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 JUNE 30, 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
-----------------------------
(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 August 10, 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 - June 30, 2001
and December 31, 2000..................................................... 1
Consolidated Statements of Operations - Six months ended
June 30, 2001 and June 30, 2000........................................... 2
Consolidated Statements of Operations - Three months ended
June 30, 2001 and June 30, 2000........................................... 3
Consolidated Statements of Cash Flows - Six months
ended June 30, 2001 and June 30, 2000..................................... 4
Consolidated Statements of Changes in Shareholders' Equity -
Six months ended June 30, 2001 and June 30, 2000 5
Notes to Interim Consolidated Financial Statements ....................... 6-7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Interim Results of Operations...................... 7-10
PART II OTHER INFORMATION
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ITEM 5. Other Information ............................................... 11
ITEM 6. Exhibits and Reports on Form 8 .................................. 11
Signature Page............................................................ 12
i
PART 1 - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and per share amounts)
June 30, December 31,
2001 2000
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ASSETS (Unaudited)
Investments:
Fixed maturities
Available for sale (amortized cost of
$46,314 in 2001 and $118,833 in 2000) $ 46,970 $119,029
Held to maturity (fair value
of $487 in 2001 and $483 in 2000) 478 486
Equity securities available for sale 375 375
Short-term 63,747 6,834
Other invested assets 39,060 37,149
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TOTAL INVESTMENTS 150,630 163,873
Cash 77 77
Agents' balances, less allowance for
doubtful accounts ($1,196 in 2001 and
$1,770 in 2000) 2,666 5,773
Accrued investment income 998 2,329
Reinsurance balances receivable 172,630 174,629
Prepaid reinsurance premiums 12,811 17,748
Deferred policy acquisition costs - 3,035
Other assets 4,350 4,820
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TOTAL ASSETS $344,162 $372,284
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LIABILITIES
Unpaid losses $231,402 $239,051
Unpaid loss adjustment expenses 31,907 29,455
Unearned premiums 22,647 32,622
Due to affiliates 1,535 649
Reinsurance balances payable 3,046 1,505
Other liabilities 7,639 8,725
Surplus note 16,792 16,486
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TOTAL LIABILITIES 314,968 328,493
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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 1,031 571
Retained earnings 11,753 26,810
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TOTAL SHAREHOLDERS' EQUITY 29,194 43,791
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $344,162 $372,284
============== =============
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)
SIX MONTHS ENDED
JUNE 30
----------------------------
2001 2000
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REVENUES
Premiums earned $11,887 $16,031
Net investment income 5,042 6,534
Net realized securities gains/(losses) 1,016 (588)
Other income 84 111
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18,029 22,088
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LOSSES AND EXPENSES
Losses 18,763 11,300
Loss adjustment expenses 6,075 3,722
Other underwriting expenses less deferrals
of $1,783 in 2001 and $4,173 in 2000 3,124 3,802
Amortization of deferred policy
acquisition costs 4,818 3,937
Interest on surplus note 306 302
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33,086 23,063
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LOSS BEFORE FEDERAL INCOME TAXES (15,057) (975)
FEDERAL INCOME TAXES
Current tax expense - 2
Deferred tax benefit - (700)
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- (698)
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NET LOSS $(15,057) $ (277)
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Per share data, based on 7,078,625 average
shares outstanding in 2001 and 2000:
BASIC AND FULLY DILUTED LOSS PER SHARE $(2.13) $ (0.04)
============== =============
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
JUNE 30,
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2001 2000
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REVENUES
Premiums earned $5,322 $7,954
Net investment income 2,351 3,249
Net realized securities gains/(losses) 4 (367)
Other income 38 43
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7,715 10,879
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LOSSES AND EXPENSES
Losses 4,586 5,508
Loss adjustment expenses 1,468 2,000
Other underwriting expenses less deferrals
of $672 in 2001 and $1,787 in 2000 1,269 2,033
Amortization of deferred policy
acquisition costs 1,032 2,047
Interest on surplus note 140 158
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8,495 11,746
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LOSS BEFORE FEDERAL INCOME TAXES (780) (867)
FEDERAL INCOME TAXES
Current tax expense - 2
Deferred tax benefit - (305)
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- (303)
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NET LOSS $(780) $( 564)
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Per share data, based on 7,078,625 average
shares outstanding in 2001 and 2000:
BASIC AND FULLY DILUTED LOSS PER SHARE $(0.11) $(0.08)
============== =============
See Notes to Interim Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands)
SIX MONTHS ENDED
JUNE 30,
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2001 2000
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NET CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(15,057) $ (277)
Adjustment to reconcile net loss to
net cash used for operations:
Deferred tax benefit - (700)
Amortization of deferred policy acquisition
costs 4,818 3,937
Provision for doubtful accounts (574) 24
Net realized securities (gains)/losses (1,016) 588
Policy acquisition costs incurred and deferred (1,783) (4,173)
Net changes in:
Agents' balances 3,681 327
Reinsurance balances receivable 1,999 32,942
Prepaid reinsurance premiums 4,937 2,788
Unpaid losses and loss adjustment expenses (5,197) (54,551)
Unearned premiums (9,975) (1,536)
Due (from)/to affiliates 886 (11,437)
Reinsurance balances payable 1,541 1,084
Other 1,209 1,107
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NET CASH USED FOR OPERATING ACTIVITIES (14,531) (29,877)
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NET CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale:
Acquisition of fixed maturities (19,559) (6,377)
Proceeds from sale of fixed maturities 72,372 32,322
Proceeds from maturities of fixed maturities 20,542 804
Net change in other invested assets (1,911) (2,203)
Net change in short-term investments (56,913) 4,795
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NET CASH PROVIDED BY INVESTING ACTIVITIES 14,531 29,341
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NET DECREASE IN CASH - (536)
Cash, at beginning of period 77 644
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Cash, at the end of period $ 77 $ 108
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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 loss (277) (277)
Other comprehensive income:
Net change in unrealized
loss on investments
(net of deferred tax
expense of $283) 526 526
Less: reclassification of
net securities losses
included in net loss
(net of deferred tax benefit
of $76) 141 141
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Comprehensive income 667 (277) 390
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Balance, June 30, 2000 $7,079 $9,331 $(1,637) $57,333 $72,106
========= ========= ========== ========== ==========
Balance, January 1, 2001 $7,079 $9,331 $ 571 $26,810 $43,791
Comprehensive loss:
Net loss (15,057) (15,057)
Other comprehensive loss:
Net change in unrealized
gain on investments 1,444 1,444
Less: reclassification of
net securities gains
included in net loss (984) (984)
---------- ---------- ----------
Comprehensive loss 460 (15,057) (14,597)
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Balance, June 30, 2001 $7,079 $9,331 $ 1,031 $11,753 $29,194
========= ========= ========== ========== ==========
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. 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 (the "Department") as required.
Commercial lines policies were 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. Starting
in the second quarter, Tower purchased 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 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 Company increased reserves for loss and loss adjustment expenses by
$11.7 million and $1.8 million for the six month periods ended June 30,
2001 and 2000, respectively, and $0.9 million for the three month
period ended June 30, 2000. The increase during the six month period
ended June 30, 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 $2.6 million and $0.4 million of deferred policy
acquisition costs during the six and three month periods ended June 30,
2001, respectively, as their recoverability from premiums and related
investment income was no longer anticipated.
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In July 2001, the Department informed the Company and its parent of its
examination findings concerning the three-year period ended December
31, 1999. The report on examination has not been filed and the Company
and its parent are in the process of reviewing these findings with the
Department. Among other matters, the Department's report indicated a
loss reserve deficiency for the Company and its parent, of which $9.0
million was attributed to the Company. Although this deficiency is less
than the combined surplus of the Company and its parent, after it is
allocated between them in accordance with the pooling agreement, this
deficiency causes its parent's stand alone statutory surplus to fall
below minimum required levels. In addition, the current structure
causes its parent's surplus to be reduced by a statutory limitation on
the amount that it can invest in its insurance subsidiaries.
Accordingly, the Company and its parent are evaluating reorganizing the
current structure to reduce and/or eliminate these statutory
limitations. Additionally, the Company and its parent are considering
certain other transactions to increase the parent's surplus above the
minimum required level on a stand alone basis.
A meeting has been scheduled with the Department for the end of August
2001 to review the Company's response to these findings. In addition,
the parent believes that the above transactions will serve as a basis
for providing the Department by the end of August 2001 with a plan for
remedying its surplus deficiency. Such a plan is subject to the review
and approval of the Department. No assurance can be given that such a
plan will be approved by the Department or that material adverse
regulatory action will not be taken.
4. 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.
5. As a result of the Empire Group's actions outlined in Note 3 above and
a consolidation of the Empire Group's internal management organization
in 2001, the Company's prior business segments of Small Business,
Mid-Market and Personal Lines have been eliminated. Accordingly, the
disclosures for these prior business segments have been eliminated.
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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 six month periods ended June 30, 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 June 30, 2001 and 2000, the yield on the Company's bond portfolio was
4.5% and 6.8%, respectively, with an average maturity of 1.0 year and 2.0 years,
respectively. At June 30, 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.
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 six month periods ended
June 30, 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-SIX AND THREE MONTHS ENDED JUNE 30, 2001 COMPARED
TO THE SIX AND THREE MONTHS ENDED JUNE 30, 2000.
Net earned premium revenues of the Company were $11.9 million and $16.0
million for the six month periods ended June 30, 2001 and 2000, respectively,
and $5.3 million and $8.0 million for the three month periods ended June 30,
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.
Commercial lines policies were non-renewed or canceled in accordance with New
York insurance law or replaced by Tower. Starting in the second quarter, Tower
purchased 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 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
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period; however, the Tower agreement provides that Tower must offer replacements
for these policies.
Pre-tax losses for the Company were $15.1 million and $1.0 million for the
six month periods ended June 30, 2001 and 2000, respectively, and $0.8 million
and $0.9 million for the three month periods ended June 30, 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 $1.8 million for the six
month periods ended June 30, 2001 and 2000, respectively, and $0.9 million for
the three month period ended June 30, 2000. In addition, during the six and
three month periods ended June 30, 2001, the Company wrote-off approximately
$2.6 million and $0.4 million, respectively, of deferred policy acquisition
costs as their recoverability from premiums and related investment income was no
longer anticipated.
During 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 Empire Group, 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
for the six month period ended June 30, 2001 by approximately $5.4 million due
to an estimated increase in severity for certain of these exposures.
Reserve strengthening in the six month period ended June 30, 2001 also
resulted from unfavorable development principally in its 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 for the six month period ended
June 30, 2001. In addition, during the six month period ended June 30, 2001, the
Empire Group 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.
In July 2001, the Department informed the Company and its parent of its
examination findings concerning the three-year period ended December 31, 1999.
The report on examination has not been filed and the Company and its parent are
in the process of reviewing these findings with the Department. Among other
matters, the Department's report indicated a loss reserve deficiency for the
Company and its parent, of which $9.0 million was attributed to the Company.
Although this deficiency is less than the combined surplus of the Company and
its parent, after it is allocated between them in accordance with the pooling
agreement, this deficiency causes its parent's stand alone statutory surplus to
fall below minimum required levels. In addition, the current structure causes
its parent's surplus to be reduced by a statutory limitation on the amount that
it can invest in its insurance subsidiaries. Accordingly, the Company and its
parent are evaluating reorganizing the current structure to reduce and/or
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eliminate these statutory limitations. Additionally, the Company and its parent
are considering certain other transactions to increase the parent's surplus
above the minimum required level on a stand alone basis.
A meeting has been scheduled with the Department for the end of August 2001
to review the Company's response to these findings. In addition, the parent
believes that the above transactions will serve as a basis for providing the
Department by the end of August 2001 with a plan for remedying its surplus
deficiency. Such a plan is subject to the review and approval of the Department.
No assurance can be given that such a plan will be approved by the Department or
that material adverse regulatory action will not be taken.
Income taxes for the six months ended June 30, 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,
effectiveness of the Tower agreement, the ability to attract and retain key
personnel, adverse selection through renewals of the Empire Group's policies,
the Empire Group's ability to develop an alternative business model, regulatory
approval of the Empire Group's plan in response to the findings of the
Department, adverse regulatory action against the Empire Group 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.
- 10 -
PART II - OTHER INFORMATION
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ITEM 5. OTHER INFORMATION
- ------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------
a) Exhibits
None
b) Report on Form 8-K
None
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SIGNATURE
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: August 14, 2001 By: /s/Rocco J. Nittoli
-------------------------
Rocco J. Nittoli Chief
Operating Officer
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