SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996 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)
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, 1997 as reported by the New York Stock
Exchange, was approximately $916,066,000.
On March 12, 1997, the registrant had outstanding 51,601,361 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 20, 1997, are
incorporated herein by reference into Part III hereof.
1
20TH CENTURY INDUSTRIES
1996 FORM 10-K ANNUAL REPORT
Table of Contents
PAGE
PART I
------
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 23
Item 3. Legal Proceedings........................................... 23
Item 4. Submission of Matters to a Vote of Security Holders......... 24
PART II
-------
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters...................................... 25
Item 6. Selected Financial Data..................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 30
Item 8. Financial Statements and Supplementary Data................ 41
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 71
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.......... 71
Item 11. Executive Compensation...................................... 71
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................... 71
Item 13. Certain Relationships and Related Transactions.............. 71
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................................... 72
Signatures.................................................. 81
2
PART I
ITEM 1. BUSINESS
GENERAL
20th Century Industries is an insurance holding company founded in 1956
and incorporated in California. 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
and incorporated in California. The Common Stock of the Company is traded on
the New York Stock Exchange under the trading symbol "TW."
The Company, through its subsidiaries, directly markets and underwrites
private passenger automobile, homeowners and personal excess liability
insurance. As a direct response writer, the Company has gained a reputation
for excellent customer service and being among the most efficient and low
cost providers of personal insurance in the markets it serves.
Historically, the Company's business has been concentrated in Southern
California, principally the greater Los Angeles and Orange County areas. In
the early 1990's, however, the Company began expanding into the San Diego and
Northern California areas. In August 1996, 20th Century Insurance Company of
Arizona ("20th of Arizona") began writing private passenger automobile
insurance in that state. 20th of Arizona is a joint venture between the
Company, which owns a 49% interest, and American International Group, Inc.
("AIG"), which owns a 51% interest. AIG currently owns the largest single
outstanding equity interest in the Company (see Note 16 of Notes to
Consolidated Financial Statements in Item 8 herein). The Company is
considering expanding into other states with large urban markets which seem
most compatible with the Company's demonstrated core competencies.
The Company began providing homeowners insurance in 1982 and condominium
insurance in 1989. Policies issued or renewed prior to July 23, 1994
included optional endorsements for earthquake coverage. In the wake of the
earthquake which occurred in the San Fernando Valley area of Southern
California on January 17, 1994 (the "Northridge Earthquake" - see discussion
in Note 15 of Notes to Consolidated Financial Statements in Item 8 herein),
the Company's writings
3
in these lines were significantly reduced in the period 1994 to 1996. In
compliance with an order by the California Department of Insurance ("DOI") in
June 1994, the Company immediately began to non-renew earthquake coverage
endorsements and to cease writing new homeowner and condominium policies.
Effective July 23, 1996, the Company began non-renewing all homeowner and
condominium policies.
In late 1996, the Company obtained permission to renew its remaining
homeowner policies effective February 15, 1997 and expects to request
authority to resume writing new homeowner policies during 1997. However,
there is no assurance this request will be granted. The statutorily required
offer of earthquake coverage on these renewals is being made by an AIG
affiliate; no additional direct earthquake exposure will be borne by the
Company. The condominium program is currently in run-off and will be fully
discontinued by July 23, 1997.
LIMITS OF INSURANCE COVERAGE
The Company offers the following insurance coverages for private passenger
automobiles: bodily injury liability, property damage, medical payments,
uninsured motorist, rental reimbursement, comprehensive and collision. Policies
are written for a six-month term. Various limits of liability are underwritten
with maximum limits of $500,000 per person and $500,000 per accident. The most
frequent bodily injury liability limits purchased are $100,000 per person and
$300,000 per accident.
The homeowners program historically utilized a replacement cost insurance
policy which covered the actual cost of rebuilding the dwelling. Contents were
covered, at replacement cost, up to the stated policy limits. In early 1997,
this policy was replaced with an extended replacement cost policy, thereby
limiting loss to 150% of the amount specified in the contract for Coverage A -
Dwelling and Other Building Structures. Underwriting guidelines provide 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 are
available. The 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
4
$250,000. Limits for personal liability coverage of $100,000, $200,000 and
$300,000 were also available.
The personal excess liability policy ("PELP") is written by 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 a minimum of $100,000 personal liability
coverage. The underlying automobile coverage must be written by the Company.
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. Quotes may be
obtained by calling the company directly at (800) 211-7283. In 1996, the
Company established a site on the Internet (http:\\www.20thCentIns.com) offering
prospective customers an additional way to request a rate quotation or obtain
other information about the Company.
20th Century was active in advertising in California's four major
metropolitan markets throughout 1996 (Los Angeles and Orange Counties, the Bay
Area, San Diego and Sacramento). Requests for automobile quotations increased
16% over the prior year while the number of vehicles for which applications were
received increased 17.2%.
The Company continues to increase penetration in its newer Sacramento and
Bay Area markets, generating approximately 80% more new business from these two
markets in 1996 than in 1995. Over 40% of all new business written in 1996 came
from outside the Los Angeles/Orange County areas.
5
UNDERWRITING AND PRICING
The regulatory system in California requires the prior approval of
insurance rates. Within this regulatory framework, the Company establishes
its automobile and homeowners 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 characteristics. The primary characteristics include
driving record, annual mileage, number of years a driver has been licensed,
where the vehicle is garaged, vehicle usage, value of the automobile and
limits and deductibles selected.
The Company is required to offer insurance to any prospect who meets the
statutory definition of a "Good Driver." 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 certain at fault
accidents.
The Company reviews many of its automobile policies prior to the time of
renewal and 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.
With respect to the homeowners renewal program starting February 15, 1997,
underwriting procedures include a review of claims and identification of changes
in circumstances that may warrant premium adjustments or cancellation of
coverage in case of a substantial increase in risk.
6
SERVICING OF BUSINESS
The Company has consistently maintained a 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 practices,
fully supported by management information systems, to improve service and
efficiency in the marketing, policy service, underwriting and claims functions.
The Company continues to adapt its technological capabilities in keeping with
its business strategies. 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. In January 1997, telephonic capacity was expanded to
include interactive voice response, which allows customers to obtain pertinent
policy information on their own, seven days a week, 6:00 am to midnight.
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 manage
loss adjustment expenses. Liability and property damage claims are handled by
specialists in each area.
The Company utilizes its legal staff to handle most aspects of claims
litigation, including trial, from offices in Brea, Ontario, Long Beach, San
Diego 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 eleven Division Service Offices in Los
Angeles, Orange, San Diego and Ventura
7
Counties as well as a new office in the San Francisco Bay Area. Each
Division Service Office is a full service center, normally 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 twelve 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 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
California. The Company agrees to accept the estimate for damages prepared by
the repair facility without the vehicle having to be 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 Company's reinspection team visits a minimum of 30% of all
repair facilities each month. The customer benefits by getting the repair
process started faster, and the repairs are guaranteed for as long as the
customer owns the vehicle. The Company benefits by not incurring the overhead
expense of a larger staff of appraisers and by negotiating repair rates it
believes are beneficial. Currently, over 25% of all damage repairs are handled
using the DRP method.
The Specialty Division is comprised of three vehicle inspection centers
located in Los Angeles and 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 approximately 100 people who are
responsible for subrogation, medical payment claims and workers' compensation
claims arising under the home-owner policy.
The Company also maintains a Special Investigations Unit with approximately
40 personnel who investigate suspected fraudulent claims. The Company believes
its efforts in this area have been responsible for saving several millions of
dollars annually.
8
The Homeowners Division processes all homeowner property claims on a
regional basis and is made up of two units of approximately fifteen employees
each. The units are located in Brea and Woodland Hills.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
The Company establishes reserves, or liabilities, at each accounting date
for losses and loss adjustment expenses arising from claims, both reported and
unreported, which have been incurred but which remain to be paid. 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 and loss adjustment expenses which include estimates of both legal and
other administrative and direct costs associated with settling incurred claims.
The reserves are estimated using actuarial techniques and the Company's own
historical loss experience and are reviewed each quarter. The effects of
inflation are implicitly considered in the actuarial estimates of liabilities
for loss and loss adjustment expenses. The Company does not report its loss and
loss adjustment expense reserves at their discounted present value.
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
9
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.
A rollforward of loss and loss adjustment expense reserves, including the
effects of reserve changes, loss payments, reinsurance and a reconciliation
between statutory reserves and GAAP reserves for each of the three years in the
period ended December 31, 1996 is presented in Note 7 to the Consolidated
Financial Statements.
The following table presents the development of loss and loss adjustment
expense reserves, net of reinsurance, for the years 1986 through 1996. The top
line of the table shows the reserves at the balance sheet date, net of
reinsurance recoverables, for each of the years indicated. The upper portion of
the table indicates the cumulative amounts paid as of subsequent year-ends 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, 1996. The decrease in the
redundancy shown in the 1994 and 1995 columns compared to prior years includes
the additional earthquake losses and loss adjustment expenses recorded
subsequent to 1994, which through December 31, 1996 have amounted to $100
million (see Note 15 of Notes to Consolidated Financial Statements).
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.
10
AS OF DECEMBER 31,
- - -----------------------------------------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ---- ---- ---- ----
Reserves for
loss and loss
adjustment expenses,
net of reinsurance $206,266 $297,853 $391,748 $472,010 $525,220 $547,098 $554,034 $574,619 $755,101
Paid (cumulative)
as of:
One year later 138,944 180,516 197,555 242,757 300,707 320,264 327,634 344,876 519,969
Two years later 187,448 238,947 271,163 328,606 391,970 401,019 403,434 423,713 635,861
Three years later 211,477 272,955 310,757 366,369 420,853 426,412 425,671 443,055
Four years later 226,550 289,901 326,495 377,980 429,791 433,642 432,086
Five years later 233,287 296,310 330,014 381,507 431,791 436,522
Six years later 235,367 297,764 330,879 382,230 432,975
Seven years later 235,510 298,098 331,433 382,108
Eight years later 235,515 298,649 331,344
Nine years later 235,813 298,583
Ten years later 235,732
Reserves re-
estimated as of:
One year later 227,848 294,504 357,220 402,706 473,974 473,209 491,048 490,166 715,637
Two years later 230,412 302,991 342,365 397,847 449,348 461,343 447,880 465,036 725,098
Three years later 237,587 304,925 340,760 389,559 442,508 440,198 438,726 453,431
Four years later 239,096 302,661 333,432 384,948 433,408 437,350 435,128
Five years later 237,528 298,764 332,100 382,331 432,370 436,929
Six years later 236,026 298,603 331,191 381,996 432,661
Seven years later 235,819 298,319 331,274 381,914
Eight years later 235,698 298,661 331,184
Nine years later 235,842 298,531
Ten years later 235,747
Redundancy
(Deficiency) $(29,481) $(678) $60,564 $90,096 $92,559 $110,169 $118,906 $121,188 $30,003
AS OF DECEMBER 31,
- - -----------------------------------------------------------
1995 1996
Reserves for
loss and loss
adjustment expenses,
net of reinsurance $552,320 $489,033
Paid (cumulative)
as of:
One year later 351,985
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Reserves re-
estimated as of:
One year later 526,730
Two years later 725,098
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Redundancy
(Deficiency) $25,590
11
The reserve for gross losses and loss adjustment expenses, as reported
in the consolidated financial statements, is recorded prior to reinsurance
and represents the accumulation for reported losses and IBNR. The table
which follows presents the development of gross losses and loss adjustment
expense reserves for calendar years 1994 through 1996. As in the ten-year
table presented net of reinsurance, 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 and it would
not be appropriate to extrapolate future development based on this table.
1994 1995 1996
---- ---- ----
Gross losses and loss adjustment
expenses, December 31 $756,243 $584,834 $543,529
Paid (cumulative) as of:
One year later 523,199 375,895
Two years later 639,870
Gross liability re-estimated as of:
end of year 756,243 584,834 543,529
One year later 719,716 559,259
Two years later 729,209
Redundancy $ 27,034 $ 25,575
OPERATING RATIOS
Combined Ratios
Underwriting profit margins are a reflection of the extent to which the
combined ratios (loss and loss adjustment expense ("LAE") ratios and
underwriting expense ratios) are less than 100%. Loss and LAE ratios are
traditionally used to interpret the underwriting experience of property and
casualty insurance companies. Losses and loss adjustment expenses are stated as
a percentage of premiums earned because losses may occur over the life of a
particular insurance policy. Underwriting expenses are stated as a percentage
of premiums written for statutory reporting purposes and as a percentage of
earned premiums for reporting under generally accepted accounting principles.
The loss and LAE ratios, underwriting expense ratios (excluding loan interest
and fees),
12
and combined ratios for the Company's subsidiaries, on a SAP and GAAP basis,
are shown in the following tables.
YEARS ENDED DECEMBER 31,
----------------------------------
COMPANYWIDE - SAP 1996 1995 1994 1993 1992
----- ----- ------ ----- -----
Loss and LAE Ratio 85.8% 88.7% 173.0% 88.0% 85.9%
Underwriting Expense Ratio 9.4 8.7 9.9 10.5 10.0
----- ----- ------ ----- -----
Combined Ratio 95.2% 97.4% 182.9% 98.5% 95.9%
----- ----- ------ ----- -----
----- ----- ------ ----- -----
YEARS ENDED DECEMBER 31,
----------------------------------
COMPANYWIDE - GAAP 1996 1995 1994 1993 1992
- - ------------------ ----- ----- ------ ----- -----
Loss and LAE Ratio 85.8% 88.4% 176.8% 87.6% 85.3%
Underwriting Expense Ratio 9.3 9.0 9.7 10.7 10.1
----- ----- ------ ----- -----
Combined Ratio 95.1% 97.4% 186.5% 98.3% 95.4%
----- ----- ------ ----- -----
----- ----- ------ ----- -----
The Northridge Earthquake contributed 85.1, 2.9 and 4.7 percentage
points on both a GAAP and SAP basis to the 1994, 1995 and 1996 combined
ratios, respectively. Weather-related claims contributed less than one
percentage point to the 1996 combined ratio and 1.5 percentage points to the
1995 combined ratio.
Premiums to Surplus Ratio
The following table shows, for the periods indicated, the Company's
statutory ratios of net premiums written to policyholders' surplus. Because
each property and casualty insurance company has different capital needs, an
"appropriate" ratio of net premiums written to policy-holders' surplus for
one company may not be the same as for another company. While there is no
statutory requirement applicable to the Company, guidelines established by
the National
13
Association of Insurance Commissioners provide that such ratio generally
should be no greater than 3 to 1 on a statutory basis.
YEARS ENDED DECEMBER 31,
-----------------------------------------------
SAP 1996 1995 1994 1993 1992
- - --- ---- ---- ---- ---- ----
(Amounts in thousands, except ratio)
Net premiums written $827,993 $958,614 $1,032,737 $1,021,902 $918,443
Policyholders' surplus $436,367 $358,474 $ 207,018 $ 582,176 $500,619
Ratio 1.9:1 2.7:1 4.9:1 1.8:1 1.8:1
The 1994 and 1995 ratios were high because of the surplus strain caused
by the Northridge Earthquake. Capital infusions in 1994 and a return to
profitable operations in 1995 resulted in improved surplus levels that
reduced the ratio below 3 to 1 in 1995 and below 2 to 1 in 1996.
INVESTMENTS AND INVESTMENT RESULTS
The Company's investment guidelines emphasize buying high-quality fixed
income investments. These guidelines, the portfolio and the investment
results are regularly reviewed by the Investment Committee of the Company's
Board of Directors. Because of the net operating loss ("NOL") carryforwards
available for tax purposes, the bulk of the Company's investment portfolio
has been invested in taxable securities. While the Company does not invest
with a view to achieving realized gains, securities are bought and sold in
order to meet the main objectives of the investment portfolio. These
objectives are to maximize after-tax investment income and total investment
returns while minimizing credit and liquidity risk. The Company currently has
designated all of its portfolio as "available-for-sale."
14
The following table summarizes investment results for the most recent five
years:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Amounts in thousands)
Average invested assets (at
cost or amortized cost;
includes cash and cash
equivalents) $1,111,396 $1,193,202 $1,259,871 $1,384,926 $1,273,168
Net investment income:
Before income taxes 73,178 81,658 84,761 97,574 94,255
After income taxes 52,038 56,597 68,629 87,915 85,442
Average annual return
on investments:
Before income taxes 6.6% 6.8% 6.7% 7.1% 7.4%
After income taxes 4.7% 4.7% 5.4% 6.3% 6.7%
Net realized investment
gains after income taxes 4,736 6,634 40,010 10,874 7,589
Net increase (decrease) in un-
realized gains on fixed
maturity investments
after income taxes (30,688) 73,286 (134,660) 39,863 12,832
The decline in the investment portfolio since 1993 resulted largely from
the need to sell investments to generate cash to cover the severe losses and
other ongoing expenses resulting from the Northridge Earthquake. The declining
return on investments is a result of the sale, maturity or early redemption of
older securities with high yields and re-investment in securities with
significantly lower current yields as well as general market conditions. In
addition, in 1994 and 1995, a greater portion of the portfolio was invested in
commercial paper which yielded a lower return than that earned on the fixed
maturity portion.
15
The following table sets forth the composition of the Company's
investments and cash and cash equivalents at the dates indicated.
DECEMBER 31,
----------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Amortized Fair Amortized Fair Amortized Fair
Type of Security Cost Value Cost Value Cost Value
- - ---------------- ---------- ---------- ---------- ---------- ----------- ----------
Fixed maturities:
U.S. Treasury secur-
itites and obliga-
tions of U.S. Govern-
ment corporations
and agencies $ 11,906 $ 11,885 $ 68,283 $ 69,711 $ 240,690 $ 232,678
Obligations of
states and politi-
cal sub-divisions 287,277 292,127 219,026 222,844 292,723 261,614
Public utilities 164,509 163,674 182,828 191,224 147,241 139,173
Corporate securities 596,346 596,017 604,884 641,769 322,177 307,941
---------- ---------- ---------- ---------- ---------- ----------
Total fixed maturities 1,060,038 1,063,703 1,075,021 1,125,548 1,002,831 941,406
Common stock 250 925 539 1,564 539 768
---------- ---------- ---------- ---------- ---------- ----------
Total investments 1,060,288 1,064,628 1,075,560 1,127,112 1,003,370 942,174
---------- ---------- ---------- ---------- ---------- ----------
Cash and cash
equivalents 18,078 18,078 50,609 50,609 249,834 249,834
---------- ---------- ---------- ---------- ---------- ----------
Total investments
and cash and cash
equivalents $1,078,366 $1,082,706 $1,126,169 $1,177,721 $1,253,204 $1,192,008
----------- ----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ----------- ---------- ----------
16
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 significant amounts of money on their insurance premiums. As a
result, the Company is able to maintain policy renewal rates which it believes
are above industry averages.
By selling its products directly to the insured, the Company has eliminated
agent and broker commissions. The Company 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 markets 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 and to reduce its
overall risk level. A reinsurance transaction 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
17
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.
Each of the Company's insurance subsidiaries have entered into a five-year
quota share reinsurance agreement with an AIG affiliate covering all ongoing
lines of business. Under this contract, which attaches to the Company's
retained risks net of all other reinsurance, 10% of each subsidiary's premiums
earned and losses and loss adjustment expenses 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 the actual underwriting
expense ratio. The ceding commission rate for 1996 was 9.13%.
During 1996, the Company's insurance subsidiaries entered into a 100% quota
share reinsurance agreement with F&G Re and Risk Capital Re covering the
homeowner and condominium lines of business. This agreement covers, for a one-
year policy term, all covered business in force as of July 1, 1996 plus renewal
business attaching between July 1, 1996 and July 23, 1996, effectively
terminating with the expiration of the underlying one-year policies. Under this
contract, the Company ceded all of its homeowner and condominium unearned
premiums as of June 30, 1996 to these companies, a total of $33.3 million.
Additionally, 100% of written premiums and incurred losses and allocated loss
adjustment expenses subsequent to June 30, 1996 are ceded under this contract.
The Company's insurance subsidiaries earn a commission on ceded premiums based
on a sliding scale dependent on the incurred loss ratio. In 1996, the Company
earned commissions at a rate of 15.8%. Homeowner policies renewed February 15,
1997 and subsequent are not covered under this contract; the Company expects to
have a catastrophe reinsurance program in place in the second quarter of 1997 to
cover its renewed homeowner policies.
The Company has a quota share reinsurance treaty for the PELP whereby 60%
of premiums and losses are ceded to the reinsurer. After the effect of the 10%
quota share treaty with AIG, the Company effectively retains 36% of the risk for
this line.
18
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, such as:
- Licensing of insurance companies and agents
- Prior approval of rates, rules and forms
- Standards of solvency
- Nature of, and limitations on, insurance company investments
- Periodic examinations of the affairs of insurers
- Annual and other periodic reports of the financial condition and
results of operations of insurers
- Establishment of accounting rules
- Issuance of securities by insurers
- Payment of dividends
Regulation by the DOI is designed principally for the benefit of
policyholders. The DOI conducts periodic examinations of the Company's
insurance subsidiaries.
In June 1994, the DOI ordered the Company to immediately begin non-renewing
earthquake coverage endorsements and to cease writing new homeowner and
condominium policies and, effective July 23, 1996, to begin non-renewing all its
remaining homeowner and condominium policies. On December 23, 1996, the DOI
amended its order to permit the Company to resume renewing its remaining
homeowner policies effective February 15, 1997, with the statutorily required
offer of earthquake coverage to be made by an affiliate of AIG. The Company
plans to seek DOI approval to resume writing new homeowner policies during 1997
but there is no assurance the DOI will do so. Inability to write new homeowner
policies hinders the Company's efforts to sell automobile insurance to certain
consumers who prefer the convenience of having both coverages provided by the
same insurer.
19
As discussed in Note 14 of the Notes to Consolidated Financial Statements
(in Item 8 herein), in January 1995, the Company and the DOI reached a
settlement concerning the Company's Proposition 103 rate rollback liability.
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. In 1996, the State of California enacted two new laws which have the
potential of impacting the auto insurance industry: Proposition 213 and Assembly
Bill 650 ("AB 650").
Ballot Proposition 213 was approved by an overwhelming majority of
California voters on November 5, 1996. This proposition bars certain drivers
and most uninsured drivers from recovering non-economic damages for injuries
they suffer in vehicle accidents. In December, a lawsuit challenging the
constitutionality of the proposition was filed and a preliminary injunction
barring the enforcement of Proposition 213 was sought.
AB 650, which requires proof of financial responsibility for vehicle
registration renewals, became effective January 1, 1997. It also restores the
right of peace officers to cite drivers for failing to show proof of automobile
liability insurance when stopped for a routine traffic violation. The courts
may impound, under certain conditions, the cars of drivers who are not in
compliance with AB 650, and substantial fines are imposed for violation of
financial responsibility provisions. The Company expects that AB 650 will cause
an increase in the number of policies for previously uninsured motorists and has
seen an increase in the first two months of 1997; however, the persistency rate
of these policies is not known. Previously uninsured motorists, as a whole,
have historically resulted in underwriting losses. Approximately 6% of 1996
gross automobile premiums were from previously uninsured motorists.
Proposition 213 is expected to impact bodily injury loss trends favorably.
However, that may be offset by the adverse effects of previously uninsured
drivers entering the system in large numbers as a result of AB 650.
20
Meanwhile, the DOI promulgated final regulations in the third quarter of
1996 on the implementation of Proposition 103 and ordered all California
personal auto insurance providers to file new class rating plans by February 18,
1997. Subsequent to the issuance of those regulations, the DOI announced that
these new rating plans must consider the estimated favorable impact of
Proposition 213. In response, the rating plan submitted by the Company would
represent a 3.3% rate level reduction, which considers a variety of factors
including the savings estimated to be attributable to Proposition 213. Because
of the time consuming nature of California's prior approval process and the
possibility of further delays due to the constitutional challenge over
Proposition 213, the Company does not expect its newly filed class rating plan
to be approved before September 1, 1997 at the earliest.
As of this date, there is no legislation pending for 1997 which the Company
believes is likely to materially impact its operations.
The Company is a member of industry organizations which may advocate
legislative and initiative proposals and which provide financial support to
officeholders and candidates for California statewide public offices. The
Company also makes financial contributions to those officeholders and candidates
who, in the opinion of management, have a favorable understanding of the needs
of the property and casualty insurance industry. In 1996, these contributions
were approximately $216,000. The Company believes that such contributions 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.
HOLDING COMPANY ACT
The Company's subsidiaries are also 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"). Certain
transactions 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 extensions of credit, and investments made within the immediately preceding
12 months involving in the net aggregate, more than the lesser of (i) 5% of the
Company's admitted assets or
21
(ii) 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 (i) 10% of the insurance company's policyholders' surplus as
of the preceding December 31 or (ii) the insurance company's net income for
the preceding calendar year. The California code further 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.
NON-VOLUNTARY BUSINESS
Automobile liability insurers in California are required to participate in
the California Automobile Assigned Risk Plan ("CAARP"). Drivers whose
driving records or other relevant characteristics make them difficult to
insure in the voluntary market may be eligible to apply to CAARP for
placement as "assigned risks." The number of assignments for each insurer is
based on the total applications received by the plan and the insurer's market
share. It is expected that AB 650 will increase the number of drivers applying
to CAARP and thus the Company's number of assignments. The CAARP assignments
have historically produced underwriting losses and, as of December 31, 1996,
represented less than 1% of gross premiums written.
Insurers offering homeowners insurance in California are required to
participate in the California Fair Plan ("Fair Plan"). Fair Plan is a state
administered pool of difficult to insure homeowners. Each participating insurer
is allocated a percentage of the total premiums written and losses incurred by
the pool according to its share of total homeowners direct premiums written in
the state.
EMPLOYEES
The Company had 2,261 full and part-time employees at December 31, 1996.
The Company provides medical, pension and 401(k) savings plan benefits to
eligible employees according to the
22
provisions of each plan. The Company believes that its relationship with its
employees is excellent, and employee turnover is generally very low.
ITEM 2. PROPERTIES
The Company leases its Home Office building in Woodland Hills,
California, 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 24 other locations throughout
California. The Company anticipates no difficulty in extending these leases
or obtaining comparable office facilities in suitable locations.
ITEM 3. LEGAL PROCEEDINGS
On January 16, 1996, a shareholder derivative lawsuit, relating to
damages incurred in the Northridge Earthquake, was filed in Los Angeles
Superior Court against various current and prior directors and officers of
the Company. The Company was named in the lawsuit as a nominal defendant
only. Upon completion of the investigation by separate legal counsel for
both the Company and the directors and officers, and after notice to the
Company's shareholders, the litigation was resolved with the final court
approval entered on November 18, 1996. The settlement included payment of
legal fees to the plaintiff attorneys by the Company's D&O insurer and the
institution of certain remedial acts by the Company. No direct financial
consideration was provided by the Company. Each director and officer was
found to have acted in good faith and in the best interests of the Company.
In the normal course of business, the Company is named as a defendant in
lawsuits related to claim issues. Some of the actions request exemplary or
punitive damages. These actions are vigorously defended unless a reasonable
settlement appears appropriate.
23
Currently included in this class of litigation are certain actions that
arise out of the Northridge Earthquake. It is believed that a majority of
these actions were filed to resolve claims involving disputed damages or to
contest the applicability of the statute of limitations. One lawsuit,
entitled ESTRADA V. 20TH CENTURY INSURANCE COMPANY, was filed in Los Angeles
Superior Court and, as amended in January 1997, seeks to convert an
individual action to a class action. According to the current Amended
Complaint, the potential class involves those insureds whose claims for
damages from the Northridge Earthquake were first reported to the Company on
or after January 18, 1995 and then denied as untimely. It is too soon to
predict with any accuracy whether the class will ultimately be certified.
While any litigation has an element of uncertainty, the Company does not
believe that the ultimate outcome of any pending actions will have a material
effect on its consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
24
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
---- ---
1996
Fourth Quarter 18-5/8 14-5/8
Third Quarter 17-7/8 14-1/2
Second Quarter 17-3/8 15-3/8
First Quarter 20-5/8 15-3/4
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
(b) HOLDERS OF COMMON STOCK
The approximate number of record holders of the common stock on December 31,
1996 was 1,170.
(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. 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
25
were paid on common shares in 1995. In the fourth quarter of 1996, the
Company paid a dividend on common shares at the rate of $.05 per share, which
totaled $2,576,000. 20th Century Industries paid cash dividends on preferred
shares of $14,623,000 and in-kind dividends of $4,950,000 in 1995 and cash
dividends of $20,245,500 in 1996.
The parent company is dependent upon dividends from its subsidiaries to
service debt and pay dividends to its stockholders. Based on 1996 operating
results and earned surplus as of December 31, 1996, the Company believes
dividends in 1997 will not require extraordinary regulatory approval.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of the end
of and for each of the years in the five-year period ended December 31, 1996
are derived from the consolidated financial statements of 20th Century
Industries and its subsidiaries. The consolidated financial statements as of
December 31, 1996 and 1995 and for each of the years in the three-year period
ended December 31, 1996 are included elsewhere in this Form 10-K.
26
All dollar amounts set forth in the following tables are in thousands, except
per share data.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Operations Data:
Net premiums earned $ 856,628 $ 963,797 $1,034,003 $ 989,712 $ 896,353
Net investment income 73,178 81,658 84,761 97,574 94,255
Realized investment gains 7,287 10,207 61,554 16,729 11,498
---------- ---------- ---------- ---------- -----------
Total Revenues 937,093 1,055,662 1,180,318 1,104,015 1,002,106
Net losses and loss
adjustment expenses 734,735 851,602 1,828,346 867,451 764,374
Policy acquisition costs 38,175 38,647 43,409 48,375 41,996
Other operating expenses 41,496 48,311 57,198 57,769 48,486
Proposition 103 expense -- -- 29,124 3,474 3,474
Loan interest and fees expense 14,260 15,897 8,348 -- --
---------- ---------- ---------- ---------- -----------
Total Expenses 828,666 954,457 1,966,425 977,069 858,330
---------- ---------- ---------- ---------- -----------
Income (loss) before
federal income taxes
and cumulative effect
of change in accounting
for income taxes 108,427 101,205 (786,107) 126,946 143,776
Federal income taxes (benefits) 34,370 31,575 (288,087) 18,350 26,309
---------- ---------- ---------- ---------- -----------
Income (loss) before cumulative
effect of change in accounting
for income taxes 74,057 69,630 (498,020) 108,596 117,467
Cumulative effect of change
in accounting for income taxes -- -- -- 3,959 --
---------- ---------- ---------- ---------- -----------
Net Income (Loss) $ 74,057 $ 69,630 $ (498,020) $ 112,555 $ 117,467
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
27
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Per Share Data:
Primary -
Before cumulative effect
of change in accounting
for income taxes $ .92 $ .88 $ (9.69) $ 2.11 $ 2.29
Cumulative effect of
change in accounting
for income taxes - - - .08 -
------- ------- --------- -------- --------
Net Income (Loss) $ .92 $ .88 $ (9.69) $ 2.19 $ 2.29
------- ------- --------- -------- --------
------- ------- --------- -------- --------
Fully Diluted -
Net Income* $ N/A $ N/A $ N/A
------- ------- ---------
------- ------- ---------
Dividends paid per
common share $ .05 $ - $ .32 $ .64 $ .52
------- ------- --------- -------- --------
------- ------- --------- -------- --------
* Fully diluted earnings per share are not presented as the results would be
antidilutive.
The Company's financial statements include increases in earthquake reserves
in 1996 of $40 million and in 1995 of $60 million offset partially by a $32
million reduction in the Prop. 103 liability, and in 1994, earthquake-related
losses and expenses of $844.1 million. On an after-tax basis, these additional
charges reduced primary earnings (loss) per share by $0.44, $0.32 and $(10.68)
for 1996, 1995 and 1994, respectively.
28
DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Balance Sheet Data:
Total investments $1,064,268 $1,127,112 $ 942,174 $ 1,422,555 $ 1,307,031
Total assets 1,513,755 1,608,886 1,702,810 1,644,670 1,498,330
Unpaid losses and loss
adjustment expenses 543,529 584,834 756,243 577,490 554,541
Unearned premiums 231,141 288,927 298,519 299,941 267,556
Bank loan payable 175,000 175,000 160,000 - -
Claims checks payable 36,445 49,306 70,725 41,535 39,329
Stockholders' equity 487,707 466,585 317,944 655,209 575,674
Book value per common share $ 5.10 $ 4.69 $ 2.29 $ 12.74 $ 11.19
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's financial condition continued to improve in 1996 as shown in
the following table:
1996 1995 1994
---- ---- ----
(Amounts in thousands except per share data)
Adjusted operating cash flow (1) $ 931 $ (154,645) $ (605,151)
Book value per share $ 5.10 $ 4.69 $ 2.29
Debt to equity ratio (2) 0.36 0.40 0.45
Statutory surplus of
insurance subsidiaries $ 436,367 $ 358,474 $ 207,018
Net written premiums to
surplus ratio 1.9:1 2.7:1 4.9:1
A.M. Best rating B+ B- B-
(1) For 1996, excludes $29.2 million, net of commissions, in homeowner and
condominium unearned premiums ceded to reinsurers in July 1996.
(2) Equity adjusted to exclude unrealized investment gains or losses.
As indicated in the Notes to Consolidated Financial Statements, the 1994
Northridge Earthquake had a significant adverse effect which required a variety
of measures to be taken to improve the Company's financial condition. In
particular, the statutory surplus strain caused by the earthquake was alleviated
by capital infusions funded through borrowings and the issuance of equity
securities (see Notes 8 and 16 of Notes to Consolidated Financial Statements),
and by suspending dividends from the insurance subsidiaries to the parent and
from the parent to common shareholders. Additionally, the Company's direct
exposure to future earthquake coverage losses was completely eliminated in
1995. The Company's only significant remaining catastrophe exposure is in the
homeowner and condominium lines, primarily relating to potential wild fires and
fire following an earthquake event, which remained adequately protected by
reinsurance.
30
The number of vehicles in force began growing again in the fourth quarter
of 1996 for the first time in nine quarters. Meanwhile, the Company did not
need to resort to workforce cutbacks or layoffs during this particularly
challenging time to maintain its low expense ratio. As a result, the Company's
most important resources, its dedicated and experienced employees, are in a
unique position to capitalize on the opportunities for growth and improved
customer service that lie ahead.
RESULTS OF OPERATIONS
Units in Force
Units in force for the Company's insurance programs as of December 31
were as follows:
1996 1995 1994
---- ---- ----
Private Passenger Automobile
(Number of vehicles) 1,011,609 1,061,007 1,132,605
Homeowner and Condominium
(Number of policies) 89,010 175,338 206,167
Personal Excess Liability (PELP)
(Number of policies) 10,223 10,499 11,072
--------- --------- ---------
Total 1,110,842 1,246,844 1,349,844
--------- --------- ---------
--------- --------- ---------
The Company maintained average annual unit growth of over 10% during the
ten years prior to 1994. That growth trend was interrupted for nine quarters
starting with the third quarter of 1994, when the surplus strain created by
the Northridge Earthquake caused the Company to reduce its insured exposures.
This was accomplished by a combination of: cessation of advertising and
marketing for new policies in the first quarter of 1994; cessation of
writing new homeowner and condominium policies in June 1994; the non-renewal
of all existing earthquake coverages in July 1994; and, rate increases of 17%
in the homeowner line effective August 1, 1994 and 6% and 3.7% in the
automobile line effective October 7, 1994 and June 15, 1995, respectively.
Information about more recent developments relating to units in force within
each major coverage line follows.
31
PRIVATE PASSENGER AUTOMOBILE. In 1996, with its financial condition
restored substantially to pre-earthquake levels, the Company was once again able
to focus on the growth of its core automobile business. The Company, in
connection with an aggressive marketing campaign and declining trends in loss
costs and frequency, lowered overall rate levels approximately 11.5% in 1996
(3.2% effective March 15, 1996 in connection with a new auto rating plan; 2.3%
effective June 1, 1996 to implement a new persistency discount; and 6% effective
September 1, 1996 in response to continuing favorable loss trends). These
actions helped to achieve increases in new business production and the rate of
renewals and led to a resumption of growth in the number of vehicles in force
during the fourth quarter of 1996. Vehicles in force grew by 4,940 in the
fourth quarter of 1996, and were up 16,224 in the first two months of 1997,
compared to declines in the comparable year-ago periods of 20,039 and 13,144,
respectively.
Recent legislative changes could cause increases in the number of policies
issued to previously uninsured motorists or drivers eligible to participate in
the California Assigned Risk Plan ("CAARP"). Because both categories
historically have been characterized by underwriting losses, growth in those
areas would dampen future underwriting results; in view of the current political
and regulatory climate, it is difficult to envision that premium rates for such
risk categories could be adjusted to adequate levels in the near future.
Vehicles in force relating to previously uninsured drivers stood at 59,013,
68,256 and 73,518 at December 31, 1996, 1995 and 1994, respectively. Vehicles
in force for this segment of the auto line rose 1,619 (2.7%) in the first two
months of 1997. Vehicles in force for the Assigned Risk segment were 6,847,
8,204 and 7,285 as of December 31, 1996, 1995 and 1994, respectively. In the
first two months of 1997, Assigned Risk vehicles increased by 1,501 units
(21.9%), bringing them generally back to the 1995 level. It is too early to
tell whether these rates of growth will continue.
HOMEOWNER AND CONDOMINIUM. On December 23, 1996, the DOI amended its
previous order to permit the Company to begin renewing homeowner policies
effective February 15, 1997. At that time approximately 68,000 homeowner
policies remained in force. Those renewals will be subject to an overall 6% rate
increase effective April 1, 1997. Unless the Company is granted permission to
resume writing new homeowner policies, the impact of this line on future
underwriting results is likely to remain insignificant.
32
PELP. The penetration of this coverage has averaged about 1% of the
vehicles in force during the three years ended December 31, 1996, which is not
expected to change significantly in 1997.
Underwriting Results
Premium revenue and underwriting results for the Company's insurance
programs follow. To facilitate comparability, the effects of the earthquake
coverage and the Proposition 103 settlement have been isolated from the core
business in the table below.
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Gross Premiums Written
Automobile $ 892,287 $ 991,969 $ 991,268
Homeowner and Condominium - excluding
effects of Earthquake and Prop. 103 34,875 69,468 74,004
Personal Excess Liability 2,114 2,146 2,307
---------- ---------- ----------
Subtotal Core Business 929,276 1,063,583 1,067,579
Earthquake and Prop. 103 567 379 11,084
---------- ---------- ----------
Total $ 929,843 $1,063,962 $1,078,663
---------- ---------- ----------
---------- ---------- ----------
Net Premiums Earned
Automobile $ 831,963 $ 920,560 $ 981,893
Homeowner and Condominium - excluding
effects of Earthquake and Prop. 103 23,872 62,890 75,016
Personal Excess Liability 772 843 944
---------- ---------- ----------
Subtotal Core Business 856,607 984,293 1,057,853
Earthquake and Prop. 103 21 (20,496) (23,850)
---------- ---------- ----------
Total $ 856,628 $ 963,797 $1,034,003
---------- ---------- ----------
---------- ---------- ----------
33
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Underwriting profit (loss)
Automobile-excluding the
effects of Earthquake and Prop. 103 $ 81,010 $ 73,755 $ 11,261
Homeowner and Condominium - excluding
effects of Earthquake and Prop. 103 (1,394) (438) 337
Personal Excess Liability - excluding the
effects of Earthquake and Prop. 103 917 418 1,120
-------- -------- ---------
Subtotal Core Business 80,533 73,735 12,718
Earthquake and Prop 103 (38,311) (48,498) (936,792)
-------- -------- ---------
Total $ 42,222 $ 25,237 $(924,074)
-------- -------- ---------
-------- -------- ---------
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---- ---- ----
CORE BUSINESS
- - -------------
Loss and Loss Adjustment Expense Ratio 81.3% 83.7% 89.0%
Underwriting Expense Ratio 9.3 8.8 9.8
-------- -------- --------
Combined Ratio 90.6% 92.5% 98.8%
-------- -------- --------
-------- -------- --------
COMPANY TOTALS
- - --------------
Loss and Loss Adjustment Expense Ratio 85.8% 88.4% 176.8%
Underwriting Expense Ratio 9.3 9.0 9.7
-------- -------- --------
Combined Ratio 95.1% 97.4% 186.5%
-------- -------- --------
-------- -------- --------
Automobile
The auto line experienced an $81 million underwriting profit in 1996,
which included an $8 million pre-tax charge for weather-related claims in the
fourth quarter. These results compared favorably to profits in 1995 and 1994
of $73.8 million and $10.1 million, respectively, as adjusted for the effects
of the earthquake and Proposition 103. The 1996 increase in underwriting
profit primarily reflects favorable loss trends while the 1995 increase was
mainly due to the 6% rate increase implemented in October 1994 and the 3.7%
increase implemented in June 1995.
34
Gross written premiums in 1996 decreased 10% from 1995 reflective of the
4.6% reduction in insured units and, to a lesser extent, the effect of the
three premium rate reductions implemented in 1996 (a total reduction of
11.5%). The impact on gross written premiums of the 1996 rate reductions
will not be fully felt until the end of the first quarter 1997, six months
after the latest reduction was implemented. Net earned premiums also
declined in 1995 reflecting both a reduction in insured vehicles and the
impact of the quota share treaty with the AIG affiliate.
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. These drivers have produced automobile underwriting losses of
$15,168,000 in 1996 compared to $26,286,000 in 1995 and $31,134,000 in 1994.
The sharp decline in losses in 1996 is reflective of the continuing effect of
the implementation of 1995 premium rate increases as well as an overall
decline in the number of these vehicles insured. The 1996 combined ratio for
this segment of the business was 129.7%. compared to 143.9% in 1995 and
155.3% in 1994.
Overall automobile underwriting results are also affected by Assigned
Risk. Underwriting losses for Assigned Risk business were $102,000 in 1996,
compared to $3,082,000 in 1995 and $3,800,000 in 1994. Combined ratios for
this business for the same periods were 101.1%, 126.7% and 137.6%,
respectively. The decrease in underwriting losses in 1996 was primarily due
to a 16.5% drop in vehicles in force since 1995 coupled with the effects of a
5.2% rate increase implemented in June 1995. The future effect of the
Assigned Risk plan on the Company cannot be predicted because it depends on
the ability of the state-administered plan to achieve and maintain an
adequate rate level.
Homeowner and Condominium - Excluding Earthquake and Proposition 103 Settlement
Underwriting results for these programs are subject to variability
caused by weather-related claims and by infrequent disasters. In 1996, no
significant losses were incurred. In 1995, the
35
underwriting loss for this line included first quarter weather-related losses
of $14.2 million and an overall decline in homeowner and condominium premium
volume.
The Company has maintained reinsurance programs to provide coverage
through the planned run-off period of its remaining homeowner policies.
Effective July 1996, the Company entered into a 100% quota share reinsurance
agreement with F&G Re and Risk Capital Re on its remaining homeowners book.
These companies assumed the total liability for related unearned premium
reserves at June 30, 1996 of $33.3 million in exchange for cash payment by
the Company. The Company received commission on the transfer of
approximately $4.2 million, or 12.5%. The total commission rate per the
agreement is subject to ultimate loss and expense ratios experienced, and is
not to exceed 22.5% or to be less than 5.0%.
The 100% quota share agreement covers all written exposures on homeowner
policies renewing on or before July 23, 1996 through the end of their
one-year policy term. These policies do not cover earthquake losses, and the
Company's exposure to fire following an earthquake on these policies is
covered by the agreement. For homeowner policies renewing on and after
February 15, 1997, the Company has no exposure to earthquake losses. As the
number of homeowner policy renewals increase after February 15, 1997, the
Company intends to reduce its exposure to other losses on this line, as
appropriate, through reinsurance. The Company had maintained separate
catastrophe coverage on these lines which expired in June, 1996. Written
premiums ceded for these lines in 1996 totaled $10.7 million (excluding the
$33.3 million portfolio transfer of unearned premium liabilities under the
100% quota share reinsurance agreement), compared to $36.3 million in 1995
and $56.5 million in 1994.
Personal Excess Liability
The personal excess liability program has remained stable over the
three-year period ended December 31, 1996 producing approximately $2 million
in gross written premiums each year. Underwriting profits can vary
significantly with the number of claims which occur infrequently. The
results of this line are considered largely immaterial compared to the
overall results of the Company.
36
Earthquake and Proposition 103
Although the Company did not write new or renewal earthquake premiums in
1995 or 1996, the Company assumes a small amount of earthquake premium from
the California Fair Plan, a state administered pool of difficult to insure
risks in which insurers are required to participate in proportion to their
share of direct written homeowners coverage in the state. The negative
premiums earned for the Earthquake and Proposition 103 in 1995 and 1994 are
due to the large amounts of reinsurance purchased, primarily in 1994, to
protect the Company until the earthquake endorsements expired in July 1995.
Policy Acquisition and General Operating Expenses
The Company's policy acquisition and general operating expense ratio
continues to be among the most competitive in the industry. The ratio of
underwriting expenses (excluding loan interest and fees) to earned premiums
was 9.3% in 1996, 9.0% in 1995 and 9.7% in 1994. The decline in the ratio
from 1994 to 1996 reflects the impact of the ceding commission earned on the
quota share agreements with an affiliate of AIG and, in 1996, with F&G Re and
Risk Capital Re. Additionally, there was a reduction in general operating
expenses due to the decline in business as well as cost efficiencies. The
Company believes that its ability to write and administer its business in a
cost efficient manner will enable it to regain and maintain price leadership
in the industry and provide for future growth and profitability.
Investment Income
Net pre-tax investment income was $73,178,000 in 1996 compared to
$81,658,000 in 1995 and $84,761,000 in 1994. Average invested assets
decreased 6.9% in 1996, compared to decreases of 5.3% and 9.0% in 1995 and
1994, respectively. The decline in invested assets is the result of the
Company's sale of these investments to meet the payment requirements of both
developing earthquake losses and reinsurance premiums. The average annual
pre-tax yield on invested assets has remained relatively stable over the past
three years; the average yield was 6.6% in 1996, 6.8% in 1995 and 6.7% in
1994.
37
Realized capital gains on the sales of investments have declined over
the past three years, generally reflective of a change in the mix of taxable
versus non-taxable securities held and an overall decrease in the amount of
investments needed to be sold to cover losses and loss adjustment expenses.
As of December 31, 1996, the Company had a net unrealized gain on fixed
maturity investments of $3,665,000 compared to $50,527,000 in 1995 and an
unrealized loss of $(61,425,000) in 1994. 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. The decrease in unrealized
gains between 1995 and 1996 resulted largely from a declining bond market
coupled with an overall decline in invested assets. In 1994, the Company
sold practically all appreciated fixed maturity investments to cover
earthquake loss payments.
Of the Company's total investments, $265,163,000 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,
1996, and the portfolio contained approximately 75% taxable instruments.
Liquidity and Capital Resources
Loss and loss adjustment 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. Additional
cash requirements include servicing the bank debt and paying the quarterly
dividend on preferred shares of $5,061,500. With the anticipated growth of
its core auto business and continued settlement of remaining earthquake
losses, the Company expects that future cash flows from operations will be
sufficient to fund future expenditures. The Company has historically written
its core businesses at an underwriting profit and thus each premium dollar
produces positive cash flow. A significant part of the decline in cash flow
from operations in 1995 and 1996 is due to the decline in the size of the net
book of business during those periods. This
38
decline would decrease cash flow, even without consideration of Earthquake
losses, until the patterns of cash inflows (premiums) and outflows (claims)
reach equilibrium.
In addition, in 1996 approximately $29.2 million of the $32.5 million
net decrease in cash and cash equivalents was related to the portfolio
transfer of unearned premiums on homeowners business. Cash flows from
operations in 1995 and 1994 were not sufficient to fund underwriting
operations of the Company due to losses from the Northridge Earthquake. In
1994, the Company paid for these 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 proceeds of $20 million.
Funds required by 20th Century Industries to pay dividends and meet its
debt obligations are provided by the insurance subsidiaries. Information
regarding the Company's debt service obligation is included in Note 8 to the
Notes to Consolidated Financial Statements. The ability of the insurance
subsidiaries to pay dividends to the holding company is regulated by state
law. Based on the operating results in 1995 and the favorable ratio of
premiums to surplus, the Company was able to resume normal dividends from the
insurance subsidiaries in 1996 to service the parent's debt and preferred
dividend requirements. Based upon 1996 operating results and earned surplus
as of December 31, 1996, the Company believes dividends in 1997 will not
require extraordinary regulatory approval.
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
utilized, 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")
39
formula in their annual statements. The RBC 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 exceeded their RBC
statutory surplus standards by considerable margin as of December 31, 1996.
To the extent that the subsidiaries would fall below prescribed levels of
surplus, it would be the parent company's intention to infuse necessary
capital to support that entity.
Home Office Lease
The Company leases its Home Office building in Woodland Hills,
California, 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.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
20th Century Industries
We have audited the accompanying consolidated balance sheets of 20th
Century Industries and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note 2 to the financial statements, in 1994 the Company
changed its method of accounting for investments.
ERNST & YOUNG LLP
Los Angeles, California
February 19, 1997
41
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
(Amounts in thousands)
Investments, available for sale, at fair value:
Fixed maturities $1,063,703 $1,125,548
Equity securities 925 1,564
---------- ----------
Total investments - Note 3 1,064,628 1,127,112
Cash and cash equivalents 18,078 50,609
Accrued investment income 18,549 19,862
Premiums receivable 71,308 90,835
Reinsurance receivables and recoverables 79,183 48,314
Prepaid reinsurance premiums 33,020 28,823
Deferred income taxes - Note 5 190,857 206,230
Deferred policy acquisition costs - Note 4 9,127 10,481
Other assets 29,005 26,620
---------- ----------
$1,513,755 $1,608,886
---------- ----------
---------- ----------
See accompanying notes to financial statements.
42
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITY AND STOCKHOLDERS' EQUITY
DECEMBER 31,
-----------------------------------------
1996 1995
------------------- --------------------
(Amounts in thousands, except share data)
Unpaid losses and loss adjustment expenses - Note 7 $ 543,529 $ 584,834
Unearned premiums 231,141 288,927
Bank loan payable - Note 8 175,000 175,000
Claims checks payable 36,445 49,306
Reinsurance payable 19,730 23,176
Other liabilities 20,203 21,058
---------- ----------
Total liabilities 1,026,048 1,142,301
Commitments and Contingencies - Notes 10 and 13
Stockholders' equity - Notes 11 and 16
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 shares - Note 16 224,950 224,950
Common stock without par value; authorized
110,000,000 shares, outstanding 51,520,006
in 1996 and 51,493,406 in 1995 70,263 69,805
Common stock warrants - Note 16 16,000 16,000
Unrealized investment gains, net - Note 3 2,820 33,508
Retained earnings 173,674 122,322
---------- ----------
Total stockholders' equity 487,707 466,585
---------- ----------
$1,513,755 $1,608,886
---------- ----------
---------- ----------
See accompanying notes to financial statements.
43
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands, except per share data)
REVENUES
Net premiums earned - Note 9 $ 856,628 $ 963,797 $ 1,034,003
Net investment income - Note 3 73,178 81,658 84,761
Realized investment gains - Note 3 7,287 10,207 61,554
--------- ---------- -----------
937,093 1,055,662 1,180,318
LOSSES AND EXPENSES
Net losses and loss adjustment
expenses - Note 7 734,735 851,602 1,828,346
Policy acquisition costs - Note 4 38,175 38,647 43,409
Other operating expenses 41,496 48,311 57,198
Proposition 103 expense - Note 14 -- -- 29,124
Loan interest and fees expense - Note 8 14,260 15,897 8,348
--------- ---------- -----------
828,666 954,457 1,966,425
--------- ---------- -----------
Income (loss) before federal
income taxes 108,427 101,205 (786,107)
Federal income taxes (benefits) -
Note 5 34,370 31,575 (288,087)
--------- ---------- -----------
NET INCOME (LOSS) $ 74,057 $ 69,630 $ (498,020)
--------- ---------- -----------
--------- ---------- -----------
EARNINGS (LOSS) PER COMMON
SHARE - Note 2 $ .92 $ .88 $ (9.69)
--------- ---------- -----------
--------- ---------- -----------
See accompanying notes to financial statements.
44
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Amounts in thousands, except per share data)
Convertible
Preferred Common
Stock Stock Unrealized
$1 Par Value Without Common Investment
Per Share Par Value Stock Gains Retained
Amount Amount Warrants (Losses) Earnings
------------- ------------ --------- ---------- ------------
Balance at January 1, 1994 $ - $ 68,848 $ - $ 36,757 $ 586,361
Net loss for the year (498,020)
Issuance of Series A
Preferred Stock and
Stock Warrants - Note 16 200,000 16,000
Cash dividends paid on
common stock ($.32 per share) (16,471)
Other 492 (76,534) 511
------------- ------------ --------- ---------- ------------
Balance at December 31, 1994 200,000 69,340 16,000 (39,777) 72,381
Net income for the year 69,630
Issuance of Series A
Preferred Stock - Note 16 24,950 (4,950)
Cash dividends paid on
preferred stock (14,623)
Other 465 73,285 (116)
------------- ------------ --------- ---------- ------------
Balance at December 31, 1995 224,950 69,805 16,000 33,508 122,322
Net income for the year 74,057
Cash dividends paid on common
stock ($.05 per share) (2,576)
Cash dividends paid on
preferred stock (20,245)
Other 458 (30,688) 116
------------- ------------ --------- ---------- ------------
Balance at December 31, 1996 $ 224,950 $ 70,263 $ 16,000 $ 2,820 $ 173,674
------------- ------------ --------- ---------- ------------
------------- ------------ --------- ---------- ------------
See accompanying notes to financial statements.
45
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income (loss) $ 74,057 $ 69,630 $ (498,020)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Provision for depreciation and amortization 4,679 6,555 7,195
Provision for deferred income taxes 31,835 30,856 (214,522)
Realized gains on sale of investments
and fixed assets (7,292) (10,128) (61,470)
Federal income taxes (1,430) 74,718 (72,668)
Reinsurance balances (38,512) (73,163) (737)
Unpaid losses and loss adjustment expenses (41,305) (171,409) 178,753
Unearned premiums (57,786) (9,592) (1,422)
Claims checks payable (12,861) (21,419) 29,190
Proposition 103 payable - (78,307) 29,122
Other 20,367 27,614 (572)
--------- --------- -----------
NET CASH USED IN
OPERATING ACTIVITIES (28,248) (154,645) (605,151)
46
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
INVESTING ACTIVITIES:
Investments available-for-sale:
Purchases $(631,428) $(666,203) $ (821,822)
Called or matured 17,190 33,308 27,531
Sales 636,419 570,443 1,275,091
Net purchases of property and
equipment (3,642) (2,505) (3,238)
--------- --------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 18,539 (64,957) 477,562
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock - 20,000 200,000
Issuance of common stock warrants - - 16,000
Proceeds from bank loan - 15,000 160,000
Dividends paid (22,822) (14,623) (16,471)
--------- --------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (22,822) 20,377 359,529
--------- --------- ----------
Net increase (decrease) in cash (32,531) (199,225) 231,940
Cash and cash equivalents, beginning of year 50,609 249,834 17,894
--------- --------- ----------
Cash and cash equivalents, end of year $ 18,078 $ 50,609 $ 249,834
--------- --------- ----------
--------- --------- ----------
See accompanying notes to financial statements.
47
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
20th Century Industries, through its wholly-owned subsidiaries, 20th
Century Insurance Company and 21st Century Casualty Company (collectively,
the "Company"), is engaged in the sale of private passenger automobile,
homeowners and personal excess liability insurance policies in the State of
California. In accordance with an order from state insurance regulators, no
new homeowner and condominium policies have been written since July 23, 1994
and, beginning July 24, 1996, the Company was required to begin non-renewing
these policies. In December 1996, the Company was granted approval to resume
offering renewals effective February 15, 1997 on existing homeowner policies.
Condominium policies are still in run-off and all policies will expire in
July 1997.
NOTE 2. SUMMARY OF ACCOUNTING POLICIES
Basis of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts
and operations of 20th Century Industries and its wholly-owned subsidiaries.
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 from statutory
accounting practices prescribed or permitted by 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. Actual results could differ from these estimates.
Investments
Effective January 1, 1994, in accordance with a required accounting change,
the Company classified its investment portfolio as available-for-sale and
carries it at fair value with unrealized gains and losses, net of any tax
effect, reported as a separate component of stockholders' equity. The effect
of this change was to increase stockholders equity as of January 1, 1994 by
approximately $36.8 million, net of deferred income taxes of $19.8 million;
the change had no effect on net income.
48
Fair values for fixed maturity and equity securities are based on quoted
market prices. When investment securities are sold, the cost used to determine
any realized gain or loss is based on specific identification.
The Company's 49% interest in 20th Century Insurance Company of Arizona,
which is a joint venture between the Company and American International
Group, Inc. ("AIG") and which began operations in August 1996, has a carrying
value of $1,784,000 at December 31, 1996, and is included in other assets in
the consolidated balance sheet. The Company's equity in the 1996 net loss of
this venture amounted to $186,000 and is included in investment income in the
consolidated statement of operations.
Cash and Cash Equivalents
Cash and cash equivalents include cash and short-term investments in
demand deposits having a maturity of three months or less at the date of
purchase.
Recognition of Revenues
Insurance premiums are recognized as revenue pro rata over the terms of
the policies. The unearned portion is included in the balance sheet as a
liability for unearned premiums.
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 costs of settlement,
net of estimated salvage and subrogation, 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 current earnings.
49
Reinsurance
In the normal course of business, the Company seeks to reduce the loss
that may arise from catastrophes and to reduce its overall risk levels by
reinsuring certain 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. The Company believes
that the fair value of its reinsurance recoverables approximates their
carrying amounts.
Policy Acquisition Costs
Policy acquisition costs, principally direct and indirect costs related to
production of business, are deferred and amortized to expense as the related
premiums are earned.
Income Taxes
Deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and the tax bases of assets and
liabilities and are measured using the enacted tax rates and laws.
Earnings (Loss) Per Common Share
Earnings (loss) per common share are computed using the weighted average
number of common share equivalents outstanding during the respective periods
utilizing the modified treasury stock method. The primary weighted average
number of common share equivalents was 58,694,730 for 1996, 57,223,839 for
1995 and 51,387,120 for 1994. The fully diluted weighted average number of
common share equivalents was 78,737,410 for 1996, 79,325,308 for 1995 and
52,122,630 for 1994. The primary and fully diluted earnings (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. Fully diluted earnings (loss) per
share amounts for 1994, 1995 and 1996 are not presented as the effect would
be antidilutive.
50
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 in accordance with the requirements set forth in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Additional financial statement disclosures required by SFAS No. 123 are included
in Note 12.
Reclassifications
The accompanying 1994 and 1995 financial statements have been
reclassified to conform with the 1996 presentations.
NOTE 3. INVESTMENTS
A summary of net investment income is as follows:
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Interest and dividends on fixed
maturities $ 71,996 $ 74,286 $ 82,125
Interest on short-term cash
investments (demand deposits) 2,170 8,049 3,210
Other (183) 109 128
---------- ---------- ----------
Total investment income 73,983 82,444 85,463
Investment expense 805 786 702
---------- ---------- ----------
Net investment income $ 73,178 $ 81,658 $ 84,761
---------- ---------- ----------
---------- ---------- ----------
51
A summary of realized investment gains and losses before income taxes is as
follows:
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Fixed maturities available-for-sale:
Gross realized gains $ 9,608 $ 12,080 $ 65,300
Gross realized losses (2,321) (1,873) (3,746)
--------- --------- ---------
Net realized investment gains $ 7,287 $ 10,207 $ 61,554
--------- --------- ---------
--------- --------- ---------
The amortized cost, gross unrealized gains and losses, and fair values of
fixed maturities as of December 31, 1996 and 1995, respectively, are as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
- - ---- ----------- ---------- ---------- --------
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 11,906 $ 57 $ 78 $ 11,885
Obligations of states and
political subdivisions 287,277 5,776 926 292,127
Public utilities 164,509 1,330 2,165 163,674
Corporate securities 596,346 6,002 6,331 596,017
---------- ------- ------ ----------
Total fixed maturities $1,060,038 $13,165 $9,500 $1,063,703
---------- ------- ------ ----------
---------- ------- ------ ----------
1995
- - ----
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 fixed maturities $1,075,021 $51,489 $ 962 $1,125,548
---------- ------- ------ ----------
---------- ------- ------ ----------
52
The amortized cost and fair value of the Company's fixed maturity
investments at December 31, 1996 are summarized, by contractual maturity, as
follows:
(Amounts in thousands) Available-for-sale
------------------------------
Amortized Fair
Fixed maturities due: Cost Value
-------------- -------------
1997 $ 7,065 $ 7,192
1998 - 2001 28,872 29,675
2002 - 2006 469,795 466,867
2007 - 2016 553,800 559,429
2017 and after 506 540
-------------- -------------
Total $1,060,038 $1,063,703
-------------- -------------
-------------- -------------
Expected maturities of the Company's investments may differ from contractual
maturities because certain borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
The changes in unrealized gains (losses) on investments
available-for-sale for 1996, 1995 and 1994 total $(30,688,000), $73,285,000
and $(76,534,000), net of deferred income taxes (benefits) of $(16,524,000),
$39,461,000 and $(41,211,000) respectively.
NOTE 4. 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,
----------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Deferred policy acquisition costs
at beginning of year $ 10,481 $ 14,776 $ 15,712
Acquisition costs deferred 36,821 34,352 42,473
---------- --------- ---------
47,302 49,128 58,185
Acquisition costs amortized and
charged to income during the year 38,175 38,647 43,409
---------- --------- ---------
Deferred policy acquisition costs
at end of year $ 9,127 $ 10,481 $ 14,776
---------- --------- ---------
---------- --------- ---------
53
NOTE 5. FEDERAL INCOME TAXES
Federal income tax expense consists of:
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Current tax expense (credit) $ 2,535 $ 719 $ (73,565)
Deferred tax expense (credit) 31,835 30,856 (214,522)
-------- -------- ----------
$ 34,370 $ 31,575 $ (288,087)
-------- -------- ----------
-------- -------- ----------
The Company's net deferred income tax asset is comprised of:
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995
---- ----
(Amounts in thousands)
Deferred tax assets:
Net operating loss carryforward $ 142,422 $ 181,393
Unearned premiums 16,180 18,207
Unpaid losses and loss adjustment expenses 13,170 14,728
Alternative minimum tax credit 11,200 8,778
Salvage and subrogation 7,506 -
Non-qualified retirement plans 3,063 2,903
Other 2,058 2,868
---------- ----------
195,599 228,877
---------- ----------
---------- ----------
Deferred tax liabilities:
Deferred policy acquisition costs 3,223 3,668
Salvage and subrogation - 936
Unrealized investment gains 1,519 18,043
---------- ----------
4,742 22,647
---------- ----------
Net deferred tax asset $ 190,857 $ 206,230
---------- ----------
---------- ----------
54
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. As of
December 31, 1996, the Company has a net operating loss carryforward of
approximately $407,000,000 for regular tax purposes and $263,000,000 for
alternative minimum tax purposes expiring in the year 2009 and an alternative
minimum tax credit carryforward of $11,200,000. Alternative minimum tax
credits may be carried forward indefinitely to offset future regular tax
liabilities.
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 realize the net deferred tax asset, the Company must
have the ability to generate sufficient future taxable income to realize the
tax benefits. Taxable income for 1996 and 1995 totaled $137.9 million, and
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 98% excluding the Northridge
Earthquake, and investment earnings have averaged approximately $98 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. As of July
23, 1995, the Company was out of the earthquake line of business. This
withdrawal will substantially reduce the Company's exposure to future
earthquake catastrophes. The Company could also increase its future taxable
income by converting the remainder of its investments in tax-exempt
securities, which represented approximately 25% of the portfolio at December
31, 1996, and investing new cash flow into taxable securities.
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.
A reconciliation of income tax computed at the federal statutory tax rate,
which was 35% for 1994 through 1996, to total income tax expense follows:
55
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Federal income taxes (benefits) at
statutory rate $ 37,949 $ 35,422 $(275,138)
Decrease due to:
Tax-exempt income, net (4,472) (3,520) (13,535)
Adjustment of deferred tax for 1%
increase in tax rate - - 1,696
Other 893 (327) (1,110)
--------- --------- ---------
Federal taxes (benefits) on income $ 34,370 $ 31,575 $(288,087)
--------- --------- ---------
--------- --------- ---------
Payments for income taxes were $2,367,500, $65,000 and $-0- for the years
ended December 31, 1996, 1995 and 1994, respectively.
NOTE 6. EMPLOYEE BENEFITS
Pension Plan and Supplemental Executive Retirement Plan
The Company sponsors a non-contributory defined benefit 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 an unfunded supplemental executive retirement
plan which covers 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 1996,
1995 and 1994 consolidated statements of operations is $3,925,000, $3,147,000
and $3,722,000, respectively. Accrued pension
56
costs reflected in the consolidated balance sheets at December 31, 1996 and
1995 are $4,073,000 and $5,637,000, respectively.
Savings and Security Plan
The Company sponsors contributory savings and security plans for
eligible employees that permit participants to make pre-tax contributions.
The Company provides matching contributions equal to 75% of the lesser of 6%
of an employee's compensation or the amount contributed by the employee.
Contributions charged against operations were $2,556,000, $2,376,000 and
$2,210,000 in 1996, 1995 and 1994, respectively.
57
NOTE 7. LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and ending
liability for unpaid losses and loss adjustment expenses ("LAE"):
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Reserves for losses and LAE, net of reinsurance
recoverables, at beginning of year $552,320 $ 755,101 $ 574,619
Add:
Provision for unpaid losses and LAE for claims
occurring, in the current year,
net of reinsurance 760,325 891,066 1,912,799
Decrease in provision for insured
events of prior years, net of reinsurance (25,590) (39,464) (84,453)
-------- -------- ---------
Total incurred losses and loss adjustment
expenses, net of reinsurance 734,735 851,602 1,828,346
Deduct losses and LAE payments for claims,
net or reinsurance, occurring during:
The current year 446,037 534,414 1,302,988
Prior years 351,985 519,969 344,876
-------- -------- ---------
Total payments, net of reinsurance 798,022 1,054,383 1,647,864
-------- -------- ---------
Reserve for unpaid losses and LAE, net of
reinsurance recoverables, at year end 489,033 552,320 755,101
Reinsurance recoverables on unpaid
losses, at year end 54,496 32,514 1,142
-------- -------- ---------
Reserves for losses and LAE, gross of
reinsurance recoverables on unpaid losses,
at year end $ 543,529 $ 584,834 $ 756,243
-------- -------- ---------
-------- -------- ---------
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss adjustment expenses decreased by $25,590,000,
$39,464,000 and $84,453,000 in 1996, 1995 and 1994, respectively, due to a
combination of improvements in the claims handling process, unanticipated
decreases in frequency and random fluctuations in severity. The 1996 and 1995
58
decreases in provisions for insured events of prior years is affected by
increases in losses related to the Northridge Earthquake of $40 million and
$60 million, respectively.
NOTE 8. BANK LOAN PAYABLE
The Company has entered into a revolving credit facility ("the
Facility") that provides an aggregate commitment of $202.5 million at
December 31, 1996. The commitment decreases by $11.25 million on the first
day of each quarter until 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.
As of December 31, 1996, the Company's outstanding advances against the
Facility totaled $175 million, which approximates its fair value. 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 are
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 .5% 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 Facility. At December 31, 1996, the annual interest rate for the
specified interest period was approximately 6.7%. Interest paid was
$9,813,000 in 1996, $12,636,000 in 1995 and $7,277,000 in 1994.
NOTE 9. 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.
59
The effect of reinsurance on premiums written and earned is as follows
(amounts in thousands):
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994
-------------------- ---------------------- ----------------------
Written Earned Written Earned Written Earned
--------- --------- ---------- ---------- ---------- ----------
Gross $ 929,843 $ 987,628 $1,063,962 $1,073,556 $1,078,663 $1,080,086
Ceded (101,850) (131,000) (137,345) (109,759) (45,926) (46,083)
--------- --------- ---------- ---------- ---------- ----------
Net $ 827,993 $ 856,628 $ 926,617 $ 963,797 $1,032,737 $1,034,003
--------- --------- ---------- ---------- ---------- ----------
--------- --------- ---------- ---------- ---------- ----------
Losses and loss adjustment expenses have been reduced by reinsurance
ceded as follows (amounts in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- -------- ----------
Gross losses and loss
adjustment expenses incurred $ 839,146 $921,104 $1,905,161
Ceded losses and loss
adjustment expenses incurred (104,411) (69,502) (76,815)
--------- -------- ----------
Net losses and loss
adjustment expenses incurred $ 734,735 $851,602 $1,828,346
--------- -------- ----------
--------- -------- ----------
In connection with an investment agreement executed in 1994 with AIG
(see Note 16), 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, which
attaches to the Company's retained risks net of all other reinsurance, 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. The majority 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. Ceding commissions of 9.13% and 10.8% were earned by the
insurance subsidiaries for 1996 and 1995, respectively. The ceding
commission is adjusted annually to equal the actual underwriting expense
ratio.
60
In 1996, the Company's insurance subsidiaries entered into a 100% quota
share reinsurance agreement with F&G Re and Risk Capital Re covering the
homeowner and condominium lines of business. This agreement covers, for a
one-year policy term, all business in force as of July 1, 1996 plus renewal
business attaching between July 1, 1996 and July 23, 1996, effectively
terminating with the expiration of the underlying, one-year policies. Under
this contract, 100% of each subsidiary's homeowner and condominium unearned
premium reserves as of June 30, 1996 were ceded 50/50 to F&G Re and Risk
Capital Re, a total of $33.3 million. Additionally, 100% of written premiums
and incurred losses and allocated loss adjustment expenses subsequent to June
30, 1996, on covered policies, are ceded under this contract. The Company's
insurance subsidiaries earn a commission on ceded premiums based on a sliding
scale dependent on the incurred loss ratio. In 1996, the Company earned
commissions at a rate of 15.8%. Homeowner policies renewed February 15, 1997
and subsequent, which are not covered under this contract, are expected to be
covered by a new reinsurance program currently under negotiation.
The Company had a homeowners excess-of-loss reinsurance treaty with General
Reinsurance Corporation which was canceled May 1, 1996. In this excess treaty,
the reinsurer's limit was $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 line whereby it cedes 60% of its business.
NOTE 10. 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.
61
Minimum rental commitments under the Company's lease obligations are as
follows:
1997 $10,571,538
1998 $ 9,244,447
1999 $ 8,312,720
2000 $ 2,312,556
2001 $ 1,253,591
Thereafter $ 705,788
Rental expense charges to operations for the years ended December 31, 1996,
1995 and 1994 were $11,243,000, $12,062,000 and $11,694,000, respectively.
NOTE 11. STOCKHOLDERS' EQUITY
The Company's insurance subsidiaries are subject to restriction as to
the amount of dividends which may be paid to the parent company within any
one year without the approval of the California Department of Insurance
("DOI"). 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% of statutory surplus as
regards policyholders as of the preceding December 31. Earned surplus
available for dividends as of December 31, 1996 was $67.3 million.
Stockholder's equity of the insurance subsidiaries on a statutory basis at
December 31, 1996 and 1995 was $436,367,000 and $358,474,000, respectively.
Statutory net income (loss) for the insurance subsidiaries was $ 121,780,000,
$118,562,000, and $(657,331,000) for the years ended December 31, 1996, 1995 and
1994, respectively.
NOTE 12. STOCK-BASED COMPENSATION
The Company has two separate stock compensation plans: the 1995 Stock
Option Plan, which provides for grants of stock options to key employees and
non-employee directors of the Company, and the Restricted Shares Plan, which
provides for stock grants to key employees.
62
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its stock-based compensation. Under APB
25, because the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no
compensation expense is recognized; however, SFAS No. 123 requires disclosure
of the pro forma net income and earnings per share as if the Company had
accounted for its employee stock compensation under the fair value method of
that Statement. Under APB 25, the fair value of stock grants made under the
Restricted Shares Plan is amortized to expense over the vesting periods of
the grants. This accounting treatment results in compensation expense being
recorded in a manner consistent with that required under Statement 123 and,
therefore, pro forma net income and earnings per share amounts would be
unchanged from those reported in the financial statements.
1995 Stock Option Plan
The aggregate number of common shares issued and issuable under the Plan
currently is limited to 1,000,000. All options granted have ten year terms and
vest over various future periods.
For disclosure purposes, the fair value of stock options was estimated
at each date of grant using a Black-Scholes option pricing model using the
following assumptions: Risk-free interest rates of 6.5% and 6.6% for 1996 and
1995, respectively; dividend yields ranging from 1.0% to 1.3% in 1996 and
from 1.5% to 1.6% in 1995; volatility factors of the expected market price of
the Company's common stock of .39 and .43 for 1996 and 1995, respectively;
and a weighted average expected life of the options of 10 years. Using the
Black-Scholes valuation model, the estimated weighted average fair value of
options granted during 1996 and 1995, respectively, were $10.04 and $6.62.
Had the accounting for stock-options been based on those values, the pro
forma net income would have been $70.5 million in 1996 and $69.2 million in
1995; pro forma primary earnings per share would have been $.86 in 1996 and
$.87 in 1995, while fully diluted earnings per share would have been
antidilutive in 1996 and equal to the primary figure in 1995.
In management's opinion, existing stock option valuation models do not
provide an entirely reliable measure of the fair value of non-transferable
employee stock options with vesting restrictions.
63
A summary of the Company's stock option activity and related information
follows:
Weighted-Average
Number of Exercise
Options Price
----------- -----------------
Options outstanding January 1, 1995 -
Granted in 1995 180,000 $12.56
-----------
Options outstanding December 31, 1995 180,000 $12.56
Granted in 1996 396,500 $19.64
Exercised in 1996 (8,000) $12.50
Forfeited in 1996 (27,000) $19.33
-----------
Options outstanding December 31, 1996 541,500 $17.41
-----------
-----------
At December 31, 1996, 116,000 options were exercisable at an average
exercise price of $12.59. No options were exercisable or forfeited in 1995.
Exercise prices for options outstanding at December 31, 1996 ranged from
$12.50 to $19.88. The weighted average remaining contractual life of those
options is 8.9 years.
Restricted Shares Plan
The Restricted Shares Plan currently provides for grants of up to
921,920 shares of common stock to be made available to key employees as
determined by the Key Employee Incentive Committee of the Board of Directors.
At December 31, 1996, 294,874 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 the unearned compensation
was $365,500, $550,000 and $431,000 in 1996, 1995 and 1994, respectively.
The common shares are restricted for five 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 five years following the year of grant.
64
A summary of grants under the plan from 1994 through 1996 follows:
Common Market Price Per
Shares Share on Date of Grant
-------- ----------------------
Outstanding, January 1, 1994 56,715
Granted in 1994 25,000 $27.38
Vested in 1994 (18,543)
Canceled or forfeited -
--------
Outstanding, December 31, 1994 63,172
Granted in 1995 35,813 $11.17
Vested in 1995 (40,224)
Canceled or forfeited (14,878)
--------
Outstanding, December 31, 1995 43,883
Granted in 1996 18,600 $19.63
Vested in 1996 (13,800)
Canceled or forfeited -
--------
Outstanding, December 31, 1996 48,683
--------
--------
NOTE 13. 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.
65
NOTE 14. PROPOSITION 103
On January 27, 1995, the Company announced it had reached a settlement
with the DOI regarding 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, which represented an average payment
per household of $80.00, or approximately 7.5% of premiums paid between
November 8, 1988 and November 7, 1989. In accordance with the settlement, the
Company offset a portion of the 1995 increase in earthquake losses associated
with the 1994 Northridge Earthquake (see Note 15) with $32 million in funds
previously set aside for potential Proposition 103 rebates. In addition, as
part of the settlement, the Company contributed $30 million to the surplus of
the insurance subsidiaries with funds obtained from the existing bank credit
facility and from the issuance of 20,000 additional shares of preferred stock
to AIG (see Notes 8 and 16, respectively).
NOTE 15. NORTHRIDGE EARTHQUAKE
The Northridge, California earthquake, which occurred on January 17,
1994, significantly affected the operating results and the financial position
of the Company. Subsequently, 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 loss adjustment expenses for
this catastrophe as of December 31, 1996 is $1.04 billion, of which $40
million and $60 million were recorded in 1996 and 1995, respectively. In
accordance with the terms of a settlement with the California Department of
Insurance, the Company offset a portion of the 1995 increase in earthquake
losses with $32 million in funds previously set aside for potential
Proposition 103 rebates (see Note 14).
NOTE 16. 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
66
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 with respect to dividend
and liquidation rights. Cash dividends of $20,245,500 and $14,622,750 were
paid on the preferred stock in 1996 and 1995, respectively. Preferred stock
dividends in kind of $4,950,000, representing 4,950 additional shares, were
issued on June 26, 1995. The Investment Agreement required the exercise
price of the Series A Warrants to be 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
where it remains. The Common Stock Warrants are generally exercisable from
February 1998 to February 2007.
67
NOTE 17. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
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)
1996
- - ----
Net premiums earned $ 232,628 $ 225,068 $ 204,755 $ 194,177
Investment income $ 18,689 $ 18,776 $ 17,770 $ 17,943
Realized gains $ 2,588 $ 1,310 $ 2,642 $ 747
Net income (loss) $ 25,583 $ 31,928 $ 24,345 $ (7,799)
Primary earnings (loss)
per common share $ .35 $ .46 $ .33 $ (.22)
Fully diluted earnings
per common share $ .32 $ .41 $ .31 *
1995
- - ----
Net premiums earned $ 248,737 $ 240,085 $ 237,588 $ 237,387
Investment income $ 21,179 $ 20,634 $ 20,305 $ 19,540
Realized gains $ 185 $ 2,019 $ 3,200 $ 4,803
Net income (loss) $ (1,418) $ 14,611 $ 30,132 $ 26,305
Primary earnings (loss)
per common share $ (.12) $ .18 $ .44 $ .36
Fully diluted earnings
per common share * * $ .39 $ .33
*Fully diluted earnings per common share are not shown as the results are
antidilutive.
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.
68
The fourth quarter of 1996 was impacted by pre-tax charges of $40
million in additional reserves related to the 1994 Northridge Earthquake. It
was also adversely affected by weather-related claims amounting to
approximately $8.0 million.
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 pre-tax loss for the Northridge Earthquake
of $18 million and $10 million, respectively.
NOTE 18. 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 for the years ended
December 31.
1996
----
Homeowner Personal
(Amounts in thousands) Auto Lines and Condominium Excess Liability
--------------- ----------------- ------------------
Gross premiums written $ 892,287 $ 35,442 $ 2,114
--------------- ----------------- ------------------
--------------- ----------------- ------------------
Premiums earned $ 831,963 $ 23,893 $ 772
--------------- ----------------- ------------------
--------------- ----------------- ------------------
Underwriting profit (loss) $ 81,010 $ (39,705) $ 917
--------------- ----------------- ------------------
--------------- ----------------- ------------------
1995
----
Homeowner Personal
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
--------------- ----------------- ------------------
--------------- ----------------- ------------------
69
AUTO. The $22.7 million decline in underwriting profit for the auto lines in
1996 compared to 1995 was caused principally by a $30 million reduction in
1995 of amounts previously set aside for Proposition 103 rebates (see Note
14), and 1996 weather-related claims of approximately $8 million. In 1994
and 1995, excluding earthquake-related claims and expenses, earthquake
reinsurance reinstatements and Proposition 103 rebate adjustments, the
underwriting profit for the auto lines would have been $10.1 million and
$73.8 million, respectively, with the increase in 1995 principally
attributable to the 6% rate increase implemented in the fourth quarter of
1994 and the 3.7% rate increase implemented in the second quarter 1995.
HOMEOWNERS AND CONDOMINIUM. The 1996 and 1995 underwriting losses in these
lines included respective provisions for additional earthquake reserves of
$40 million and $60 million, which was partially offset by a $32 million
reduction in Proposition 103 rebates. Also affecting 1995 were first quarter
weather-related losses of $14.2 million, earthquake-related catastrophe
reinsurance premiums of $24 million and an overall decline in premium volume
resulting from the DOI's order to discontinue writing new policies. The
significant underwriting loss in 1994 was caused by the Northridge Earthquake.
70
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 EXECUTIVE 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
1997 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
1997 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
1997 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
1997 Annual Meeting of Shareholders pursuant to
71
Instruction G(3) of Form 10-K. There were no relationships or related party
transactions which require disclosure.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED WITH THIS REPORT PAGE
----
(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Company
are filed as a part of this report:
(i) Report of independent auditors; ........................... 41
(ii) Consolidated balance sheets - December 31, 1996 and 1995;.. 42
(iii) Consolidated statements of operations - Years ended
December 31 1996, 1995, and 1994; ........................ 44
(iv) Consolidated statement of changes in stockholders' equity -
Years ended December 31, 1996, 1995 and 1994; ............ 45
(v) Consolidated statements of cash flows - Years ended
December 31, 1996, 1995 and 1994; ........................ 46
(vi) Notes to consolidated financial statements ................ 48
(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 II - Condensed Financial Information of Registrant ........ 76
Schedules I, 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.
72
(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 and are filed herewith or
incorporated by reference as indicated below.
3(a) Articles of Incorporation, as amended, incorporated herein by
reference from the Registrant's Form 10-K for the year ended
December 31, 1994
3(b) By Laws, as amended, filed herewith
The following contract is incorporated herein by reference from the
Registrant's Form 10-K for the year ended December 31, 1985:
10(a) Life Insurance Agreement for key officers (originally filed
as Exhibit 10(b))
The following contracts are incorporated herein by reference from the
Registrant's Form 10-K for the year ended December 31, 1987:
10(b) Amendment to 20th Century Industries Restricted Shares Plan
(originally filed as Exhibit 10(c))
10(c) Split Dollar Insurance Agreement between the Company and Stanley
M. Burke, as trustee of the 1983 Foster Insurance Trust
(originally filed as Exhibit 10(e))
The following contracts are incorporated herein by reference from the
Registrant's Form 10-K for the year ended December 31, 1988:
10(d) Amendment to 20th Century Industries Supplemental Executive
Retirement Plan (originally filed as Exhibit 10(h))
The following contracts are incorporated herein by reference from the
Registrant's Form 8-K dated October 5, 1994:
10(e) Letter of intent between the Company and American International
Group, Inc. (originally filed as Exhibit 10(o))
73
10(f) Stock Option Agreement between the Company and American
International Group, Inc. (originally filed as Exhibit 10(p))
The following contract is incorporated herein by reference from the
Registrant's Form 10-Q dated November 13, 1994:
10(g) Investment and Strategic Alliance Agreement between the Company
and American International Group, Inc. (originally filed as
Exhibit 10(s))
The following contract is incorporated herein by reference from the
Registrant's Form 10-K for the year ended December 31, 1994:
10(h) Amendment No. 1 to Investment and Strategic Alliance Agreement
between the Company and American International Group, Inc.
(originally filed as Exhibit 10(v))
The following contract is incorporated herein by reference from the
Registrant's Form S-8 dated July 26, 1995:
10(i) 20th Century Industries Stock Option Plan for eligible employees
and non-employee directors (originally filed as Exhibit 10(x))
The following contracts are incorporated herein by reference from the
Registrant's Form 10-K for the year ended December 31, 1995:
10(j) Amended and Restated Credit Agreement among the Company, Union
Bank, The First National Bank of Chicago, et. al. (originally
filed as Exhibit 10(r))
10(k) Quota Share Reinsurance Agreement between the Company and American
International Group, Inc., as amended (originally filed as Exhibit
10(w))
74
The following contracts are filed herewith:
10(l) Forms of Stock Option Agreements
10(m) Form of Restricted Shares Agreement
10(n) Supplemental 401(k) Plan
10(o) 20th Century Industries Supplemental Executive Retirement Plan, as
amended
10(p) Restated 20th Century Industries Savings and Securities Plan
10(q) 20th Century Industries Pension Plan, 1994 Amendment and
Restatement
10(r) Amendment No. 1 to 20th Century Industries Pension Plan
11 Computation of Earnings Per Common Share, filed herewith
21 Subsidiaries of the Registrant, incorporated herein by reference
from "Item 1. Business" in the Registrant's Form 10-K for the year
ended December 31, 1996
23 Consent of Independent Auditors, filed herewith
28 Information from reports furnished to state regulatory
authorities, filed herewith:
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, 1996.
75
SCHEDULE II
20TH CENTURY INDUSTRIES (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
ASSETS
DECEMBER 31,
-----------------------------------------
1996 1995
---- ----
(Amounts in thousands, except share data)
Cash $ 14,802 $ 8,699
Prepaid loan fees 5,999 7,794
Other current assets 1,224 1,485
Accounts receivable from subsidiaries, net of payables 3,610 546
Investment in non-consolidated insurance
subsidiaries and affiliates at equity 641,261 624,574
Other assets 12,594 14,068
------------ ------------
$ 679,490 $ 657,166
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 16,783 $ 15,581
Bank loan payable 175,000 175,000
------------ ------------
Total liabilities 191,783 190,581
------------ ------------
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 1996
and 1995 224,950 224,950
Common stock, without par value; authorized
110,000,000 shares, outstanding 51,520,006
in 1996 and 51,493,406 in 1995 70,263 69,805
Common stock warrants 16,000 16,000
Unrealized investment gains of
insurance subsidiaries - net 2,820 33,508
Retained earnings 173,674 122,322
------------ ------------
Total stockholders' equity 487,707 466,585
------------ ------------
$ 679,490 $ 657,166
------------ ------------
------------ ------------
See note to condensed financial statements.
76
SCHEDULE II
20TH CENTURY INDUSTRIES (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands, except per share data)
REVENUES
Dividends received from subsidiaries $ 43,000 $ - $ 16,471
Interest 339 1,390 1,139
Other - 1,269 -
----------- ---------- -----------
Total 43,339 2,659 17,610
EXPENSES
Loan interest and fees 14,260 15,897 8,348
General and administrative 621 544 685
----------- ---------- -----------
Total 14,881 16,441 9,033
Income (loss) before income tax refund 28,458 (13,782) 8,577
Refund of income taxes (7) (4,994) (2,763)
----------- ---------- -----------
Net income (loss) before equity in net
income of insurance subsidiaries 28,465 (8,788) 11,340
Undistributed income (loss) of non-
consolidated insurance subsidiaries 45,592 78,418 (509,360)
----------- ---------- -----------
NET INCOME (LOSS) $ 74,057 $ 69,630 $ (498,020)
----------- ---------- -----------
----------- ---------- -----------
EARNINGS (LOSS) PER COMMON SHARE
Primary $ .92 $ .88 $ (9.69)
----------- ---------- -----------
----------- ---------- -----------
See note to condensed financial statements.
77
SCHEDULE II
20TH CENTURY INDUSTRIES (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- -----------
(Amounts in thousands)
OPERATING ACTIVITIES
Net income (loss) $ 74,057 $ 69,630 $(498,020)
Adjustments to reconcile net
income (loss) to net cash provided by
(used in) operating activities:
Undistributed (income) loss of
insurance subsidiaries (88,592) (78,418) 492,889
Reimbursement of depreciation and
amortization by subsidiaries 635 572 550
(Gain) loss on sale of fixed assets (5) 72 42
Effects of common stock issued
under restricted shares plan 458 465 492
Dividends received from
insurance subsidiaries 43,000 - 16,471
Change in other assets, other
liabilities, and accrued income taxes 2,196 (4,116) (43,006)
-------- -------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 31,749 $(11,795) $(30,582)
78
SCHEDULE II
20TH CENTURY INDUSTRIES (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- -----------
(Amounts in thousands)
INVESTING ACTIVITIES:
Capital contributed to 21st Century
Casualty Company $ - $ - $ (40,841)
Capital contributed to 20th Century
Insurance Company - (30,000) (256,612)
Capital contributed to 20th Century Insurance
Company of Arizona (1,970) - -
Purchase of equipment (1,126) (1,472) (478)
Proceeds from sale of equipment 271 306 144
------- -------- ---------
NET CASH USED IN INVESTING ACTIVITIES (2,825) (31,166) (297,787)
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 (22,821) (14,623) (16,471)
------- -------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (22,821) 20,377 359,529
------- -------- ---------
Net increase (decrease) in cash 6,103 (22,584) 31,160
Cash, beginning of year 8,699 31,283 123
------- -------- ---------
Cash, end of year $ 14,802 $ 8,699 $ 31,283
------- -------- ---------
------- -------- ---------
Supplemental disclosure of cash flow information:
Interest paid was $9,813,000, $12,636,000, and $7,277,000 for the years ended
December 31, 1996, 1995, and 1994, respectively.
See note to condensed financial statements.
79
SCHEDULE II
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.
NOTE 1 - DEBT AND OTHER DISCLOSURES
The Company's outstanding advances against its revolving credit facility
("the Facility") totaled $175 million at December 31, 1996. Refer to Note 8
of the Notes to Consolidated Financial Statements for a more detailed
explanation of the Facility.
80
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 under-signed, thereunto duly authorized.
20TH CENTURY INDUSTRIES
(Registrant)
Date: March 24,1997 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 24th of
March, 1997.
Signature Title
--------- -----
President and Chief Executive Officer
- - ------------------------------ (Principal Executive Officer)
William L. Mellick
Senior Vice President
and Chief Financial Officer
- - ------------------------------ (Principal Financial Officer)
Robert B. Tschudy
Controller
- - ------------------------------ (Principal Accounting Officer)
John M. Lorentz
81
Signature Title
--------- -----
- - ------------------------------ Chairman of the Board
John B. De Nault
- - ------------------------------ Director
Stanley M. Burke
- - ------------------------------ Director
John B. De Nault, III
- - ------------------------------ Director
R. Scott Foster, M.D.
- - ------------------------------ Director
Rachford Harris
- - ------------------------------ Chief Executive Officer and Director
William L. Mellick
- - ------------------------------ Vice Chairman of the Board
Robert M. Sandler
- - ------------------------------ Director
Gregory M. Shepard
- - ------------------------------ Director
Howard I. Smith
- - ------------------------------ Director
Arthur H. Voss
82