FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 1-7411
ALLCITY INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
New York 13-2530665
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
335 Adams Street, Brooklyn, N.Y 11201-3731
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (718)422-4000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
On May 11, 2001 there were 7,078,625 shares of Common Stock outstanding.
ALLCITY INSURANCE COMPANY
INDEX
PART I FINANCIAL INFORMATION PAGE
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ITEM 1. Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2001 and December 31, 2000........ 1
Consolidated Statements of Operations - Three months ended
March 31, 2001 and 2000................................................... 2
Consolidated Statements of Cash Flows - Three months
ended March 31, 2001 and 2000 ............................................ 3
Consolidated Statements of Changes in Shareholders' Equity -
Three months ended March 31, 2001 and 2000................................ 4
Notes to Interim Consolidated Financial Statements ....................... 5-6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Interim Results of Operations...................... 6-8
PART II OTHER INFORMATION
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ITEM 5. Other Information ............................................... 9
ITEM 6. Exhibits and Reports on Form 8 .................................. 9
Signature Page............................................................ 10
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and per share amounts)
March 31, December 31,
2001 2000
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ASSETS (Unaudited)
Investments:
Fixed maturities
Available for sale (amortized cost of
$48,265 in 2001 and $118,833 in 2000) $48,963 $119,029
Held to maturity (fair value
of $488 in 2001 and $483 in 2000) 478 486
Equity securities available for sale 375 375
Short-term 58,984 6,834
Other invested assets 38,113 37,149
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TOTAL INVESTMENTS 146,913 163,873
Cash 77 77
Agents' balances, less allowance for
doubtful accounts ($1,489 in 2001 and
$1,770 in 2000) 3,787 5,773
Accrued investment income 874 2,329
Reinsurance balances receivable 173,644 174,629
Prepaid reinsurance premiums 16,065 17,748
Deferred policy acquisition costs 360 3,035
Due from affiliates 4,313 -
Due from brokers 5,771 -
Other assets 4,968 4,820
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TOTAL ASSETS $356,772 $372,284
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LIABILITIES
Unpaid losses $237,013 $239,051
Unpaid loss adjustment expenses 34,773 29,455
Unearned premiums 28,646 32,622
Due to affiliates - 649
Reinsurance balances payable 2,363 1,505
Other liabilities 7,309 8,725
Surplus note 16,652 16,486
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TOTAL LIABILITIES 326,756 328,493
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SHAREHOLDERS' EQUITY
Common stock, $1 par value: 7,368,420
shares authorized; 7,078,625 shares issued
and outstanding in 2001 and 2000 7,079 7,079
Additional paid-in capital 9,331 9,331
Accumulated other comprehensive income 1,073 571
Retained earnings 12,533 26,810
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TOTAL SHAREHOLDERS' EQUITY 30,016 43,791
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $356,772 $372,284
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See Notes to Interim Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and per share amounts)
THREE MONTHS ENDED
MARCH 31
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2001 2000
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REVENUES
Premiums earned $ 6,565 $ 8,077
Net investment income 2,691 3,285
Net realized securities gains/(losses) 1,012 (221)
Other income 46 158
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10,314 11,299
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LOSSES AND EXPENSES
Losses 14,177 5,792
Loss adjustment expenses 4,607 1,722
Other underwriting expenses less deferrals
of $1,111 in 2001 and $2,386 in 2000 1,855 1,859
Amortization of deferred policy
acquisition costs 3,786 1,890
Interest on surplus note 166 144
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24,591 11,407
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LOSS BEFORE FEDERAL INCOME TAXES (14,277) (108)
DEFERRED TAX BENEFIT - (395)
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NET (LOSS)/INCOME $(14,277) $ 287
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Per share data, based on 7,078,625 average
shares outstanding in 2001 and 2000:
BASIC AND FULLY DILUTED (LOSS)
EARNINGS PER SHARE $(2.02) $ 0.04
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See Notes to Interim Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands)
THREE MONTHS ENDED
MARCH 31,
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2001 2000
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NET CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)/income $(14,277) $ 287
Adjustment to reconcile net (loss)/income to
net cash used for operations:
Deferred tax benefit - (395)
Amortization of deferred policy acquisition
costs 3,786 1,890
Provision for doubtful accounts (281) 10
Net realized securities (gains)/losses (1,012) 221
Policy acquisition costs incurred and deferred (1,111) (2,386)
Net changes in:
Agents' balances 2,267 (2,225)
Reinsurance balances receivable 985 16,219
Prepaid reinsurance premiums 1,683 2,460
Unpaid losses and loss adjustment expenses 3,280 (27,845)
Unearned premiums (3,976) 62
Due (from)/to affiliates (4,962) (1,081)
Reinsurance balances payable 858 630
Due from brokers (5,771) -
Other 193 1,845
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NET CASH USED FOR OPERATING ACTIVITIES (18,338) (10,308)
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NET CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale:
Acquisition of fixed maturities (18,019) (6,377)
Proceeds from sale of fixed maturities 69,617 10,789
Proceeds from maturities of fixed maturities 19,854 805
Net change in other invested assets (964) (981)
Net change in short-term investments (52,150) 5,950
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NET CASH PROVIDED BY INVESTING ACTIVITIES 18,338 10,186
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NET DECREASE IN CASH - (122)
Cash, at beginning of period 77 644
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Cash, at the end of period $ 77 $ 522
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See Notes to Interim Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except par value amounts)
ACCUMULATED
COMMON OTHER
STOCK ADDITIONAL COMPREHENSIVE
$1 PAR PAID-IN INCOME/ RETAINED
VALUE CAPITAL (LOSS) EARNINGS TOTAL
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Balance, January 1, 2000 $7,079 $9,331 $(2,304) $57,610 $71,716
Comprehensive income:
Net income 287 287
Other comprehensive income:
Net change in unrealized
loss on investments
(net of deferred tax
of $64) 118 118
Less: reclassification of
net securities losses
included in net income
(net of deferred tax of $16) 31 31
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Comprehensive income 436
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Balance, March 31, 2000 $7,079 $9,331 $(2,155) $57,897 $72,152
========== ========== ========== ========== ==========
Balance, January 1, 2001 $7,079 $9,331 $ 571 $26,810 $43,791
Comprehensive loss:
Net loss (14,277) (14,277)
Other comprehensive income:
Net change in unrealized
gain on investments 1,443 1,443
Less: reclassification of
net securities gains
included in net loss (941) (941)
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Comprehensive loss (13,775)
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Balance, March 31, 2001 $ 7,079 $9,331 $ 1,073 $12,533 $30,016
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See Notes to Interim Consolidated Financial Statements.
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ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited interim consolidated financial statements, which reflect
all adjustments (consisting only of normal recurring items) that management
believes necessary to fairly present interim results of operations, should be
read in conjunction with the Notes to Consolidated Financial Statements
(including the Summary of Significant Accounting Policies) included in the
Company's audited consolidated financial statements for the year ended December
31, 2000, which are included in the Company's Annual Report filed on Form 10-K
for such year (the "2000 10-K"). Results of operations for interim periods are
not necessarily indicative of annual results of operations. The consolidated
balance sheet at December 31, 2000 was extracted from the audited annual
financial statements and does not include all disclosures required by generally
accepted accounting principles for annual financial statements.
2. Certain amounts for prior periods have been reclassified to conform with
the 2001 presentation.
3. Certain information concerning the Company's segments for the three
month periods ended March 31, 2001 and 2000 is as follows (in
thousands):
2001 2000
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PREMIUMS EARNED
Small Business $ 1,219 $ 1,419
Mid-Market 2,847 3,032
Personal Lines (1) 2,499 3,626
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Total Premiums Earned $ 6,565 $ 8,077
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LOSSES INCURRED
Small Business $ 3,867 $ 753
Mid-Market 6,203 2,590
Personal Lines (1) 4,107 2,449
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Total Losses Incurred $14,177 $ 5,792
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LOSS ADJUSTMENT EXPENSES INCURRED
Small Business $ 1,257 $ 222
Mid-Market 2,016 624
Personal Lines (1) 1,334 876
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Total Loss Adjustment Expenses
Incurred $ 4,607 $ 1,722
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<FN>
(1) Includes assigned risk automobile business which the Company no longer
participates in effective January 1, 2000
</FN>
4. On March 1, 2001, the Company, Empire Insurance Company (its parent
company) and Centurion Insurance Company (an affiliate) (collectively referred
to as the "Empire Group") announced that, effective immediately, it would no
longer issue any new (as compared to renewal) insurance policies and that it
filed plans of orderly withdrawal with the New York Insurance Department as
required. Existing commercial lines policies will be non-renewed or canceled in
accordance with New York insurance law or replaced by Tower Insurance Company of
New York or Tower Risk Management (collectively, "Tower") under an agreement for
the sale of the Empire Group's renewal rights (the "Tower Agreement"). Under the
Tower Agreement, Tower will buy the renewal rights for substantially all of
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the Empire Group's remaining lines of business, excluding private passenger
automobile and commercial automobile/garage, for a fee based on the direct
written premium actually renewed by Tower. The amount of the fee is not expected
to be material. The Empire Group will continue to be responsible for the
remaining term of its existing policies and all claims incurred prior to the
expiration of these policies. For commercial lines, the Empire Group will
thereafter have no renewal obligations for those policies. Under New York
insurance law, the Empire Group is obligated to offer renewals of homeowners,
dwelling fire, personal insurance coverage and personal umbrella for a
three-year policy period; however, the Tower Agreement provides that Tower must
offer replacements for these policies. The closing of the transaction is subject
to the approval of the New York Insurance Department.
The Company increased reserves for loss and loss adjustment expenses by
$11.7 million and $0.9 million for the three month periods ended March 31, 2001
and 2000, respectively. The increase during the first quarter of 2001 reflected
adverse development in commercial package lines of business, primarily due to
increases in severity of liability claims, adverse development in workers'
compensation and automobile lines of business and an increase in estimated loss
adjustment expenses related to claims handled in house. In addition, the Company
wrote-off approximately $2.2 million of deferred policy acquisition costs as
their recoverability from premiums and related investment income was no longer
anticipated.
5. On January 1, 2001, the Company adopted Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended ("SFAS 133"). Under SFAS 133, the Company would reflect derivative
instruments at fair value. The implementation of SFAS 133 did not have a
material effect on the Company's financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF INTERIM OPERATIONS
The following should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the 2000 10-K.
LIQUIDITY AND CAPITAL RESOURCES
For the three month periods ended March 31, 2001 and 2000, net cash was
used for operations principally as a result of a decrease in premiums written
and the payment of claims.
At March 31, 2001 and 2000, the yield on the Company's bond portfolio
was 5.3% and 6.7%, respectively, with an average maturity of 1.0 year and 2.5
years, respectively. At March 31, 2001, a substantial portion of the Company's
investment portfolio is rated "investment grade" by established bond rating
agencies or issued or guaranteed by the U.S. Treasury or by governmental
agencies. A portion of the Company's invested assets represent an investment in
a limited partnership which invests principally in convertible preferred stocks,
convertible long-term debt securities, limited partnerships, and common stocks
sold, but not yet purchased.
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The Company maintains cash, short-term and readily marketable securities
and anticipates that the cash flow from investment income and the maturities and
sales of short-term investments and fixed maturities will be sufficient to
satisfy its anticipated cash needs. During each of the three month periods ended
March 31, 2001 and 2000, the Company sold certain securities to meet short-term
cash flow needs. The Company does not presently anticipate paying dividends in
the near future.
INTERIM RESULTS OF OPERATIONS-THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2000.
Net earned premium revenues of the Company were $6.6 million and $8.1
million for the three month periods ended March 31, 2001 and 2000, respectively.
Earned and written premiums declined in almost all lines of business. The
declines are due, in part, to previously announced decisions not to issue any
new (as compared to renewal) insurance policies in any lines of business
effective March 1, 2001, to non-renew all statutory automobile policies (public
livery vehicles) effective March 1, 2001, and to not accept any new private
passenger automobile policies effective December 2000. Any remaining commercial
lines policies will be non-renewed or canceled in accordance with New York
insurance law or replaced by Tower. Under the Tower Agreement, Tower will buy
the renewal rights for substantially all of the Empire Group's remaining lines
of business, excluding private passenger automobile and commercial
automobile/garage, for a fee that is not expected to be material. The Empire
Group will continue to be responsible for the remaining term of its existing
policies and all claims incurred prior to the expiration of these policies. For
commercial lines, the Empire Group will thereafter have no renewal obligations
for those policies. Under New York insurance law, the Empire Group is obligated
to offer renewals of homeowners, dwelling fire, personal insurance coverage and
personal umbrella for a three-year policy period; however, the Tower Agreement
provides that Tower must offer replacements for these policies. The closing of
the transaction is subject to the approval of the New York Insurance Department.
Pre-tax losses for the Company were $14.3 million and $0.1 million for
the three month periods ended March 31, 2001 and 2000, respectively. The pre-tax
losses include increases for loss and loss adjustment expenses for prior
accident years of $11.7 million and $0.9 million for the three month periods
ended March 31, 2001 and 2000, respectively. In addition, during the first
quarter of 2001, the Empire Group wrote-off approximately $2.2 million of
deferred policy acquisition costs as their recoverability from premiums and
related investment income was no longer anticipated.
During the first quarter of 2001, the Company increased its reserve
estimates for its commercial package policies lines of business, primarily due
to an increase in severity of liability claims for accident years 1998 and
prior. The Company, along with other carriers that write similar risks in the
New York marketplace, has exposure for third party liability claims in many of
its lines of business. During 2001, there were several settlements and court
decisions on third party liability cases for amounts that are greater than the
industry's historical experience for similar claims, which had formed the basis
for the Company's estimated loss reserves. While many of these decisions are
being appealed, these results may signal a change in the judicial environment in
the Company's marketplace. Accordingly, the Company has increased its loss
reserve estimate by approximately $5.4 million due to an estimated increase in
severity for certain of these exposures.
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First quarter 2001 reserve strengthening also resulted from unfavorable
development principally in the Company's automobile lines of business for the
1998 through 2000 accident years, primarily relating to personal injury
protection coverage ("PIP") and in its workers' compensation lines of business.
The Company believes that the increased loss estimates for PIP are consistent
with recent trends in the industry, and has strengthened loss reserves for all
automobile lines by $2.7 million. In addition, during the first quarter, the
Company recalculated its estimate of loss adjustment expenses and increased its
reserve by $2.1 million, primarily as a result of increased costs to settle
claims handled in house.
In management's judgment, information currently available has been
appropriately considered in estimating the Company's loss reserves. However, the
reserving process relies on the basic assumption that past experience is an
appropriate basis for predicting future events. As additional experience and
other data become available and are reviewed, the Company's estimates and
judgments may be revised.
Income taxes for 2000 reflect a benefit of $0.4 million for a change in
the Company's estimated prior year's federal tax liability.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Interim Operations may contain
forward-looking statements pursuant to the safe-harbor provisions of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements may
relate, but are not limited, to projections of revenues, income or loss, capital
expenditures, fluctuations in insurance reserves, plans for growth and future
operations, competition and regulation as well as assumptions relating to the
foregoing. Forward-looking statements are inherently subject to risks and
uncertainties, many of which cannot be predicted or quantified. When used in
this Management's Discussion and Analysis of Financial Condition and Results of
Interim Operations, the words "estimates", "expects", "anticipates", "believes",
"plans", "intends" and variations of such words and similar expressions are
intended to identify forward-looking statements that involve risks and
uncertainties. Future events and actual results could differ materially from
those set forth in, contemplated by or underlying the forward-looking
statements. The factors that could cause actual results to differ materially
from those suggested by any such statements include, but are not limited to,
those discussed or identified from time to time in the Company's public filings,
including general economic and market conditions, changes in domestic laws,
regulations and taxes, changes in competition and pricing environments, regional
or general changes in asset valuation, the occurrence of significant natural
disasters, the inability to reinsure certain risks economically, the adequacy of
loss and loss adjustment expense reserves, prevailing interest rate levels,
weather related conditions that may affect the Company's operations,
consummation of the Tower Agreement, the ability to attract and retain key
personnel, adverse selection through renewals of the Group's policies, the
Group's ability to develop an alternative business model and changes in
composition of the Company's assets and liabilities through acquisitions or
divestitures. Undue reliance should not be placed on these forward-looking
statements, which are applicable only as of the date hereof. The Company
undertakes no obligation to revise or update these forward-looking statements to
reflect events or circumstances that arise after the date of this Management's
Discussion and Analysis of Financial Condition and Results of Interim Operations
or to reflect the occurrence of unanticipated events.
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PART II - OTHER INFORMATION
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ITEM 5. OTHER INFORMATION
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None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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a) Exhibits
None
b) Report on Form 8-K
The Company filed a current report on Form 8-K dated March 1,
2001, which sets forth information under Item 5. Other Events
and Item 7. Financial Statements and Exhibits.
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SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLCITY INSURANCE COMPANY
Registrant
Date: May 15, 2001 By: /s/Rocco J. Nittoli
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Rocco J. Nittoli
Chief Operating Officer
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