1995, the Company and the DOI reached a settlement concerning
the Company's Proposition 103 rate rollback liability, whereby $78 million was
allocated for customer refunds consistent with rollback obligations estab-
lished through a DOI administrative hearing during 1992. The Company paid a
total of $46 million to customers in 1995 for Proposition 103 rebates and sub-
sequently reduced its liability by $32 million due to the ultimate level of
claims costs incurred in connection with the 1994 Northridge Earthquake, in
accordance with the settlement. The Company has no remaining liability for
rollback rebates.
The operations of the Company are governed by the laws of the State of
California and changes in those laws can affect the revenues and expenses of
the Company. The Company is a member of industry organizations which may
advocate legislative and initiative proposals and which provide financial sup-
port to officeholders and candidates for California statewide public offices.
The Company also makes financial contributions to those officeholders and can-
didates who, in the opinion of management, have a favorable understanding of
the needs of the property and casualty insurance industry. In 1995, these
20
contributions were approximately $56,000. The Company believes that such con-
tributions are important to the future of the property and casualty insurance
industry in California and intends to continue to make such contributions as
it determines to be appropriate.
PROPOSED LEGISLATION
The State of California Assembly and Senate have proposed several bills
over the past year affecting the automobile insurance industry.
Senate Bill (SB) 1433 would amend Proposition 103 by codifying certain
auto rating factor regulations. The bill faces strong opposition by consumer
groups and would require a two-thirds majority in both houses to pass. This
bill is pending for the 1996 legislative session.
Two bills were introduced which limited insurers' exposure to drivers
convicted of driving under the influence ("DUI") or driving while uninsured.
AB 432 prohibits the recovery of non-economic losses suffered by persons con-
victed of DUI or driving while uninsured. This bill is pending the 1996 ses-
sion. SB 905 places a seven-year restriction on Good Driver Discounts for
persons convicted of DUI. This bill was signed into law and took effect
January 1, 1996.
Two bills introduced in 1994 were still pending as of the end of the
1995 legislative session. SB 49 would make certain changes to the Financial
Responsibility law and impose arbitration requirements for specific third-
party bodily injury claims. AB 607 contains a proposal for a no-fault system
for the compensation of automobile injury claims.
At this time, the likelihood of passage of any pending legislative
proposals or their potential for future legal challenges, amendments or
agreement or veto by the state's governor is uncertain.
HOLDING COMPANY ACT
The Company's subsidiaries are subject to regulation by the California
Department of Insurance pursuant to the provisions of the California Insurance
Holding Company System Regulatory Act (the "Holding Company Act"). The DOI
may examine the affairs of the subsidiaries at any time. Certain transactions
21
defined to be of an "extraordinary" nature may not be effected without the
prior approval of the California Department of Insurance. Such transactions
include, but are not limited to, sales, purchases, exchanges, loans and exten-
sions of credit, and investments made within the immediately preceding 12
months involving in the net aggregate, more than the lesser of 5% of the Com-
pany's admitted assets or surplus as to policyholders, as of the preceding
December 31. An extraordinary transaction also includes a dividend which,
together with other dividends or distributions made within the preceding
twelve months, exceeds the greater of 10% of the insurance company's
policyholders' surplus as of the preceding December 31 or the insurance com-
pany's net income for the preceding calendar year. The California code fur-
ther provides that property and casualty insurers may pay dividends only from
earned surplus. The Holding Company Act generally restricts the ability of
any one person to acquire more than 10% of the Company's voting securities
without prior regulatory approval.
ASSIGNED RISKS
Automobile liability insurers in California are required to participate
in the California Automobile Assigned Risk Plan ("CAARP"). Each company is
required to write liability insurance coverages for drivers applying to CAARP
for placement as "assigned risks" because their driving records or other
relevant characteristics make them difficult to insure in the voluntary
market. The number of assignments for each insurer is based on the total
applications received by the plan and the insurer's market share.
While the number of applicants to CAARP fluctuated in both directions
between 1993 and 1995, the number of CAARP policies in force for the Company
steadily increased from 6,427 in 1993 to 7,285 and 8,204 in 1994 and 1995,
respectively.
In June 1995, CAARP increased its rates 5.2%. The increased rate level,
while not making the remaining assigned risk business profitable, did, at
least, cause the business to be less unprofitable. The Company experienced
combined loss and expense ratios of 126.9%, 137.0% and 134.2% for the years
ended December 31, 1995, 1994 and 1993, respectively, for this business. The
future effect of the assigned risk plan on the Company cannot be predicted
because it depends on the ability of CAARP to achieve and maintain an adequate
rate level.
22
EMPLOYEES
The Company had approximately 2,300 full and part-time employees at
December 31, 1995. The Company provides medical, pension and 401(k) savings
plan benefits to its employees according to the provisions of each plan. The
Company believes that its relationship with its employees is excellent, and
employee turnover generally is very low.
23
ITEM 2. PROPERTIES
The Company leases its Home Office building in Woodland Hills, Califor-
nia, which contains approximately 234,000 square feet of leasable office
space. The lease was amended in October 1994 which extended the lease term
until November 1999. The lease may be renewed for two consecutive five-year
periods.
The Company also leases office space in nineteen other locations
throughout Southern California. The Company anticipates no difficulty in
extending these leases or obtaining comparable office facilities in comparable
locations.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company is named as a defendant in
lawsuits related to claims issues. Currently included in this class of liti-
gation are several actions that arise out of the Northridge Earthquake. It is
believed that a majority of these claims were filed to protect statutes of
limitations. Some of the actions request exemplary or punitive damages.
These actions are vigorously defended unless a reasonable settlement appears
appropriate.
On January 27, 1995, the California Department of Insurance issued an
order which addressed the issue of the Company's rebate liability associated
with Proposition 103. The order, based upon a stipulated agreement with the
Company, provided for certain refunds to policyholders, immediate capital
additions to improve the Company's financial strength, and financial resources
for possible increases in earthquake claims. Responding to a written demand
by a consumer group, a hearing was held by the DOI with a decision rendered on
August 29, 1995 that the order was in the public interest. We believe this
case, affirmed by the Superior Court on January 12, 1996, is concluded and the
time to appeal has run. For further details regarding the order, see Note 12
of the Notes to Consolidated Financial Statements.
24
On January 16, 1996, a shareholder derivative lawsuit was filed in Los
Angeles Superior Court against various current and prior directors and
officers of the Company. The Company is named in the lawsuit as a nominal
defendant only. Legal counsel has been retained for both the Company and for
the directors and officers and is investigating the allegations contained in
the Complaint.
While any litigation has an element of uncertainty, the Company does not
believe that the ultimate outcome of these pending actions will have a
material effect on its consolidated financial condition or results of its
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER
None.
25
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
(a) PRICE RANGE OF COMMON STOCK
The stock is currently traded on the New York Stock Exchange under the
trading symbol "TW." The following table sets forth the high and low bid
prices for the common stock for the indicated periods.
High Low
---- ---
1995
Fourth Quarter 21-1/4 15-1/4
Third Quarter 16-3/8 11-3/8
Second Quarter 13-1/4 10-3/4
First Quarter 13-7/8 10-3/8
1994
Fourth Quarter 12-7/8 9-5/8
Third Quarter 17-3/8 8-3/4
Second Quarter 19-3/8 14-1/4
First Quarter 28-1/8 18-7/8
26
(b) HOLDERS OF COMMON STOCK
The approximate number of record holders of the Common Stock on Decem-
ber 31, 1995 was 1,225.
(c) DIVIDENDS
The Company paid regular cash dividends on its Common Stock each year
since 1973 through the second quarter of 1994. Dividends were paid at the
rate of $.16 per share for each of the first two quarters of 1994 and $.16 per
share per quarter during 1993. Due to the adverse impact of the Northridge
Earthquake on the financial strength of the Company, no dividends were paid in
the last two quarters of 1994 and no dividends were paid on common shares in
1995. 20th Century Industries paid cash dividends on preferred shares of
$14,623,000 and in-kind dividends of $4,950,000 in 1995.
As a holding company, the Company is dependent upon dividends from its
subsidiaries to pay dividends to its stockholders. The Company's subsidiaries
are subject to California laws that restrict their ability to distribute
dividends. California law permits a casualty insurance company to pay
dividends, within any 12-month period, without any prior regulatory approval,
in an amount up to the greater of 10% of policyholders' surplus as of the
preceding December 31 or the insurance company's net income for the calendar
year preceding the date the dividend is paid. The California insurance code
further provides that property and casualty insurers may pay dividends only
from earned surplus. Under these rules, 20th Century Insurance Company and
21st Century Casualty Company were unable to pay dividends to the Company dur-
ing 1995 without regulatory approval. The Company expects to generate positive
earned surplus early in 1996 and resume normal dividends from the insurance
subsidiaries to service the debt and preferred dividend requirements.
27
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for, and as of
the end of, each of the years in the five-year period ended December 31, 1995
are derived from the consolidated financial statements of 20th Century
Industries and its subsidiaries. The consolidated financial statements as of
December 31, 1995 and 1994 and for each of the years in the three-year period
ended December 31, 1995 are included elsewhere in this Form 10-K. All dollar
amounts set forth in the following tables are in thousands, except per share
data.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Operations Data:
Net premiums earned $ 963,797 $1,034,003 $ 989,712 $ 896,353 $810,636
Net investment income 81,658 84,761 97,574 94,255 90,043
Realized investment gains 10,207 61,554 16,729 11,498 9,137
---------- ---------- ---------- ---------- --------
Total Revenues 1,055,662 1,180,318 1,104,015 1,002,106 909,816
---------- ---------- ---------- ---------- --------
Net losses and loss
adjustment expenses 851,602 1,828,346 867,451 764,374 697,521
Policy acquisition costs 38,647 43,409 48,375 41,996 38,372
Other operating expenses 48,311 57,198 57,769 48,486 42,577
Proposition 103 expense - 29,124 3,474 3,474 6,195
Loan interest and
fees expense 15,897 8,348 - - 361
---------- ---------- ---------- ---------- --------
Total Expenses 954,457 1,966,425 977,069 858,330 785,026
---------- ---------- ---------- ---------- --------
Income (loss) before
federal income taxes
and cumulative effect
of change in accounting
for income taxes 101,205 (786,107) 126,946 143,776 124,790
Federal income taxes
(benefit) 31,575 (288,087) 18,350 26,309 21,253
---------- ---------- --------- --------- --------
Income (loss) before cumu-
lative effect of change
in accounting for
income taxes 69,630 (498,020) 108,596 117,467 103,537
Cumulative effect of change
in accounting for income
taxes - - 3,959 - -
---------- ---------- --------- --------- --------
Net Income (Loss) $ 69,630 $ (498,020) $ 112,555 $ 117,467 $103,537
========== ========== ========= ========= ========
28
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Per Share Data:
PRIMARY -
Before cumulative effect
of change in accounting
for income taxes $ .88 $ (9.69) $ 2.11 $ 2.29 $ 2.02
Cumulative effect of
change in accounting
for income taxes - - .08 - -
--------- --------- -------- -------- --------
Net Income (Loss) $ .88 $ (9.69) $ 2.19 $ 2.29 $ 2.02
========= ========= ======== ======== ========
FULLY DILUTED -
Net Income (Loss) $ .88 $ (9.69)
========= =========
Dividends paid per
common share $ - $ .32 $ .64 $ .52 $ .42
========= ========= ========= ======== ========
DECEMBER 31,
-----------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Balance Sheet Data:
Total investments $1,127,112 $ 942,174 $1,422,555 $1,307,031 $1,200,067
Total assets 1,608,886 1,702,810 1,644,670 1,498,330 1,372,628
Unpaid losses and loss
adjustment expenses 584,834 756,243 577,490 554,541 548,377
Unearned premiums 288,927 298,519 299,941 267,556 245,290
Bank loan payable 175,000 160,000 - - -
Claims checks payable 49,306 70,725 41,535 39,329 36,884
Stockholders' equity 466,585 317,944 655,209 575,674 484,578
Book value per common share $ 4.69 $ 2.29 $ 12.74 $ 11.19 $ 9.43
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INDUSTRY OVERVIEW AND COMPANY STRATEGY
The property and casualty insurance business has a history of fluctuat-
ing results and underwriting profitability and has tended to vary in cycles.
Insurer profitability is influenced by many factors, including price competi-
tion, claim frequency and severity, crime rates, natural disasters, economic
conditions, interest rates, state regulations and laws, changes in the legal
system and court decisions. Insurance industry price levels tend to change
with underwriting results. As companies experience underwriting losses, and
therefore reduced surplus levels, prices tend to increase and competition
decreases. As underwriting results improve, and surplus levels increase,
prices tend to decrease and competition increases. One of the challenging and
unique features of the property and casualty insurance business is that its
products must be priced before costs are fully known because premiums are
charged before claims are incurred.
The Company markets its products to individual insureds to meet their
personal insurance needs. The Company has no commercial risks. Prior to
1994, the Company actively marketed private passenger automobile, homeowners,
condominium, earthquake and personal excess liability insurance in California.
The Company's primary focus has been private passenger automobile insurance
since its inception. Private passenger automobile insurance has always
accounted for over 90% of premiums written by the Company.
The Northridge, California Earthquake which occurred on January 17, 1994
("Northridge Earthquake") resulted in unprecedented losses for the Company.
In order to reduce future earthquake exposure, the Company ceased writing new
homeowner and condominium insurance and renewing earthquake insurance in
accordance with an order received from the California Department of Insurance
("DOI") in June 1994. The last earthquake coverages were terminated in July
1995. In accordance with the order, the Company will continue to renew
existing homeowner and condominium policies (without earthquake coverage)
until June 1996. The last homeowners and condominium coverages will be term-
inated in July 1997.
30
Financial Condition
The Northridge Earthquake significantly affected the financial condition
of the Company and its operating results for the entire year of 1994 and, to a
lesser extent, 1995.
The Company experienced a reduction in its historical pattern of growth,
ceased all advertising and marketing in 1994 for new policies, and suspended
its quarterly dividend on common shares for the third and fourth quarters of
fiscal 1994 and all of 1995. As of December 31, 1995, total estimated gross
losses and allocated loss adjustment expenses from the Northridge Earthquake
were $1 billion.
During 1994, when the magnitude of the Company's losses became evident,
the DOI imposed certain requirements on the Company and its insurance sub-
sidiaries designed to reduce further exposure to earthquake losses and to
strengthen the financial position of the Company. The Company's insurance
subsidiaries were ordered to stop writing new homeowners and condominium
policies and to non-renew all existing earthquake coverages. The DOI also
granted the Company a 17% increase in homeowners premium rates and a 6%
increase in automobile premium rates.
In June 1994, the Company obtained a bank loan of $175 million and in
December 1994 entered into an Investment and Strategic Alliance Agreement
("Investment Agreement") with American International Group, Inc. ("AIG").
Under the terms of the Investment Agreement, AIG provided the Company with a
total of $216 million of equity capital in exchange for 200,000 shares of
convertible preferred stock and certain preferential stock warrants. As
a part of the agreement, each of the Company's insurance subsidiaries and
an AIG affiliate have entered into a five-year quota share reinsurance agree-
ment for 10% of each subsidiaries' policies incepting on and after January 1,
1995. After the initial term, the AIG affiliate may renew the agreement
annually for four years at declining rates of coverage. In addition, the
Company and AIG have formed a joint venture to market personal automobile in-
surance in Arizona which is expected to become operational in the second quar-
ter of 1996.
In January 1995, the Company reached a settlement of rebate liabilities
associated with Proposition 103 with the DOI in the amount of $78 million.
The Company was to refund $46 million to customers specified in the agreement
as soon as practicable with the remaining $32 million set aside for additional
31
customer refunds conditioned on the ultimate level of claim costs associated
with the 1994 Northridge Earthquake. The settlement required the Company to
withdraw its request for a hearing before the United States Supreme Court to
appeal the California Supreme Court decision on Proposition 103.
In addition, the settlement required the Company to obtain new capital
of $50 million and contribute the funds to the surplus of the insurance sub-
sidiaries, consisting of $30 million by March 31, 1995 and $20 million by
December 31, 1995. The $30 million capital contribution was made on March 30,
1995. The Company has been informed that the $20 million capital requirement
has been waived by the DOI due to the significant recovery in statutory
surplus in 1995.
As of December 31, 1995, the Company's insurance subsidiaries had a com-
bined statutory surplus of $358,474,000, a ratio of 2.7:1 of net written
premium to surplus and was in compliance with DOI requirements and its loan
covenants. The 1995 underwriting results for auto business were favorable and
demonstrated a return to profitability and stability.
With the statutory surplus of the Company restored to levels within
regulatory norms as a result of the capital infusion by AIG in December 1994
and operating profits in 1995, the Company filed for an auto rate decrease of
3.15% in December 1995. These new rates have been approved and are effective
March 15, 1996. The Company expects the new rates combined with an aggressive
marketing and advertising campaign to restore unit growth in the automobile
line. Because the Company is still subject to the order issued by the DOI in
June 1994, the homeowners and condominium policies will have to be non-renewed
starting July 1996 and the Company will be fully withdrawn from this line in
July 1997.
RESULTS OF OPERATIONS
Units in Force
Units in force for the Company's insurance programs as of December 31
were as follows:
1995 1994 1993
---- ---- ----
Units in Force
Private Passenger Automobile
(number of vehicles) 1,056,028 1,132,605 1,130,446
Homeowner and Condominium
(number of policies) 174,968 206,167 233,436
Personal Excess Liability
(number of policies) 10,400 11,072 11,350
--------- --------- ---------
Total 1,241,396 1,349,844 1,375,232
========= ========= =========
32
The Company had total unit growth of over 10% on average for the
ten years prior to 1994. The Northridge Earthquake significantly reduced
statutory surplus and thus required the Company to reduce its insured
exposures. As a result, the Company ceased all advertising and marketing for
new policies in the first quarter of 1994. In June 1994, the DOI ordered the
Company to stop writing all new homeowners and condominium policies and to
non-renew all existing earthquake coverages. The DOI also granted the Company
a 17% increase in homeowners premium rates effective August 1, 1994 and a 6%
increase in automobile premium rates effective October 7, 1994. While improv-
ing profitability, the effect of these actions was to cause a decline in units
in force which carried into 1995. A further automobile rate increase of 3.65%
was effective June 15, 1995, causing the decline in units to continue in 1995.
Total units declined from December 31, 1993 to December 31, 1995 9.7% (6.6%
for automobile and 25.0% for homeowners and condominium).
Underwriting Results
Premium revenue and underwriting results for the Company's insurance
programs were as follows:
Years Ended DECEMBER 31,
------------------------------------------
1995 1994 1993
---- ---- ----
(Amounts in thousands)
Gross Premiums Written
Automobile $ 991,969 $ 991,268 $ 932,497
Homeowner and Condominium 69,847 85,088 99,060
Personal Excess Liability 2,146 2,307 2,338
---------- ---------- ----------
Total $1,063,962 $1,078,663 $1,033,895
========== ========== ==========
Net Premiums Earned
Automobile $ 920,560 $ 981,893 $ 908,523
Homeowner and Condominium 42,394 51,166 80,630
Personal Excess Liability 843 944 559
---------- ---------- ----------
Total $ 963,797 $1,034,003 $ 989,712
========== ========== ==========
Underwriting Profit (Loss)
Automobile $ 103,744 $ (45,850) $ 23,800
Homeowner and Condominium (78,976) (879,221) (11,641)
Personal Excess Liability 469 997 484
---------- ---------- ----------
Total $ 25,237 $ (924,074) $ 12,643
========== ========== ==========
33
Automobile
Automobile insurance is the primary line of business written by the Com-
pany and has been consistently profitable. Excluding earthquake-related
claims and expenses, the earthquake reinsurance reinstatement premium and the
Proposition 103 rollback, the Company would have realized an automobile
underwriting profit of $73.8 million in 1995 and $10.1 million in 1994.
Because of the cessation of advertising in 1994 and some loss of auto business
from not offering new homeowner business or earthquake coverage, total
automobile units in force for 1995 decreased from 1994 by 6.8% compared to a
slight increase of .2% in 1994. Gross written premiums in 1995 remained level
despite the decrease in units in force, primarily as a result of the rate
increases effective during the year. Net earned premiums decreased 6.2% in
1995 compared to an increase of 8.1% in 1994, reflecting the impact of the
quota share treaty with an AIG affiliate effective January 1, 1995 which ceded
10% of premiums and losses on a net written basis.
The voluntary automobile insurance business written by the Company is
comprised of "Good Drivers", as defined by California statute. While the
majority of this business would have been acceptable to the Company before
Proposition 103, those who had no prior insurance would have been written at a
higher rate level than those who had been insured prior to being written by
the Company. The underwriting losses produced by this segment of the market
suggests that the former differential was appropriate. These drivers have
produced automobile underwriting losses of $26,286,000 in 1995, compared to
$31,134,000 in 1994 and $16,877,000 in 1993.
Overall automobile underwriting results are also affected by assigned
risk units in force. Such units have increased steadily since 1993.
Underwriting losses for assigned risk business were $3,082,000 in 1995, com-
pared to $3,800,000 in 1994 and $3,031,000 in 1993. A 5.2% rate increase for
assigned risk business was implemented by the DOI in June 1995.
Homeowner and Condominium
As ordered by the DOI, the Company no longer writes new homeowners or
condominium policies or earthquake coverage endorsements. Additionally, the
Company will continue to renew existing homeowner and condominium policies
34
without earthquake coverage through July 1996. Due to the requirement to exit
the homeowners' market, units in force for the homeowner and condominium
programs decreased 15.1% in 1995 and 11.7% in 1994. This decline in units
resulted in lower gross premiums written and, therefore, net earned premiums
in 1995 and 1994. This program will continue to decline until the final
policy expires in July 1997.
Underwriting results for these programs are subject to variability
caused by weather-related claims and by infrequent disasters. Results in 1995
include storm losses of $14.2 million in the first quarter, $24 million of
earthquake-related catastrophe reinsurance premiums, and Northridge Earthquake
related losses of $60 million. Results in 1994 include $35 million of
catastrophe reinsurance premiums related to the additional reinsurance
coverage and $844.1 million of net losses as related to the Northridge
Earthquake. Results in 1993 were influenced by $4.6 million in storm losses
in the first quarter and by $4.3 million in claims due to the Southern
California fires in the fourth quarter plus a $2.6 million California Fair
Plan assessment.
The Company maintains a catastrophe reinsurance program to provide
coverage through the run-off period of its remaining homeowners policies. The
program currently in place provides coverage for the period from July 1, 1995
through June 30, 1996 for a total annual premium of approximately $13 million.
Coverage under these treaties is provided by a number of domestic, foreign and
London market companies in two layers as follows:
Catastrophe Company Reinsurance
Loss Layer Retention Amount
----------------- ----------- -----------
first $ 10,000,000 $ 7,750,000 $ 2,250,000
next $ 90,000,000 $ 4,500,000 $ 85,500,000
The Company will maintain a catastrophe reinsurance program in place
until the homeowner and condominium program expires. It is expected that the
cost will decline as the exposures decline.
Personal Excess Liability
The personal excess liability program has remained stable over the
three-year period ended December 31, 1995 producing approximately $2 million
in gross written premiums each year. Underwriting profits can vary sig-
nificantly with the number of claims which occur infrequently.
35
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. The ratio of underwriting
expenses (excluding loan interest and fees) to earned premiums was 9.0% in
1995, 9.7% in 1994 and 10.7% in 1993. The decline in the ratio from 1993 to
1995 reflects the impact of the ceding commission earned on the quota share
agreement with an affiliate of AIG and a reduction in general operating
expenses due to the decline in business as well as cost efficiencies. Such
efficiency, as reflected in its expense advantage over its competitors,
enables the Company to maintain its price leadership and provide for future
growth and profitability.
Investment Income
Net pre-tax investment income was $81,658,000 in 1995, $84,761,000 in
1994 and $97,574,000 in 1993. Average invested assets decreased 5.3% and 9.0%
in 1995 from 1994 and 1994 from 1993, respectively. Average annual pre-tax
yield on invested assets declined from 7.1% in 1993 to 6.7% in 1994 and
increased slightly to 6.8% in 1995. The overall decline in investment income
and yields from 1993 levels is the result of lower rates available on fixed
maturity investments purchased since 1993, the sale of relatively higher
yielding bonds in 1994 to generate cash for paying earthquake claims in 1994
and the decline in business in 1995.
Realized capital gains on the sales of investments increased from
$16,729,000 in 1993 to $61,554,000 in 1994 and then decreased to $10,207,000
in 1995.
As of December 31, 1995, the Company had a net unrealized gain on fixed
maturity investments of $50,527,000 compared to a net unrealized gain (loss)
of ($61,425,000) and $145,745,000 in 1994 and 1993, respectively. The primary
reasons for the shifts in unrealized gains and losses are twofold. Interest
rates rose sharply in 1994 but fell in 1995 reducing the fair value of the
bond portfolio in 1994 and increasing it in 1995. In addition, in 1994, the
Company sold practically all appreciated fixed maturity investments, realizing
$62 million in investment gains.
36
Of the Company's total investments, $195,609,000 at fair value was
invested in tax-exempt state and municipal bonds and the balance was invested
in taxable government, corporate and municipal securities. At December 31,
1995, the portfolio contained 83% taxable instruments compared to 76% a year
earlier.
Statutory regulations require the majority of the Company's investments
to be made in high-grade securities to provide ample protection for
policyholders. The Company primarily invests in long-term fixed maturity
investments such as bonds.
The Company's investment guidelines currently emphasize buying high-
quality, fixed income, taxable securities because of the Company's substantial
net operating loss carryforward. While the Company's policy is generally to
hold these investments until maturity, its ongoing monitoring and evaluation
of investment holdings and market conditions may, from time to time, result in
selected sales of investments prior to maturity. The Company has designated
its portfolio as "available-for-sale" and it is carried at fair value as of
December 31, 1995 and 1994 in accordance with the standards set forth in
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". For a more complete description
of this standard, see Note 1 of the Notes to Consolidated Financial State-
ments, "Investments".
LIQUIDITY AND CAPITAL RESOURCES
Prior to 1994, the Company experienced positive cash flow from operating
activities. In 1994, the Company paid for the Northridge Earthquake losses
with cash flow from operations, investment sales, loan proceeds and equity
financing. For 1995, funds needed to pay these claims as well as
Proposition 103 rebates came from normal operating cash flows, available cash
on deposit, additional loan proceeds of $15 million and preferred stock pro-
ceeds of $20 million. As of December 31, 1995, the Company had total cash of
$50,609,000 and total investments at fair value of $1,127,112,000.
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.
37
Prior to 1994, the Company's most significant capital requirement
resulted from its need to maintain an acceptable ratio of net premiums written
to policyholders' surplus. In 1994, the losses from the Northridge Earthquake
were so severe that the Company obtained a bank loan for its subsidiaries and
equity financing from AIG to meet its obligation to pay earthquake claims and
strengthen surplus. See Notes 7 and 14 of the Notes to Consolidated Financial
Statements.
As of December 31, 1995, there was $224,950,000 of preferred stock out-
standing, bearing interest at 9% per year payable quarterly, resulting in a
dividend of $5,061,500 per quarter.
The Company also increased in 1995 its revolving credit line to
$225 million, with interest obligations varying according to market condi-
tions. As of December 31, 1995, the outstanding balance on the loan was
$175 million. First quarter 1996 interest payments are estimated to be
approximately $2,900,000.
Funds required by 20th Century Industries to pay dividends and meet its
debt obligations are provided by the insurance subsidiaries. The ability of
the insurance subsidiaries to pay dividends to the holding company is regu-
lated by state law. Because of statutory regulations which require dividends
to be paid from earned surplus, no dividends were paid by the subsidiaries in
1995. The Company expects to generate positive earned surplus early in 1996
and resume normal dividends from the insurance subsidiaries to service the
debt and preferred dividend requirements.
The Company expects to have very small cash outlays for income taxes,
specifically alternative minimum tax for the next two to three years. Until
the net operating losses caused by the Northridge Earthquake are fully util-
ized, the Company expects that cash outlays for income taxes will be less than
income tax expense recorded in accordance with generally accepted accounting
principles. The net operating loss carryforwards will expire in the year
2009.
RISK-BASED CAPITAL
The National Association of Insurance Commissioners requires property
and casualty insurance companies to calculate and report information under
a Risk-Based Capital ("RBC") formula in their annual statements. The RBC
38
requirements are intended to assist regulators in identifying inadequately
capitalized companies. The RBC calculation is based on the type and mix of
risks inherent in the Company's business and includes components for
underwriting, asset, interest rate and other risks. The Company's insurance
subsidiaries have sufficient capital to meet all RBC requirements.
HOME OFFICE LEASE
The Company leases its Home Office building in Woodland Hills, Califor-
nia, which contains approximately 234,000 square feet of leasable office
space. The current lease comes up for renewal in November 1999 and may be
renewed for two consecutive five-year periods.
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Board of Directors
20th Century Industries
We have audited the accompanying consolidated balance sheets of 20th
Century Industries and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of 20th Century Industries and subsidiaries at December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with gen-
erally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic finan-
cial statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As described in Note 1, 20th Century Industries and subsidiaries adopted
in 1994 the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." As
described in Note 4, 20th Century Industries and subsidiaries adopted in 1993
the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
ERNST & YOUNG LLP
Los Angeles, California
February 2, 1996
40
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
------------------------------
1995 1994
---- ----
(Amounts in thousands)
Investments:
Fixed maturities - available-for-
sale, at fair value $1,125,548 941,406
Equity securities, at fair value 1,564 768
---------- ----------
Total investments - Note 2 1,127,112 942,174
Cash and cash equivalents 50,609 249,834
Accrued investment income 19,862 19,631
Premiums receivable 90,835 90,236
Reinsurance receivables and recoverables 48,314 2,737
Prepaid reinsurance premiums 28,823 1,237
Income taxes receivable - 74,064
Deferred income taxes - Note 4 206,230 276,570
Deferred policy acquisition
costs - Note 3 10,481 14,776
Other assets 26,620 31,551
---------- ----------
$1,608,886 $1,702,810
========== ==========
See accompanying notes to financial statements.
41
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
-----------------------------
1995 1994
---- ----
(Amounts in thousands, except share data)
Unpaid losses and loss adjustment
expenses - Note 6 $ 584,834 $ 756,243
Unearned premiums 288,927 298,519
Bank loan payable - Note 7 175,000 160,000
Claims checks payable 49,306 70,725
Reinsurance payable 23,176 296
Proposition 103 payable - Note 12 - 78,307
Other liabilities - Note 5 21,058 20,776
---------- ----------
Total liabilities 1,142,301 1,384,866
---------- ----------
Commitments - Note 9 and
Contingencies - Note 11
Stockholders' equity - Note 10
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, outstanding 224,950 in
1995 and 200,000 in 1994 224,950 200,000
Common stock without par value;
authorized 110,000,000 shares,
outstanding 51,493,406 in 1995
and 51,472,471 in 1994 69,805 69,340
Common stock warrants 16,000 16,000
Unrealized investment gains
(losses), net - Note 2 33,508 (39,777)
Retained earnings 122,322 72,381
---------- ----------
Total stockholders' equity 466,585 317,944
---------- ----------
$1,608,886 $1,702,810
========== ==========
See accompanying notes to financial statements.
42
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------------
1995 1994 1993
---- ---- ----
(Amounts in thousands, except per share data)
REVENUES:
Net premiums earned - Note 8 $ 963,797 $1,034,003 $ 989,712
Net investment income - Note 2 81,658 84,761 97,574
Realized investment gains - Note 2 10,207 61,554 16,729
----------- ---------- ----------
1,055,662 1,180,318 1,104,015
----------- ---------- ----------
LOSSES AND EXPENSES:
Net losses and loss adjustment
expenses - Note 6 851,602 1,828,346 867,451
Policy acquisition costs - Note 3 38,647 43,409 48,375
Other operating expenses 48,311 57,198 57,769
Proposition 103 expense - Note 12 - 29,124 3,474
Loan interest and fees
expense - Note 7 15,897 8,348 -
----------- ---------- ----------
954,457 1,966,425 977,069
----------- ---------- ----------
Income (loss) before federal income
taxes and cumulative effect
of change in accounting for
income taxes 101,205 (786,107) 126,946
Federal income taxes (benefit) -
Note 4 31,575 (288,087) 18,350
----------- ---------- ----------
Income (loss) before cumulative
effect of change in accounting
for income taxes 69,630 (498,020) 108,596
Cumulative effect of change in
accounting for income taxes - - 3,959
----------- ---------- ----------
NET INCOME (LOSS) $ 69,630 $ (498,020) $ 112,555
=========== ========== ==========
EARNINGS (LOSS) PER COMMON
SHARE - Note 1
PRIMARY -
Before cumulative effect of
change in accounting for
income taxes $ .88 $ (9.69) $ 2.11
Cumulative effect of change in
accounting for income taxes - - .08
----------- ---------- ----------
NET INCOME (LOSS) $ .88 $ (9.69) $ 2.19
=========== ========== ==========
FULLY DILUTED -
NET INCOME (LOSS) $ .88 $ (9.69)
=========== ==========
See accompanying notes to financial statements.
43
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 and 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK UNREALIZED
$1 PAR VALUE WITHOUT COMMON INVESTMENT
PER SHARE PAR VALUE STOCK GAINS RETAINED
AMOUNT AMOUNT WARRANTS (LOSSES) EARNINGS
-------------- - --------- -------- ---------- --------
Balance at January 1, 1993 $ - $ 68,431 $ - $ - $ 507,243
Net income for the year 112,555
Effects of common stock issued
under restricted shares plan 417
Unrealized pension loss (511)
Cash dividends paid on common
stock ($.64 per share) (32,926)
-------- -------- -------- -------- ---------
Balance at December 31, 1993 - 68,848 - - 586,361
Net loss for the year (498,020)
Effects of common stock issued
under restricted shares plan 492
Effect of implementing change
in accounting for investments
at January 1, 1994 - Note 2 36,757
Net decrease in unrealized gains
on investments, net of deferred
taxes of $(21,419) - Note 2 (76,534)
Issuance of Series A
Preferred Stock - Note 14 200,000
Issuance of Series A Common
Stock Warrants - Note 14 16,000
Unrealized pension gain 511
Cash dividends paid on common
stock ($.32 per share) (16,471)
-------- -------- -------- -------- ---------
Balance at December 31, 1994 200,000 69,340 16,000 (39,777) 72,381
Net income for the year 69,630
Effects of common stock issued
under restricted shares plan 465
Issuance of Series A
Preferred Stock - Note 14 24,950 (4,950)
Net increase in unrealized gains
on investments, net of deferred
taxes of $39,461 - Note 2 73,285
Unrealized pension loss (116)
Cash dividends paid on
preferred stock (14,623)
-------- -------- -------- -------- ---------
Balance at December 31, 1995 $224,950 $ 69,805 $ 16,000 $ 33,508 $ 122,322
======== ======== ======== ======== =========
See accompanying notes to financial statements.
44
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income (loss) $ 69,630 $(498,020) $ 112,555
Adjustments to reconcile net income
to net cash provided (used) by operating
activities:
Provision for depreciation
and amortization 6,555 7,195 7,203
Provision for deferred income taxes 30,856 (214,522) (6,518)
Realized gains on sale of invest-
ments, fixed assets, etc. (10,128) (61,470) (16,515)
Federal income taxes 74,718 (72,668) (1,255)
Prepaid reinsurance premiums
and reinsurance receivables
and recoverables (73,163) (737) 1,501
Unpaid losses and loss
adjustment expenses (171,409) 178,753 22,950
Unearned premiums (9,592) (1,422) 32,385
Claims checks payable (21,419) 29,190 2,206
Proposition 103 payable (78,307) 29,122 3,474
Other 27,614 (572) (18,333)
--------- --------- ---------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (154,645) (605,151) 139,653
45
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1995 1994 1993
---- ---- ----
(Amounts in thousands)
INVESTING ACTIVITIES:
Investments held-to-maturity:
Purchases - - (308,543)
Called or matured - - 19,760
Sales - - 58,116
Investments available-for-sale:
Purchases (666,203) (821,822) -
Called or matured 33,308 27,531 14,323
Sales 570,443 1,275,091 117,503
Net purchases of property and
equipment (2,505) (3,238) (4,895)
---------- ---------- ----------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (64,957) 477,562 (103,736)
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 20,000 200,000 -
Proceeds from issuance of common stock
warrants - 16,000 -
Payments on installment contract - - (75)
Proceeds from bank loan 15,000 160,000 -
Dividends paid (14,623) (16,471) (32,926)
---------- ---------- ----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 20,377 359,529 (33,001)
---------- ---------- ----------
Net increase (decrease) in cash (199,225) 231,940 2,916
Cash, beginning of year 249,834 17,894 14,978
---------- ---------- ----------
Cash, end of year $ 50,609 $ 249,834 $ 17,894
========== ========== ==========
See accompanying notes to financial statements.
46
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
Basis of Consolidation and Presentation
The accompanying financial statements include the accounts of 20th
Century Industries and its wholly-owned subsidiaries, 20th Century Insurance
Company and 21st Century Casualty Company (collectively, the Company). The
Company is engaged in the sale of private passenger automobile insurance and
personal excess liability policies in the State of California. The Company
also has homeowner and condominium insurance, although this line is being run-
off with all policies expiring in July 1997. All material intercompany
accounts and transactions have been eliminated. The consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles which differ in some respects from those followed in reports to
insurance regulatory authorities. The preparation of the financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and footnotes. Actual results could differ from
these estimates.
Investments
The Company has classified its investments as available-for-sale in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". SFAS
No. 115, which was adopted January 1, 1994, requires that fixed maturity
securities are to be classified as either held-to-maturity, available-for-
sale, or trading. Held-to-maturity debt securities are to be reported at
amortized cost; trading securities are to be reported at fair value, with
unrealized gains or losses included in earnings; and available-for-sale
securities are to be reported at fair value, with unrealized gains or losses
excluded from earnings and reported in a separate component of stockholders'
equity.
Fair values for fixed maturity and equity securities are based on quoted
market prices. Unrealized investment gains and losses are credited or charged
directly to stockholders' equity, net of any tax effect. When investment
47
securities are sold, the cost used to determine any realized gain or loss is
based on specific identification.
Cash and Cash Equivalents
Cash and cash equivalents include cash and short-term investments in
demand deposits.
Reinsurance
In the normal course of business, the Company seeks to reduce the loss
that may arise from catastrophes or other events that cause unfavorable
underwriting results by reinsuring certain levels of risk in various areas of
exposure with other insurance enterprises or reinsurers. Reinsurance premiums
and reserves on reinsured business are accounted for on a basis consistent
with those used in accounting for the original policies issued and the terms
of the reinsurance contracts. Amounts applicable to ceded unearned premiums
and ceded claim liabilities are reported as assets in the accompanying balance
sheets.
Income Recognition
Premiums written are recorded as earned proportionately over the term of
the policy.
Losses and Loss Adjustment Expenses
The estimated liabilities for losses and loss adjustment expenses
include the accumulation of estimates of losses for claims reported prior to
the balance sheet dates, estimates (based upon actuarial analysis of
historical data) of losses for claims incurred but not reported and estimates
of expenses for investigating and adjusting all incurred and unadjusted
claims. Amounts reported are estimates of the ultimate net costs of
settlement which are necessarily subject to the impact of future changes in
economic and social conditions. Management believes that, given the inherent
variability in any such estimate, the aggregate reserves are within a
reasonable and acceptable range of adequacy. The methods of making such
estimates and for establishing the resulting reserves are continually reviewed
and updated and any adjustments resulting therefrom are reflected in earnings.
48
Policy Acquisition Costs
Policy acquisition costs, principally direct and indirect costs related
to production of business, are deferred and amortized against the premiums
earned.
Income Taxes
Income taxes have been provided using the liability method in accordance
with SFAS No. 109, "Accounting for Income Taxes". Under that method, deferred
tax assets and liabilities are determined based on the differences between
their financial reporting and their tax bases and are measured using the
enacted tax rates.
Earnings (Losses) Per Common Share
Earnings (losses) per common share are computed using the weighted
average number of common shares outstanding during the respective periods.
The primary weighted average number of shares was 57,223,839 for the year
ended December 31, 1995, 51,387,120 for 1994 and 51,411,968 for 1993. The
fully diluted weighted average number of shares was 79,325,308 for the year
ended December 31, 1995, and were the same as primary for 1994. Primary
earnings per share amounts for 1993 reflect a simple capital structure in
which there were no securities in existence allowing common stock to be
acquired as a result of exercising the conversion rights of such securities.
The 1994 and 1995 primary and fully diluted loss 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. Primary and fully diluted loss per share amounts
for 1994 are the same since there was a net loss for the year, as including
the convertible securities in the computation of the loss per share would be
antidilutive.
Fair Values of Financial Instruments
The carrying amounts of financial instruments, other than investment
securities, approximate their fair values. For investment securities, fair
values are based on quoted market prices. The carrying amounts and fair
values for all investment securities are disclosed in Note 2.
49
New Accounting Standard
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting and Disclosure of Stock-Based Compensation", became effective with
fiscal years beginning after December 15, 1995. Stock-based compensation is
accounted for presently in accordance with the requirements set forth in APB
Opinion No. 25, "Accounting for Stock Issued to Employees". At this time, the
Company is evaluating the provisions of SFAS No. 123 and has not yet
determined whether it will adopt the Statement for expense recognition
purposes.
Reclassifications
The accompanying 1993 and 1994 financial statements have been
reclassified to conform with the 1995 presentation.
NOTE 2. INVESTMENTS
The changes in unrealized gains (losses) for 1995 and 1994 total
$73,285,000 and ($39,777,000), net of deferred income taxes of $39,461,000 and
($21,419,000), respectively.
A summary of net investment income is as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
---- ---- ----
(Amounts in thousands)
Interest and dividends on fixed
maturities $ 74,286 $ 82,125 $ 97,771
Interest on short-term cash
investments (demand deposits) 8,049 3,210 522
Dividends and other 109 128 51
-------- -------- --------
Total investment income 82,444 85,463 98,344
Investment expense 786 702 770
-------- -------- --------
Net investment income $ 81,658 $ 84,761 $ 97,574
======== ======== ========
50
A summary of realized investment gains and losses before income taxes
is as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
---- ---- ----
(Amounts in thousands)
Fixed maturities available-for-sale:
Gross realized gains $ 12,080 $ 65,300 $ 11,528
Gross realized losses (1,873) (3,746) (99)
Fixed maturities held-to-maturity:
Gross realized gains - - 5,300
Gross realized losses - - -
-------- ---------- --------
Net realized investment gains $ 10,207 $ 61,554 $ 16,729
======== ========== ========
The amortized cost, gross unrealized gains and losses, and fair values
of fixed maturities as of December 31, 1995 and 1994, respectively, are as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
1995 Cost Gains Losses Value
- - ---- --------- ---------- ----------- -----------
(Amounts in thousands)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 68,283 $ 1,440 $ 12 $ 69,711
Obligations of states and
political subdivisions 219,026 4,681 863 222,844
Public utilities 182,828 8,396 - 191,224
Corporate securities 604,884 36,972 87 641,769
----------- -------- ------- -----------
Total available-for-sale $ 1,075,021 $ 51,489 $ 962 $ 1,125,548
=========== ======== ======= ===========
1994
- - ----
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 240,690 $ 65 $ 8,077 $ 232,678
Obligations of states and
political subdivisions 292,723 355 31,464 261,614
Public utilities 147,241 11 8,079 139,173
Corporate securities 322,177 1,594 15,830 307,941
----------- -------- ------- -----------
Total available-for-sale $ 1,002,831 $ 2,025 $63,450 $ 941,406
=========== ======== ======= ===========
51
The maturity distribution of the Company's fixed maturity investments at
December 31, 1995 was as follows: (Amounts in thousands)
Available-for-Sale
---------------------------
Amortized Fair
Fixed maturities due: Cost Value
- - --------------------- ---------- --------
1996 $ 5,138 $ 5,201
1997 - 2000 120,561 126,126
2001 - 2005 492,272 515,480
2006 - 2015 455,860 477,496
2016 and after 1,190 1,245
---------- ----------
Total $1,075,021 $1,125,548
========== ==========
Expected maturities of the Company's investment portfolios differ from
contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
NOTE 3. POLICY ACQUISITION COSTS
The following reflects the policy acquisition costs deferred for
amortization against future income and the related amortization charged to
income from operations, excluding certain amounts deferred and amortized in
the same period:
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
(Amounts in thousands)
Deferred policy acquisition costs
at beginning of year $ 14,776 $ 15,712 $ 13,345
Acquisition costs deferred 34,352 42,473 50,742
-------- -------- --------
49,128 58,185 64,087
Deferred policy acquisition costs
at end of year 10,481 14,776 15,712
-------- -------- --------
Acquisition costs amortized and
charged to income during the year $ 38,647 $ 43,409 $ 48,375
======== ======== ========
52
NOTE 4. FEDERAL INCOME TAXES
In 1993, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes". The adoption of SFAS 109
changed the Company's method of accounting for income taxes from the deferred
method to the liability method. The liability method requires the recognition
of deferred tax liabilities and tax assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. This adoption is shown as a cumulative
effect of a change in accounting for income taxes in the 1993 Statement of
Operations.
Federal income tax expense consists of:
YEARS ENDED DECEMBER 31,
------------------------------------------------
1995 1994 1993
---- ---- ----
(Amounts in thousands)
Current tax expense (benefit) $ 719 $ (73,565) $ 24,868
Deferred tax expense (benefit) 30,856 (214,522) (6,518)
--------- --------- --------
$ 31,575 $(288,087) $ 18,350
========= ======== ========
The Company's net deferred income tax asset is composed of:
YEARS ENDED DECEMBER 31,
------------------------------
1995 1994
---- ----
(Amounts in thousands)
Deferred Tax Assets:
Net operating loss carryforward $181,393 $192,334
Unearned premiums 18,207 20,810
Loss reserves 14,728 21,886
Alternative minimum tax credit 8,778 8,084
Proposition 103 - 14,138
Unrealized investment losses - 21,419
Non-qualified retirement plans 2,903 2,761
Other 2,868 1,373
-------- --------
228,877 282,805
-------- --------
Deferred Tax Liabilities:
Deferred policy acquisition costs 3,668 5,173
Salvage and subrogation 936 1,062
Unrealized investment gains 18,043 -
-------- --------
22,647 6,235
-------- --------
Net Deferred Tax Asset $206,230 $276,570
======== ========
53
Under normal operations, the Company's principal deferred tax assets
arise from the discounting of loss reserves for tax purposes which delays a
portion of the loss deduction, and from the acceleration of 20% of the
unearned premium reserve into taxable income before it is earned. The Company
as of December 31, 1995 has a net operating loss carryforward of approximately
$518,000,000 for regular tax purposes and $373,000,000 for alternative minimum
tax purposes expiring in the year 2009 and an alternative minimum tax credit
carryforward of $8,778,000.
The Company is required to establish a "valuation allowance" for any
portion of the deferred tax asset that management believes will not be
realized. In order to utilize the deferred tax asset, the Company must have
the ability to generate sufficient future taxable income to realize the tax
benefits. The Company has available the following tax-planning strategies to
generate additional taxable income in the future above historical levels:
1) The Company, as of December 31, 1995, has approximately 83% of its
$1.1 billion investment portfolio invested in taxable securities
compared to 76% at December 31, 1994. By converting the remainder
of its investment portfolio from tax-exempt securities and
investing new cash flow into taxable securities, the Company could
increase its future taxable income.
2) The Company could reinsure outstanding loss reserves and thus
eliminate the temporary difference related to the discounting of
loss reserves for tax purposes.
The Company has a strong record of profitable operations. Except for
the losses arising from the Northridge Earthquake, the Company has been
profitable for each of the past 10 years. Over the last five years, the
Company's combined ratio has been approximately 99% excluding the Northridge
Earthquake, and investment earnings have averaged approximately $101 million a
year over the same five year period. Historically, the Company has generated
almost all of its profits from its automobile line of business. In accordance
with the order by the California Department of Insurance, the Company is
withdrawing from the homeowner, condominium and earthquake lines of business.
As of July 23, 1995, the Company was out of the earthquake line of business
and will be out of the homeowner and condominium line of business by July 23,
1997. This withdrawal will substantially reduce the Company's exposure to
future earthquake catastrophes.
54
The Company believes that because of its historically strong earnings
performance, return to profitability in 1995, and the tax planning strategies
available, it is more likely than not that the Company will realize the
benefit of the deferred tax asset, and therefore, no valuation allowance has
been established.
Income taxes do not bear the expected relationship to income because of
differences in the recognition of revenue and expense for tax and financial
reporting purposes. The tax effects of such differences are:
YEARS ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
---- ---- ----
(Amounts in thousands)
Federal income tax (benefit)
at statutory rate $ 35,422 $(275,138) $ 44,431
(Decrease) increase due to:
Tax-exempt income, net (3,520) (13,535) (24,492)
Adjustment of deferred tax for
1% increase in tax rate - 1,696 (1,074)
Other (327) (1,110) (515)
--------- --------- --------
Federal taxes on income $ 31,575 $(288,087) $ 18,350
========= ======== ========
The statutory tax rate was 35% for 1993 through 1995.
Cash paid for income taxes was $65,000, $-0- and $26,026,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
55
NOTE 5. EMPLOYEE BENEFITS
Pension Plan and Supplemental Executive Retirement Plan
The Company sponsors a non-contributory defined benefit pension plan
(Pension Plan) which covers essentially all employees who have completed at
least one year of service. The benefits are based on employees' compensation
during all years of service. The Company's funding policy is to make annual
contributions as required by applicable regulations. The Pension Plan's
assets consist of high-grade fixed income securities and cash equivalents.
The Company also sponsors unfunded Supplemental Executive Retirement
Plans (Supplemental Plan) which cover certain key employees, designated by the
Board of Directors. The Supplemental Plan benefits are based on years of
service and compensation during the last three years of employment, and are
reduced by the benefit payable from the Pension Plan.
The net periodic pension cost for these plans reflected in the 1995,
1994 and 1993 Consolidated Statements of Operations is $3,147,000, $3,722,000,
and $2,998,000, respectively. Accrued pension costs reflected in the
Consolidated Balance Sheets at December 31, 1995 and 1994 are $5,637,000 and
$4,713,000, respectively.
Savings and Security Plan
The Company has voluntary qualified contributory savings and security
plans for eligible employees which incorporate Section 401(k) of the Internal
Revenue Code to permit certain pre-tax contributions by participants. Under
the plans, the Company matches 75% of all employee contributions up to a limit
of 6% of each participating employee's compensation. Contributions charged
against operations were $2,376,000, $2,210,000 and $1,943,000 in 1995, 1994
and 1993, respectively.
56
NOTE 6. LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid losses and loss adjustment expenses
is summarized as follows:
1995 1994 1993
---- ---- ----
(AMOUNTS IN THOUSANDS)
Reserves for losses and loss adjustment
expenses, net of reinsurance recover-
ables on unpaid losses, at beginning
of year $ 755,101 $ 574,619 $554,034
Incurred losses and loss adjustment
expenses, net of reinsurance:
Provision for insured events of the
current year, net of reinsurance 891,066 1,912,799 930,437
Decrease in provision for
insured events of prior years,
net of reinsurance (39,464) (84,453) (62,986)
---------- ---------- --------
Total incurred losses and loss
adjustment expenses, net of
reinsurance 851,602 1,828,346 867,451
---------- ---------- --------
Payments, net of reinsurance:
Losses and loss adjustment expenses
attributable to insured events of
the current year, net of reinsurance 534,414 1,302,988 519,232
Losses and loss adjustment expenses
attributable to insured events of
prior years, net of reinsurance 519,969 344,876 327,634
---------- ---------- --------
Total payments, net of reinsurance 1,054,383 1,647,864 846,866
---------- ---------- --------
Reserves for losses and loss adjustment
expenses, net of reinsurance recover-
ables on unpaid losses, at year end 552,320 755,101 574,619
Reinsurance recoverables on unpaid
losses, at year end 32,514 1,142 2,871
---------- ---------- --------
Reserves for losses and loss adjust-
ment expenses, gross of reinsurance
recoverables on unpaid losses, at
year end $ 584,834 $ 756,243 $577,490
========== ========== ========
As a result of changes in estimates of insured events in prior years,
the provision for losses and loss adjustment expenses decreased by
$39,464,000, $84,453,000 and $62,986,000 in 1995, 1994 and 1993, respectively,
due to a combination of improvements in the claims handling process,
unanticipated decreases in frequency and random fluctuations in severity. The
1995 decrease in provision for insured events of prior years is affected by a
$28 million net increase in losses related to the Northridge Earthquake.
57
NOTE 7. BANK LOAN PAYABLE
Effective December 1995, the Company increased its reducing-revolver
credit facility (the Facility) to an aggregate commitment of $225 million.
As of December 31, 1995, the Company's outstanding advances against the
Facility totalled $175 million for which loan origination fees totaling
$9.8 million were incurred. Loan fees are being amortized over the life of
the Facility. Interest is charged at a variable rate based, at the option of
the Company, on either (1) the contractually defined Alternate Base Rate (ABR)
plus a margin of 0.25% or (2) the Eurodollar Rate plus a margin of 1.00%.
Margins will be adjusted in relation to certain financial and operational
levels of the Company. The ABR is defined as a daily rate which is the higher
of (a) the prime rate for such day or (b) the Federal Funds Effective Rate for
such day plus 1/2% per annum. Interest is payable at the end of each interest
period. The stock of the Company's insurance subsidiaries is pledged as
collateral under the loan agreement. At December 31, 1995, the annual
interest rate for the specified interest period was approximately 6.9%.
Interest paid was $12,636,000 in 1995 and $7,277,000 in 1994.
On both April 1, 1996 and July 1, 1996, the aggregate commitment will be
reduced by $5,625,000, and thereafter by $11,250,000 on the first day of each
quarter through the Facility's maturity on April 1, 2001. Principal
repayments are required when total outstanding advances exceed the aggregate
commitment. The Company may prepay principal amounts of the advances, as well
as voluntarily cause the aggregate commitment to be reduced at any time during
the term of the Facility.
NOTE 8. REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. The Company periodically reviews the financial condition of
its reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. It is the Company's policy to hold collateral under related
reinsurance agreements in the form of letters of credit for unpaid losses for
all reinsurers not licensed to do business in the Company's state of domicile.
58
The effect of reinsurance on premiums written and earned is as follows
(amounts in thousands):
1995 1994 1993
----------------------- ---------------------- ----------------------
Written Earned Written Earned Written Earned
---------- ---------- ---------- ---------- ---------- ----------
Gross $1,063,962 $1,073,556 $1,078,663 $1,080,086 $1,033,895 $1,001,510
Ceded (137,345) (109,759) (45,926) (46,083) (11,993) (11,798)
---------- ---------- ---------- ---------- ---------- ----------
Net premiums $ 926,617 $ 963,797 $1,032,737 $1,034,003 $1,021,902 $ 989,712
========== ========== ========== ========== ========== ==========
Loss and loss adjustment expenses have been reduced by reinsurance ceded
as follows (amounts in thousands):
1995 1994 1993
-------- ---------- --------
Gross losses and loss
adjustment expenses incurred $921,104 $1,905,161 $871,151
Ceded losses and loss
adjustment expenses (69,502) (76,815) (3,700)
-------- ---------- --------
Net losses and loss
adjustment expenses incurred $851,602 $1,828,346 $867,451
======== ========== ========
In connection with an investment agreement formed in 1995 with American
International Group, Inc. ("AIG") (see Note 14), each of the Company's
insurance subsidiaries entered into a five-year quota share reinsurance
agreement with an AIG affiliate to provide coverage for all ongoing lines of
business. Under this contract, 10% of each subsidiary's premiums earned and
losses incurred in connection with policies incepted during the period
January 1, 1995 through December 31, 1999 are ceded. Substantially all of the
Company's reinsurance receivables are due from the AIG affiliate. At the end
of the five-year period, the AIG affiliate may elect to renew the agreement
annually at declining coverage percentages. A ceding commission of 10.8% was
earned by the insurance subsidiaries for 1995 and, thereafter, is paid a
ceding commission at a rate equal to their actual underwriting expense ratio.
The Company maintains a catastrophe reinsurance program to provide
coverage through the run-off period of its remaining homeowner and condominium
policies. The program currently in place provides coverage for the period
from July 1, 1995 through June 30, 1996 for a total annual premium of
approximately $13 million. Coverage under these treaties is provided by a
number of domestic, foreign and London market companies in two layers as
follows:
Catastrophe Company Reinsurance
Loss Layer Retention Amount
------------------ ----------- -----------
first $ 10,000,000 $7,750,000 $ 2,250,000
next $ 90,000,000 $4,500,000 $ 85,500,000
59
The Company has a homeowners' excess-of-loss reinsurance treaty with
General Reinsurance Corporation. In this excess treaty, the reinsurer's limit
is $650,000 in excess of the Company's retention of $300,000 per risk, subject
to a maximum reinsurer's limit of $1,300,000 per occurrence. The Company has
a quota share treaty for its Personal Excess Liability Policy business whereby
it cedes 60% of its business.
NOTE 9. LEASE COMMITMENTS
The Company leases office space in a building in Woodland Hills,
California. The lease was amended in October 1994, extending the lease term
until November 1999. The lease may be renewed for two consecutive five-year
periods. The Company also leases office space in several other locations
throughout California, primarily for claims servicing.
Minimum rental commitments under the Company's lease obligations are as
follows:
1996 $10,744,000
1997 10,477,000
1998 8,865,000
1999 7,963,000
2000 1,890,000
Thereafter 1,085,000
Rental expense charges to operations for the years ended December 31,
1995, 1994 and 1993 were $12,062,000, $11,694,000, and $11,259,000, respec-
tively.
60
NOTE 10. STOCKHOLDERS' EQUITY
Retained Earnings:
The Company's insurance subsidiaries have restrictions affecting the
amount of stockholder dividends which may be paid to the parent company within
any one year without the approval of the California Department of Insurance.
The California Insurance Code provides that amounts may be paid as dividends
from earned surplus on an annual, noncumulative basis, without prior approval
by the California Department of Insurance, up to the greater of (1) net income
for the preceding year, or (2) 10 percent of statutory surplus as regards
policyholders as of the preceding December 31.
Stockholder's equity of the insurance subsidiaries on a statutory
accounting basis at December 31, 1995 and 1994 was $358,474,000 and
$207,018,000, respectively. Statutory net income (loss) for the insurance
subsidiaries was $118,562,000, $(657,331,000) and $96,218,000 for the years
ended December 31, 1995, 1994 and 1993, respectively.
Restricted Shares Plan:
The plan provides for grants of common shares not to exceed 921,920
shares to be made to key employees as determined by the Key Employee Incentive
Committee of the Board of Directors. At December 31, 1995, 313,474 common
shares remain available for future grants. Upon issuance of grants of common
shares under the plan, unearned compensation equivalent to the market value on
the date of grant is charged to common stock and subsequently amortized in
equal monthly installments over the five-year period of the grant.Amortization
of unearned compensation was $550,000, $431,000 and $320,000 in 1995, 1994 and
1993, respectively. At December 31, 1995 and 1994, unearned compensation, net
of amortization, was $605,000 and $1,153,000, respectively. The common shares
are restricted for 5 years retroactive to the first day of the year of grant.
Restrictions are removed on 20% of the shares of each employee on January 1 of
each of the 5 years following the year of grant. A summary of grants
outstanding under the plan from 1993 through 1995 is as follows:
61
COMMON MARKET PRICE PER
SHARES SHARE ON DATE OF GRANT
------ ----------------------
Outstanding, December 31, 1992 54,950
Granted in 1993 21,225 $28.13
Vested in 1993 19,460
Cancelled or forfeited -
-------
Outstanding, December 31, 1993 56,715
Granted in 1994 25,000 $27.38
Vested in 1994 18,543
Cancelled or forfeited -
-------
Outstanding, December 31, 1994 63,172
Granted in 1995 35,813 $11.17
Vested in 1995 40,224
Cancelled or forfeited 14,878
-------
Outstanding, December 31, 1995 43,883
=======
Stock Option Plan
On May 25, 1995, the shareholders of the Company approved the 1995 Stock
Option Plan (the "Plan"), which provides for the grant of stock options to key
employees and non-employee directors of the Company. The aggregate number of
common shares issued and issuable under the Plan shall not exceed 1,000,000.
At December 31, 1995, options to purchase 180,000 common shares have been
granted with an average exercise price of $12.56 per share.
NOTE 11. LITIGATION
Lawsuits arising from claims under insurance contracts are provided for
through loss and loss adjustment expense reserves established on an ongoing
basis. From time to time, the Company has been named as a defendant in
lawsuits incident to its business. Some of these actions assert claims for
exemplary or punitive damages which are not insurable under California
judicial decisions. The Company vigorously defends these actions unless a
reasonable settlement appears appropriate. While any litigation has an
element of uncertainty, the Company believes that the ultimate outcome of
pending actions will not have a material adverse effect on its consolidated
financial condition or results of operations.
62
NOTE 12. PROPOSITION 103
On January 27, 1995, the Company announced a settlement of rebate
liabilities associated with Proposition 103, which was passed by California
voters on November 8, 1988, for $78 million.
By the second quarter of 1995, the Company had refunded $46 million to
customers specified in the settlement, representing an average payment per
household of $80.00, approximately 7.5 percent of premiums paid between
November 8, 1988 and November 7, 1989. In accordance with the settlement, the
Company offset the increase in earthquake losses associated with the 1994
Northridge Earthquake with $32 million in funds previously set aside for
potential Proposition 103 rebates. In addition as part of the settlement, the
Company obtained an additional $15 million from the existing bank credit
facility and $20 million from the issuance of 20,000 additional shares of
preferred stock to AIG ( see Notes 7 and 14, respectively ) and contributed
$30 million to the surplus of the insurance subsidiaries.
NOTE 13. NORTHRIDGE EARTHQUAKE
The Northridge, California Earthquake, which occurred on January 17,
1994, significantly affected the operating results and the financial position
of the Company. Since the event occurred, the Company and other members of
the property and casualty insurance industry have revised their estimates of
claim costs and related expenses several times.
The Company's estimate of gross losses and allocated loss adjustment
expenses for this catastrophe as of December 31, 1995 is $1 billion, of which
$60 million was recorded in 1995. In accordance with the terms of the
settlement with the California Department of Insurance, the Company offset the
increase in earthquake losses with approximately $32 million in funds
previously set aside for potential Proposition 103 rebates.
63
NOTE 14. CAPITAL TRANSACTIONS
On December 16, 1994, the Company received $216 million of equity
capital from AIG and in exchange, issued (i) 200,000 shares of Series A 9%
Convertible Preferred Stock, par value $1.00 per share, at a price and
liquidation value of $1,000 per share and convertible into common shares at a
conversion price of $11.33 per share, and (ii) 16,000,000 Series A Warrants to
purchase an aggregate 16,000,000 shares of the Company's Common Stock at
$13.50 per share (collectively, the "Investment Agreement"). In 1995, an
additional 20,000 shares of preferred stock were issued to AIG in exchange for
$20,000,000 of equity capital. The Series A Preferred Stock ranks senior to
the Common Stock in respect to dividend and liquidation rights. Cash
dividends of $14,622,750 were paid on the preferred stock. Preferred stock
dividends in kind of $4,950,000, representing 4,950 additional shares, were
issued on June 26, 1995. Per the Investment Agreement, the exercise price of
the Series A Warrants is reduced $.08 per share for each million dollars of
gross losses and allocated loss adjustment expenses in excess of $945 million
with respect to the Northridge Earthquake through December 31, 1995. As the
Company's estimate of the gross losses and loss adjustment expenses for the
Northridge Earthquake rose to $1 billion at December 31, 1995, the exercise
price of the Series A Warrants declined to $9.10 per share. The Common Stock
Warrants are generally exercisable from February 1998 to February 2007.
As part of the Investment Agreement, a 10% quota share reinsurance
agreement with an AIG affiliate applicable to each of the Company's insurance
subsidiaries' entire book of business was implemented on January 1, 1995 (see
Note 8).
64
NOTE 15. UNAUDITED QUARTERLY RESULTS
The summarized unaudited quarterly results of operations were as follows:
QUARTER ENDED
-----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(Amounts in thousands, except per share data)
1995
----
Revenues $ 270,091 $ 262,748 $ 261,093 $ 261,730
Net income (loss) $ (1,418) $ 14,611 $ 30,132 $ 26,305
Primary earnings (loss)
per common share $ (0.12) $ .18 $ .44 $ .36
Fully diluted earnings
(loss) per common
share * * $ .39 $ .33
1994
----
Revenues $ 290,599 $ 333,506 $ 280,019 $ 276,194
Net income (loss) $(339,993) $ 4,880 $(114,254) $ (48,653)
Primary earnings (loss)
per common share $ (6.61) $ .09 $ (2.22) $ (.95)
Fully diluted earnings
(loss) per common
share - - - *
* Fully diluted earnings (loss) per common share are not shown as the results
are anti-dilutive.
The quarterly earnings per share amounts do not add to annual amounts
due to the changing dilutive effect of common stock equivalents as the price
of the common stock fluctuates.
The first quarter 1995 net loss was impacted by $14.2 million in pre-tax
losses resulting from a series of severe storms as well as $6.0 million of
catastrophe reinsurance premiums related to the additional reinsurance
coverage purchased in order to provide reinsurance coverage for the declining
earthquake exposure. The second and fourth quarters of 1995 were adversely
affected by increases in the net loss for the Northridge Earthquake of
$11.7 million and $6.5 million, respectively.
The net income (loss) for all four quarters of 1994 reflects the impact
of the January 17 Northridge Earthquake, which were as follows: first
quarter, $551.3 million; second quarter, $76.5 million; third quarter, $129.8
65
million; and fourth quarter, $126.2 million. The second quarter 1994 net
income reflects approximately $50 million in realized capital gains from the
sale of investments. The third quarter 1994 net loss reflects additional
deferred revenue of $43.6 million and interest expense of $28 million related
to the Proposition 103 order directing the Company to issue refunds totaling
approximately $78.3 million, plus interest at 10% per annum from May 8, 1989
to September 30, 1994. The fourth quarter 1994 net loss reflects the reversal
of all Proposition 103 interest accrued of approximately $44 million in
accordance with a settlement with the California Department of Insurance.
NOTE 16. RESULTS OF OPERATIONS BY LINE OF BUSINESS
The following table presents premium revenue and underwriting profit
(loss) for the Company's insurance lines on a GAAP basis:
1995
----
Homeowner Personal
(Amounts in thousands) Auto Lines and Condominium Excess Liability
---------- --------------- ----------------
Gross premiums written $ 991,969 $ 69,847 $ 2,146
========== ========== ==========
Premiums earned $ 920,560 $ 42,394 $ 843
========== ========== ==========
Underwriting profit (loss) $ 103,744 $ (78,976) $ 469
========== ========== ==========
1994
----
Homeowner Personal
Auto Lines and Condominium Excess Liability
---------- --------------- ----------------
Gross premiums written $ 991,268 $ 85,088 $ 2,307
========== ========== ==========
Premiums earned $ 981,893 $ 51,166 $ 944
========== ========== ==========
Underwriting profit (loss) $ (45,850) $ (879,221) $ 997
========== ========== ==========
1993
----
Homeowner Personal
Auto Lines and Condominium Excess Liability
---------- --------------- ----------------
Gross premiums written $ 932,497 $ 99,060 $ 2,338
========== ========== ==========
Premiums earned $ 908,523 $ 80,630 $ 559
========== ========== ==========
Underwriting profit (loss) $ 23,800 $ (11,641) $ 484
========== ========== ==========
In 1995, the Homeowner and Condominium line experienced an underwriting
loss primarily as a result of first quarter weather-related losses of
$14.2 million, earthquake-related catastrophe reinsurance premiums of $24
million, Northridge Earthquake-related losses of $60 million, and an
overall decline in homeowner and
66
condominium premium volume in accordance with the order from the DOI to
discontinue writing new homeowners and condominium owners policies and
earthquake coverages. The Auto line reflects a $30 million reduction in
amounts previously set aside for Proposition 103 rebates due to the increase
in earthquake-related losses, in accordance with the order from the DOI.
In 1994, both the Auto and Homeowner and Condominium lines experienced
an underwriting loss due to the high level of claims incurred as a result of
the January 17 Northridge Earthquake and the cost of the Proposition 103
rollback order.
In 1993 , the Homeowner and Condominium line experienced an
underwriting loss primarily as a result of first quarter weather-related
losses of approximately $4.6 million, and the third quarter Southern
California fires with related net losses incurred of approximately $4.3
million and $2.6 million in assessments for the Company's share of California
Fair Plan losses. The underwriting loss also included losses of approximately
$1 million related to the 1991 Oakland, California fire.
67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Company's independent auditors on
any matters of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, or any reportable events.
PART III
--------
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information in response to Item 10 is incorporated by reference from the
Company's definitive proxy statement used in connection with the Company's
1996 Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to Item 11 is incorporated by reference from the
Company's definitive proxy statement used in connection with the Company's
1996 Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to Item 12 is incorporated by reference from the
Company's definitive proxy statement used in connection with the Company's
1996 Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to Item 13 is incorporated by reference from the
Company's definitive proxy statement used in connection with the Company's
1996 Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.
68
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED WITH THIS REPORT
(1) FINANCIAL STATEMENTS. PAGE
The following consolidated financial statements of the ----
Company are filed as part of this report:
(i) Report of independent accountants;.................. 40
(ii) Consolidated balance sheets-December 31, 1995 & 1994; 41
(iii) Consolidated statements of operations--Years ended
December 31, 1995, 1994 and 1993;................... 43
(iv) Consolidated statement of changes in stockholders'
equity--Years ended December 31, 1995, 1994 and 1993; 44
(v) Consolidated statements of cash flows--Years ended
December 31, 1995, 1994 and 1993;................... 45
(vi) Notes to consolidated financial statements.......... 47
(2) SCHEDULES
The following financial statement schedule required to be filed by
Item 8 and by paragraph (d) of Item 14 of Form 10-K is submitted
as a separate section of this report.
Schedule I - Condensed Financial Information of Registrant.... 73
Schedules II, III, IV, and VI have been omitted as all required
data is included in the Notes to Consolidated Financial
Statements.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
69
(3) EXHIBITS REQUIRED.
The following exhibits required by Item 601 of Regulation S-K and
by paragraph (c) of Item 14 of Form 10-K are listed by number
corresponding to the Exhibit Table of Item 601 of Regulation S-K.
3 Articles of Incorporation and the By-Laws as amended in the
fiscal year ended December 31, 1994.
4 A Specimen Common Stock Certificate is incorporated herein
by reference from the Registrant's Form 10-K for the fiscal
year ended December 31, 1985, in which it was included as an
exhibit.
10 The contracts listed below as 10(a) and 10(b) are
incorporated herein by reference from the Registrant's Form
10-K for the fiscal year ended December 31, 1985, and 10(c)
through 10(g) are amended or added for the fiscal year ended
December 31, 1987, 10(h) and 10(i) are for the fiscal year
ended December 31, 1988, 10(j) and 10(k) are for the fiscal
year ended December 31, 1989, 10(l) is amended for the
fiscal year ended December 31, 1990, 10(m) is amended for
the fiscal year ended December 31, 1995, 10(n) is amended
for the fiscal year ended December 31, 1996, 10(o) and 10(p)
are incorporated herein by reference from the Registrant's
Form 8-K dated October 5, 1994, 10(q) is incorporated herein
by reference from the Registrant's Form 10-K for the fiscal
year ended December 31, 1994, 10(r) is amended for the
fiscal year ended December 31, 1995, 10(s) and 10(t) are
incorporated herein by reference from the Registrant's
Form 10-Q dated November 13, 1994, 10(u) and 10(v) are
incorporated herein by reference from the Registrant's
Form 10-K for the fiscal year ended December 31, 1994, 10(w)
is amended for the fiscal year ended December 31, 1995, and
10(x) is incorporated herein by reference from the
Registrant's Form S-8 dated July 26, 1995.
10(a) First Amended Employment Agreement and
Retirement Agreement between the Company and
Louis W. Foster.
10(b) Life Insurance Agreement for key officers.
10(c) 20th Century Industries Restricted Shares Plan,
as amended.
10(d) Restricted Shares Agreement.
10(e) Split Dollar Insurance Agreement between the
Company and Stanley M. Burke, as trustee of the
1983 Foster Insurance Trust.
70
10(f) Property Reinsurance Agreement No. 7288 between
the Company and General Reinsurance Corporation.
10(g) Note payable with Bank of America.
10(h) 20th Century Industries supplemental executive
retirement plan, as amended.
10(i) Amendment and restatement of 20th Century
Industries pension plan.
10(j) Software system agreement between the Company
and Management Science America, Inc.
10(k) Employment contract for a key officer.
10(l) 20th Century Industries Savings and Security
Plan, as amended.
10(m) Property Catastrophe Reinsurance Agreement No.
P3341-1 and 2 between 20th Century Insurance
Company and/or 21st Century Casualty Company and
Guy Carpenter and Company, Inc., a reinsurance
intermediary, as amended.
10(n) PELP Reinsurance Contract, as amended.
10(o) Letter of intent between the Company and
American International Group, Inc.
10(p) Stock Option Agreement between the Company and
American International Group, Inc.
10(q) Property Catastrophe Excess of Loss Reinsurance
Agreement between 20th Century Insurance Company
and/or 21st Century Casualty Company and
National Indemnity Company.
10(r) Credit Agreement between the Company, Union Bank
and The First National Bank of Chicago, as
amended.
10(s) Investment and Strategic Alliance Agreement
between the Company and American International
Group, Inc.
10(t) Amendment and Waiver between the Company, Union
Bank and The First National Bank of Chicago.
10(u) Amendment No. 2 and Waiver between the Company,
Union Bank and The First National Bank of
Chicago.
10(v) Amendment No. 1 to Investment and Strategic
Alliance Agreement between the Company and
American Internal Group, Inc.
71
10(w) Quota Share Reinsurance Agreement between 20th
Century Insurance Company and American
International Insurance Company and 21st Century
Casualty Company and American International
Insurance Company, as amended.
10(x) 20th Century Industries Stock Option Plan for
eligible employees and nonemployee directors.
11 Computation of Earnings Per Common Share.
21 Subsidiaries of Registrant.
23 Consent of Independent Accountants.
28 Information from reports furnished to state insurance
regulatory authorities.
28(a) 20th Century Insurance Company
28(b) 21st Century Casualty Company
(b) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed for the three months ended
December 31, 1995.
72
SCHEDULE I
20TH CENTURY INDUSTRIES (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
ASSETS
DECEMBER 31,
------------------------------
1995 1994
---- ----
(Amounts in thousands, except share data)
Cash $ 8,699 $ 31,283
Accrued interest income - 499
Prepaid loan fees 7,794 6,520
Other current assets 1,485 1,701
Accounts receivable from subsidiaries 868 4,050
Investment in non-consolidated insurance
subsidiaries at equity 624,574 442,871
Other assets 14,068 12,371
-------- --------
$657,488 $499,295
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable to subsidiaries $ 322 $ 3,705
Accounts payable and accrued expenses 15,581 17,646
Bank loan payable 175,000 160,000
-------- --------
Total liabilities 190,903 181,351
-------- --------
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, outstanding 224,950 in
1995 224,950 200,000
Common stock, without par value; author-
ized 110,000,000 shares, outstanding
51,493,406 in 1995 and 51,472,471 in
1994 69,805 69,340
Common stock warrants 16,000 16,000
Unrealized investment gains (losses) of
insurance subsidiaries - net 33,508 (39,777)
Retained earnings 122,322 72,381
-------- --------
Total stockholders' equity 466,585 317,944
-------- --------
$657,488 $499,295
======== ========
See note to condensed financial statements.
73
SCHEDULE I
20TH CENTURY INDUSTRIES (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
---- ---- ----
(Amounts in thousands, except per share data)
REVENUES
Interest $ 1,390 $ 1,139 $ 2
Other 1,269 - -
--------- --------- --------
Total 2,659 1,139 2
EXPENSES
Loan interest and fees 15,897 8,348 -
General and administrative 544 685 644
--------- --------- --------
Total 16,441 9,033 644
Loss before income tax refund (13,782) (7,894) (642)
Refund of income taxes (4,994) (2,763) (225)
--------- --------- --------
Net loss before equity in net
income of insurance subsidiaries (8,788) (5,131) (417)
Net income (loss) of non-consolidated
insurance subsidiaries 78,418 (492,889) 112,972
--------- --------- --------
NET INCOME (LOSS) $ 69,630 $(498,020) $112,555
========= ========= ========
EARNINGS (LOSS) PER COMMON SHARE
Primary $ .88 $ (9.69) $ 2.19
========= ========= ========
Fully diluted $ .88 $ (9.69)
========= =========
See note to condensed financial statements.
74
SCHEDULE I
20TH CENTURY INDUSTRIES (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
---- ---- ----
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income (loss) $ 69,630 $(498,020) $ 112,555
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Net (income) loss of non-consolidated
insurance subsidiaries (78,418) 492,889 (112,972)
Reimbursement of depreciation and
amortization by non-consolidated
subsidiaries 572 550 586
Loss on sale of fixed assets 72 42 138
Effects of common stock issued
under restricted shares plan 465 492 417
Dividends received from non-consolidated
insurance subsidiaries - 16,471 33,120
Change in other assets, other
liabilities, and accrued
income taxes (4,116) (43,006) 17,285
--------- -------- ---------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES $ (11,795) $(30,582) $ 51,129
75
SCHEDULE I
20TH CENTURY INDUSTRIES (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(Continued)
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
---- ---- ----
(Amounts in thousands)
INVESTING ACTIVITIES:
Capital contributed to 21st Century
Casualty Company $ - $ (40,841) $(17,500)
Capital contributed to 20th Century
Insurance Company (30,000) (256,612) -
Purchase of equipment (1,472) (478) (946)
Proceeds from sale of equipment 306 144 291
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (31,166) (297,787) (18,155)
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 20,000 200,000 -
Proceeds from issuance of stock warrants - 16,000 -
Proceeds from bank loan 15,000 160,000 -
Dividends paid (14,623) (16,471) (32,926)
--------- --------- --------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 20,377 (359,529) (32,926)
--------- --------- --------
Net increase (decrease) in cash (22,584) 31,160 48
Cash, beginning of year 31,283 123 75
--------- --------- --------
Cash, end of year $ 8,699 $ 31,283 $ 123
========= ========= ========
Supplemental disclosures of cash flow information:
Cash paid for interest was $12,636,000, $7,277,000 and $-0- for the years ended
December 31, 1995, 1994 and 1993, respectively.
See note to condensed financial statements.
76
SCHEDULE I
20TH CENTURY INDUSTRIES (PARENT COMPANY)
NOTE TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
20th Century Industries and Subsidiaries.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
(Registrant)
Date: March 27, 1996 By: William L. Mellick
-------------- -------------------------------------
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated on the 27th of
March, 1996.
SIGNATURE TITLE
--------- -----
President and Chief Executive Officer
William L. Mellick (Principal Executive Officer)
- - ------------------------------
Senior Vice President
and Chief Financial Officer
Robert B. Tschudy (Principal Financial Officer)
- - ------------------------------
Treasurer and Assistant Secretary
Margaret Chang (Principal Accounting Officer)
- - ------------------------------
78
SIGNATURE TITLE
--------- -----
John B. Denault Chairman of the Board
- - -----------------------------
William L. Mellick Chief Executive Officer and Director
- - ------------------------------
Stanley M. Burke Director
- - -----------------------------
John B. Denault III Director
- - ------------------------------
Louis W. Foster Director
- - ------------------------------
R. Scott Foster, M.D. Director
- - ------------------------------
79