SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1997 Commission File Number 0-6964
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20TH CENTURY INDUSTRIES
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(Exact name or registrant as specified in its charter)
CALIFORNIA 95-1935264
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) number)
Suite 700, 6301 Owensmouth Avenue, Woodland Hills, California 91367
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 704-3700
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None
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Former name, former address and former fiscal year, if changed since last
report.
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
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at April 25, 1997
Common Stock, Without Par Value 51,609,361 shares
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
March 31, December 31,
1997 1996
---- -----
(Unaudited)
(Amounts in thousands)
Investments, available-for-sale, at fair value:
Fixed maturities - Note 3 $ 1,017,195 $ 1,063,703
Equity securities 1,159 925
------------ ------------
Total investments 1,018,354 1,064,628
Cash and cash equivalents 28,529 18,078
Accrued investment income 20,298 18,549
Premiums receivable 75,857 71,308
Reinsurance receivables and recoverables 78,713 79,183
Prepaid reinsurance premiums 34,518 33,020
Deferred income taxes - Note 4 189,512 190,857
Deferred policy acquisition costs 11,116 9,127
Other assets 28,090 29,005
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$ 1,484,987 $ 1,513,755
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See accompanying notes to financial statements.
2
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1997 1996
---- ----
(Unaudited)
(Amounts in thousands, except share data)
Unpaid losses and loss adjustment expenses $ 497,770 $ 543,529
Unearned premiums 237,199 231,141
Bank loan payable 175,000 175,000
Claims checks payable 37,714 36,445
Reinsurance payable 26,486 19,730
Other liabilities 25,887 20,203
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Total liabilities 1,000,056 1,026,048
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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, out-
standing 224,950 in 1997 and 1996 224,950 224,950
Common stock without par value;
authorized 110,000,000 shares, out-
standing 51,609,361 in 1997 and
51,520,006 in 1996 70,382 70,263
Common stock warrants 16,000 16,000
Unrealized investment gains (losses), net (18,336) 2,820
Retained earnings 191,935 173,674
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Total stockholders' equity 484,931 487,707
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$1,484,987 $1,513,755
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See accompanying notes to financial statements.
3
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
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(Amounts in thousands, except per share data)
REVENUES:
Net premiums earned $ 194,969 $ 232,628
Net investment income 17,835 18,689
Realized investment gains 1,072 2,588
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213,876 253,905
LOSSES AND EXPENSES:
Net losses and loss adjustment expenses 152,901 191,596
Policy acquisition costs 10,312 8,168
Other operating expenses 7,285 12,372
Loan interest and fees expense 3,293 3,565
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173,791 215,701
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Income before federal income taxes 40,085 38,204
Federal income taxes - Note 4 13,213 12,621
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NET INCOME $ 26,872 $ 25,583
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EARNINGS PER COMMON SHARE - Note 2
- - ----------------------------------
PRIMARY $ .37 $ .35
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FULLY DILUTED $ .34 $ .32
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See accompanying notes to financial statements.
4
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 1997
(Unaudited)
Convertible
Preferred Common Unrealized
Stock Stock Common Investment
$1 Par Value Without Stock Gains Retained
Per Share Par Value Warrants (Losses), Net Earnings
------------ ------------ ------------ ------------ ------------
(Amounts in thousands)
Balance at January 1, 1997 $ 224,950 $ 70,263 $ 16,000 $ 2,820 $ 173,674
Net Income 26,872
Cash dividends declared (7,642)
Other 119 (21,156) (969)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 1997 $ 224,950 $ 70,382 $ 16,000 $ (18,336) $ 191,935
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
See accompanying notes to financial statements.
5
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
---- ----
(Unaudited)
(Amounts in thousands)
OPERATING ACTIVITIES:
Net Income $ 26,872 $ 25,583
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for depreciation and amortization 1,199 1,299
Provision for deferred income taxes 12,737 11,912
Realized gains on sale of investments
and fixed assets (1,073) (2,590)
Federal income taxes 1,498 (896)
Reinsurance balances 5,728 (10,459)
Unpaid losses and loss adjustment expenses (45,760) (18,276)
Unearned premiums 6,058 (9,447)
Claims checks payable 1,269 (2,488)
Other (254) 13,352
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NET CASH PROVIDED
BY OPERATING ACTIVITIES $ 8,274 $ 7,990
6
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
THREE MONTHS ENDED MARCH 31,
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1997 1996
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(Unaudited)
(Amounts in thousands)
INVESTING ACTIVITIES:
Investments available-for-sale:
Purchases $ (225,906) $ (118,468)
Called or matured - 12,107
Sales 240,629 107,674
Net purchases of property and equipment (4,904) (347)
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NET CASH PROVIDED BY
INVESTING ACTIVITIES 9,819 966
FINANCING ACTIVITIES:
Dividends paid (7,642) (5,062)
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NET CASH USED IN
FINANCING ACTIVITIES (7,642) (5,062)
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Net increase in cash and cash equivalents 10,451 3,894
Cash and cash equivalents, beginning of year 18,078 50,609
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Cash and cash equivalents, end of quarter $ 28,529 $ 54,503
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See accompanying notes to financial statements.
7
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal, recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1997. For further information, refer to the
consolidated financial statements and notes thereto included in the 20th
Century Industries Annual Report on Form 10-K for the year ended December
31, 1996.
2. Earnings Per Common Share
Earnings 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 in accordance with APB
Opinion No. 15, "Earnings Per Share." The primary weighted average number
of common share equivalents was 59,272,681 and 59,294,292 for the three
months ended March 31, 1997 and 1996, respectively. The fully diluted
weighted average number of common share equivalents was 79,127,050 and
79,148,661 for the three months ended March 31, 1997 and 1996,
respectively. The primary and fully diluted earnings 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.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Investments
The amortized cost, gross unrealized gains and losses, and fair values of
fixed maturities as of March 31, 1997 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------- -------------- ----------
(Amounts in thousands)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 3,867 $ 57 $ 112 $ 3,812
Obligations of states and political
subdivisions 160,200 1,918 1,905 160,213
Public Utilities 182,554 276 6,838 175,992
Corporate Securities 699,692 2,116 24,630 677,178
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Total Fixed Maturities $ 1,046,313 $ 4,367 $ 33,485 $ 1,017,195
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9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Income Taxes
Income taxes do not bear the expected relationship to pre-tax income
primarily because of tax-exempt investment income. As of March 31, 1997,
the Company has a net operating loss carryforward of approximately
$384,000,000 and $241,000,000 for regular and alternative mini-mum tax
purposes, respectively, and an alternative tax credit carryforward of
$11,690,000. The net operating loss carryforwards will expire in 2009.
Alternative minimum tax credits may be carried forward indefinitely to
offset future regular tax liabilities.
Federal income tax expense consists of:
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
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(Amounts in thousands)
Current tax expense $ 476 $ 709
Deferred tax expense 12,737 11,912
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$ 13,213 $ 12,621
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5. New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is required to be adopted
on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements, primary earnings
per share will be replaced by a simpler calculation called "basic"
earnings per share. This calculation will exclude all common stock
equivalents and other dilutive securities (i.e. options, warrants and
convertible
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. New Accounting Standard (continued)
instruments). Under the new standard, basic earnings per share would be
$.42 and $.40 for the periods ending March 31, 1997 and 1996,
respectively. Under the new requirements, "diluted" earnings per share
will replace the existing fully diluted earnings per share calculation.
The new diluted earnings per share will include the effect of all dilutive
instruments if they meet certain requirements. Under the new standard,
diluted earnings per share would be $.34 and $.32 for the periods ended
March 31, 1997 and 1996, respectively.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's strong performance in the first quarter of 1997 reinforced the
turnaround in unit growth in the core automobile business that began in the last
half of 1996. The number of written vehicles increased by 22,514 in the first
quarter of 1997 compared to a decrease of 22,518 in the first quarter of 1996.
As of March 31, 1997, the Company's insurance subsidiaries had a combined
statutory surplus of $467.9 million, and a net written premium to surplus ratio
of 1.7:1. In addition, the Company's claims paying ability rating from Standard
& Poors was recently upgraded to A- from BBB+.
Strong unit growth in the auto business remains the Company's priority for 1997.
Through its aggressive marketing efforts and the introduction of rating plans
that offer lower rates to its more profitable preferred customers and higher
rates for drivers deemed to represent greater risks, the Company expects to
achieve a more profitable customer mix of new business. Thus far, the Company's
strategy for growth as well as continued downward trends in the frequency and
severity of claims is producing the desired results: the combined ratio for the
first three months of 1997 was 87.4 versus 91.2 for the first quarter of 1996.
As of February 15, 1997, the Company began offering renewal of policies for
68,000 homeowner insurance customers. The Company is complying with
California's requirement to offer earthquake coverage to those customers through
a separate residential earthquake insurance policy underwritten and issued by
American Home Assurance Company, a subsidiary of American International Group,
Inc. (AIG). While the Company is not currently authorized to offer homeowner
insurance to new customers, continuing requests from current auto policy
customers and other California residents make this an important strategic
goal. Authority to sell new homeowner policies requires the
12
ITEM 2. (CONTINUED)
approval of the California Insurance Commissioner. The Company has initiated
discussions to obtain that authorization. The Company's reentry into the
homeowners market is intended to complement its auto business and facilitate
growth in that line. All the risks associated with these homeowner policies
have been ceded to reinsurers since July 1, 1996. The Company remains exposed
to possible upward development in the estimated cost to resolve certain claims
stemming from the 1994 Northridge Earthquake. Although management believes
current reserves are adequate, the outcome of future events could require
changes in previous estimates.
Invested assets as of March 31, 1997 were $1.0 billion. All investments in
fixed maturities are investment grade. Of the Company's total investments at
March 31, 1997, 13.2% at fair value were invested in tax-exempt state and
municipal bonds and 86.8% were invested in taxable government, corporate and
municipal securities.
Loss and loss expense payments are the most significant cash flow requirements
of the Company. The Company continually monitors loss payments to provide
projections of future cash requirements. Cash flow from operations was more
than sufficient to fund loss payments in the first quarter of 1997.
The Company has a variable rate credit line available of $191.3 million at April
1, 1997, which had an outstanding balance of $175 million at March 31, 1997.
Presently, interest is paid monthly; interest payments in the first three months
of 1997 totaled $4.8 million.
At March 31, 1997, the Company had $225 million of preferred stock outstanding,
bearing dividends of 9% per year payable quarterly in cash or in kind. Cash
dividends of $5,061,375 were paid on the preferred stock in the first three
months of 1997.
13
ITEM 2. (CONTINUED)
Funds required by 20th Century Industries to pay preferred stock dividends, debt
obligations and holding company expenses are provided by the insurance
subsidiaries. The ability of the insurance subsidiaries to pay dividends to the
holding company is regulated by state law.
In August 1996, 20th Century Insurance Company of Arizona began writing private
passenger auto policies in that state. As of March 31, 1997, insured vehicles
totaled 5,273, an increase of 75.4% over the total at December 31, 1996.
Insured vehicles increased by 750 in April 1997. 20th Century Insurance
Company of Arizona is a joint venture owned 51% by AIG and 49% by 20th Century
Industries. The Company's investment in 20th Century Insurance Company of
Arizona, (the operations of which, to date, have not been material), is
accounted for by the equity method. The statistical and other information
presented below do not include the activities of 20th Century Insurance Company
of Arizona.
RESULTS OF OPERATIONS
UNITS IN FORCE
Units in force for the Company's insurance programs as of March 31 were as
follows:
1997 1996
---- ----
Private Passenger Automobile
(number of vehicles) 1,034,123 1,038,489
Homeowner and Condominium
(number of policies) 70,073 170,926
Personal Excess Liability
(number of policies) 10,238 10,438
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Total 1,114,434 1,219,853
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14
ITEM 2. (CONTINUED)
The overall decrease in units in force of 8.6% is attributable primarily to the
decrease in homeowners and condominium policies.
The Company's voluntary auto units in force declined by less than 1% compared to
a year ago from 1,031,320 units in force at March 31, 1996 to 1,024,313 units
in force at March 31, 1997. Voluntary auto units grew in the quarter by
19,551 (2%) from December 31, 1996, compared to a decline in units of 21,483
(2%) for the same period in 1996. The increase in units in force is the result
of the Company's aggressive marketing campaign, rate reductions implemented in
1996 and, to some extent, new legislation to enforce the state's mandatory
insurance law.
Assigned Risk units increased by 36.8% from the same period a year ago, from
7,169 units in force at March 31, 1996 to 9,810 units in force at March 31,
1997. The overall increase in Assigned Risk units was an expected response to
the new legislation.
Units in force for the Company's homeowner and condominium programs
declined by 58.9% between March 31, 1996 and March 31, 1997 primarily because
the Company was required by the California Department of Insurance to non-renew
homeowner and condominium policies from July 1, 1996 until February 15, 1997.
However, the Company expects that this decline will slow in 1997 as its
remaining homeowner policyholders are able to renew their policies with the
Company.
15
ITEM 2. (CONTINUED)
UNDERWRITING RESULTS
Premium revenue and underwriting results for the Company's insurance programs
were as follows:
Three Months Ended March 31,
----------------------------
1997 1996
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(Amounts in thousands)
Gross Premiums Written
Automobile $ 218,768 $ 236,295
Homeowners and Condo 8,604 14,977
PELP 493 475
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Total $ 227,865 $ 251,747
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Net Premiums Earned
Automobile $ 192,388 $ 219,722
Homeowners and Condo 2,392 12,708
PELP 189 198
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Total $ 194,969 $ 232,628
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Underwriting Profit (Loss)
Automobile $ 24,549 $ 20,504
Homeowners and Condo (257) (228)
PELP 179 216
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Total $ 24,471 $ 20,492
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16
ITEM 2. (CONTINUED)
Net premiums earned for the first quarter decreased 16.2% to $195 million
compared to the first quarter of 1996. The decline of $37.6 million includes
the effects of lower average vehicles in force of approximately $5.6 million,
auto rate changes of approximately $21.7 million and a reduction of $10.3
million in homeowner and condominium premiums due to non-renewals and ceded
reinsurance premiums.
Automobile
Automobile insurance is the primary line of business written by the Company and
has been consistently profitable. Approximately 51% of the Company's insured
autos are located in Los Angeles County; however, the Company continues to
expand its coverage throughout the state by aggressively marketing its business
in Northern California and San Diego County.
The Company's voluntary automobile program realized better than expected
underwriting profits of $25.0 million for the three months ended March 31, 1997
compared to $20.8 million for the comparable 1996 period. The improvement came
despite a 9% decrease in gross premiums written in the period versus last year.
The impact of continuing favorable loss trends and relatively dry weather
contributed to the improvement in underwriting results in the first quarter of
1997 over the same quarter a year ago, as did the Company's growth and marketing
initiatives to attract and retain a higher proportion of more profitable
preferred customers.
Assigned Risk units produced an underwriting loss of $436,000 in the first three
months of 1997 compared to a $263,000 underwriting loss for the first three
months of 1996. The increased underwriting loss reflects a 36.8% rise in the
number of Assigned Risk vehicles over the same period last year, as new
mandatory insurance enforcement legislation became effective January 1, 1997.
17
ITEM 2. (CONTINUED)
Homeowners and Condominium
In December 1996, the Company was granted authority to offer renewals on its
existing homeowner policies beginning February 15, 1997. This renewal business
is covered in full by quota share reinsurance agreements with three reinsurers,
as follows:
REINSURER PARTICIPATION
----------- --------------
National Union Fire Insurance Co. of Pittsburgh, PA (AIG subsidiary) 50%
United States Fidelity & Guaranty Company 25%
Risk Capital Reinsurance Company 25%
Earthquake coverage, which the Company is obliged to offer in conjunction with
its homeowner policies, is provided through a subsidiary of AIG; no earthquake
exposures are assumed by the Company. As of March 31, 1997, more than 17,000
policies had been renewed, which is in excess of 90% of those eligible.
Homeowners and condominium policies inforce on June 30, 1996 or renewed before
July 23, 1996 (which do not include earthquake coverage) were ceded in full at
equal percentages to United States Fidelity & Guaranty Company and Risk Capital
Reinsurance Company. This coverage is effective until the underlying policies
expire or are renewed.
Underwriting results for these programs are subject to the variability caused by
weather-related claims and infrequent disasters. The underwriting loss for this
line was $257,000 for the first three months of 1997 compared to an underwriting
loss of $228,000 for the same period in 1996. As a result of the 100% quota
share agreement entered into as of July 1, 1996, the Company's exposure to
weather-related and disaster claims has been significantly reduced.
18
ITEM 2. (CONTINUED)
Personal Excess Liability
Units in force decreased by 1.9% from March 31, 1996 to March 31, 1997.
Gross premiums written decreased in the first quarter of 1997 compared to the
same period in 1996. The decline in this business from the prior year is
primarily attributable to the runoff of the homeowner and condominium
programs, as some policyholders for this program are likely to purchase
excess liability coverage in conjunction with their homeowner policies.
Underwriting profits for this line can vary significantly with the number of
claims, which occur infrequently. Personal Excess Liability business is
subject to two quota share reinsurance agreements resulting in a net
retention by the Company of approximately 36%.
Policy Acquisition and General Operating Expenses
The Company's policy acquisition and general operating expense ratio
continues to be one of the lowest in the industry. As a direct writer, the
Company does not incur agent commissions and thus enjoys an expense advantage
over most of its competitors. Net underwriting expenses for the first
quarter ending March 31, 1997 decreased by $2.9 million (14.3%), compared to
the same period in 1996. This decrease reflects a reduction in general
operating expenses due to the decline in the number of units in force and
steps taken to achieve operating cost efficiencies, as well as a benefit from
the ceding commission earned on reinsurance. Ceding commissions accounted
for approximately $710,000 of the reduction in underwriting expenses in the
first quarter of 1997 compared to the same quarter a year ago.
The ratio of net underwriting expenses (excluding loan interest and fees) to net
premiums earned for the first quarter ended March 1997 was 9.0% compared to 8.8%
for the first quarter in 1996. The increase in the expense ratio for the first
quarter is mainly due to the decline in premiums earned.
19
ITEM 2. (CONTINUED)
INVESTMENT INCOME
Net pre-tax investment income decreased 4.6% during the first three months of
1997 compared to the same period in 1996. Average invested assets decreased
4.9% between March 1996 and March 1997 primarily due to the decline in premiums
written and the payment of earthquake-related claims. The average annual
pre-tax yield on invested assets for the three months ended March 31, 1997 was
6.6%, which was unchanged from the first quarter of 1996.
Realized gains on sales of investments decreased in the three months ended March
1997 to $1 million from $2.6 million for the same period of 1996, and unrealized
gains on investments decreased $21.2 million since December 31, 1996 to a net
unrealized loss of $18.3 million as of March 31, 1997, primarily because of
unfavorable conditions in the bond market.
20
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended March
31, 1997.
21
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
20TH CENTURY INDUSTRIES
(Registrant)
Date MAY 08, 1997 /s/William L. Mellick
------------------------------ ----------------------------
WILLIAM L. MELLICK
President and Chief Executive Officer
Date MAY 08, 1997 /s/Robert B. Tschudy
------------------------------- ----------------------------
ROBERT B. TSCHUDY
Senior Vice President and
Chief Financial Officer
22