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, 2000 Commission File Number 0-6964
21ST CENTURY INSURANCE GROUP
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(Exact name of 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)
6301 Owensmouth Avenue, Suite 700, 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
----------- -----------
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 28, 2000
Common Stock, Without Par Value 85,047,801 shares
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2000 1999
------------ -------------
(Unaudited)
(Amounts in thousands)
Investments, available-for-sale, at fair value:
Fixed maturities $ 941,448 $ 942,982
Equity securities 338 563
------------ -------------
Total investments - Note 3 941,786 943,545
Cash and cash equivalents 19,382 45,034
Accrued investment income 14,761 15,403
Premiums receivable 73,907 70,796
Reinsurance receivables and recoverables 55,104 56,616
Prepaid reinsurance premiums 20,503 32,212
Deferred income taxes - Note 4 87,943 91,251
Deferred policy acquisition costs 24,698 22,156
Property and equipment, net of accumulated 93,082 84,455
depreciation
Other assets 23,627 17,864
------------ -------------
$ 1,354,793 $ 1,379,332
============ =============
See accompanying notes to financial statements.
2
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2000 1999
------------ --------------
(Unaudited)
(Amounts in thousands, except share data)
Unpaid losses and loss adjustment expenses $ 274,074 $ 276,248
Unearned premiums 243,050 232,702
Bank loan payable 45,000 67,500
Claims checks payable 33,198 31,912
Reinsurance payable 10,351 22,311
Other liabilities 40,293 27,822
------------ --------------
Total liabilities 645,966 658,495
Stockholders' equity
Capital stock
Preferred stock, par value $1.00 per share;
Authorized 500,000 shares, none issued - -
Series A convertible preferred stock, par value
$1.00 per share, stated value $1,000 per share;
Authorized 376,126 shares, none outstanding
in 2000 and 1999 - -
Common stock, without par value; authorized
110,000,000 shares, outstanding 85,161,735
in 2000 and 85,918,680 in 1999 415,735 429,623
Accumulated other comprehensive loss (28,607) (40,519)
Retained earnings 321,699 331,733
------------ --------------
Total stockholders' equity 708,827 720,837
------------ --------------
$ 1,354,793 $ 1,379,332
============ ==============
See accompanying notes to financial statements.
3
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
-------------------
2000 1999
--------- --------
(Amounts in thousands,
except per share data)
REVENUES
Net premiums earned $200,272 $194,345
Net investment income 13,050 17,899
Realized investment gains (losses) (3,743) 7,248
--------- --------
209,579 219,492
LOSSES AND EXPENSES
Losses and loss adjustment expenses 178,857 154,679
Policy acquisition costs 21,690 17,114
Other operating expenses 7,346 2,610
Interest and fees expense 1,137 1,952
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209,030 176,355
--------- --------
Income before federal income taxes 549 43,137
Federal income taxes (benefit) - Note 4 (3,106) 14,224
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NET INCOME $ 3,655 $ 28,913
========= ========
EARNINGS PER COMMON SHARE - Note 2
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BASIC $ 0.04 $ 0.33
========= ========
DILUTED $ 0.04 $ 0.33
========= ========
See accompanying notes to financial statements.
4
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Three Months Ended March 31, 2000
---------------------------------
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income (Loss) Total
--------- ---------- --------------- ---------
(Amounts in thousands)
Balance at January 1, 2000 $429,623 $ 331,733 $ (40,519) $720,837
Comprehensive income:
Net income 3,655 3,655
Change in accumulated other
comprehensive income, net -
Note 3 11,912 11,912
---------
Total comprehensive income 15,567
Cash dividends declared (13,689) (13,689)
Common stock repurchased
and retired (13,933) (13,933)
Other 45 45
--------- ---------- --------------- ---------
Balance at March 31, 2000 $415,735 $ 321,699 $ (28,607) $708,827
========= ========== =============== =========
See accompanying notes to financial statements.
5
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
-------------------
2000 1999
-------- ---------
(Unaudited)
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income $ 3,655 $ 28,913
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for depreciation and amortization 3,382 3,239
Provision for deferred income taxes (3,106) 7,393
Realized (gains) losses on sale of investments 3,716 (7,346)
Federal income taxes - 10,932
Reinsurance balances 1,261 4,867
Unpaid losses and loss adjustment expenses (2,174) (43,779)
Unearned premiums 10,348 1,381
Claims checks payable 1,286 6,955
Other 1,724 17,219
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NET CASH PROVIDED BY
OPERATING ACTIVITIES $20,092 $ 29,774
6
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Three Months Ended
March 31,
---------------------
2000 1999
--------- ----------
(Unaudited)
(Amounts in thousands)
INVESTING ACTIVITIES:
Investments available-for-sale:
Purchases $(55,100) $(232,493)
Calls or maturities - 5,040
Sales 71,398 270,463
Net purchases of property and equipment (11,965) (10,271)
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NET CASH PROVIDED BY
INVESTING ACTIVITIES 4,333 32,739
FINANCING ACTIVITIES:
Common stock repurchased (13,933) -
Bank loan principal repayments (22,500) (11,250)
Dividends paid (13,689) (14,021)
Other 45 -
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NET CASH USED IN
FINANCING ACTIVITIES (50,077) (25,271)
--------- ----------
Net increase (decrease) in cash (25,652) 37,242
Cash and cash equivalents, beginning of period 45,034 167,856
--------- ----------
Cash and cash equivalents, end of period $ 19,382 $ 205,098
========= ==========
See accompanying notes to financial statements.
7
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(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,
2000, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000. For further information, refer to the
consolidated financial statements and notes thereto included in the 21st Century
Insurance Group Annual Report on Form 10-K for the year ended December 31, 1999.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 presentation.
8
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Earnings Per Common Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended March 31,
----------------------------
2000 1999
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(Amounts in thousands, except per share data)
Numerator for basic and diluted earnings per share:
Income available to common stockholders $ 3,655 $28,913
======= =======
Denominator:
Weighted-average shares outstanding for basic 85,343 87,633
earnings per share
Effect of dilutive securities:
Restricted stock grants 164 -
Employee stock options 67 75
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Dilutive potential common shares 231 75
Adjusted weighted-average shares outstanding for
Diluted earnings per share 85,574 87,708
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Basic earnings per share $ 0.04 $ 0.33
======= =======
Diluted earnings per share $ 0.04 $ 0.33
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9
3. Investments
The amortized cost, gross unrealized gains and losses, and fair values of
investments as of March 31, 2000, 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 $ 15,213 $ 9 $ 809 $ 14,413
Obligations of states and political
subdivisions 912,849 1,570 40,224 874,195
Corporate securities 57,693 47 4,900 52,840
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Total fixed maturities 985,755 1,626 45,933 941,448
Equity securities 41 297 - 338
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Total investments $ 985,796 $ 1,923 $ 45,933 $941,786
========== =========== =========== ========
Details follow concerning the change during the three months ended March 31,
2000, in the after-tax net unrealized gain on investments, which is included in
the consolidated balance sheet under the caption "Accumulated Other
Comprehensive Income (Loss)" (amounts in thousands):
Net unrealized gains on available-for-sale investments, net of
income tax expense of $5,114 $ 9,497
Plus: reclassification adjustment for losses included in net income,
net of income tax benefit of $1,301 2,415
-------
$11,912
=======
10
4. Federal Income Taxes
Income taxes do not bear the expected relationship to pre-tax income
because of tax-exempt investment income and other differences in the recognition
of revenue and expenses for tax and financial statement purposes. At March 31,
2000, the Company had a net operating loss carryforward of approximately $110.9
million for regular tax purposes and an alternative minimum tax credit
carryforward of $33.0 million. 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 (benefit) consists of:
Three Months Ended March 31,
----------------------------
2000 1999
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(Amounts in thousands)
Current tax expense $ - $ 6,831
Deferred tax (3,106) 7,393
expense (benefit)
-------------- ------------
$ (3,106) $ 14,224
============== ============
11
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- - ----------------------------------
The Company is principally dependent on premiums and its portfolio of marketable
securities and the investment income thereon to pay claims and operating
expenses and to service outstanding debt. Loss and loss expense payments are
the most significant cash flow requirement of the Company. The Company
continually monitors loss payments to provide projections of future cash
requirements. Cash flow from operations and investment activities has continued
to be sufficient to fund the Company's needs.
Funds required by 21st Century Insurance Group to pay 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, which allows the payment of up to the
greater of prior year statutory net income or 10% of surplus without prior
approval from the state. As of March 31, 2000, the Company's insurance
subsidiaries had a combined statutory surplus of $572.6 million compared to a
combined statutory surplus of $634.0 million at March 31, 1999. The Company's
ratio of net written premium to surplus was 1.4:1 at March 31, 2000, compared to
1.2:1 at March 31, 1999.
Invested assets as of March 31, 2000, had a fair value of $961.2 million
compared to $988.6 million at December 31, 1999. The decrease includes a
decrease in unrealized losses of $18.3 million. All investments in fixed
maturities are investment grade. Of the Company's total investments at March
31, 2000, 89.8% were invested in tax-exempt fixed-income securities compared to
85.6% at December 31, 1999 and 29.8% at March 31, 1999.
12
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
The fixed maturity available-for-sale portfolio is subject to decline in fair
value as interest rates rise. As of March 31, 2000, the after-tax unrealized
loss on investments was $28.6 million, compared to $40.5 million as of December
31, 1999. The Company's strategy has been to minimize the realization of these
losses by holding the underlying investments, to the extent practicable, until
they regain their value.
At April 1, 2000, the Company has a variable rate credit line available of $45.0
million, all of which is outstanding. Presently, interest is paid monthly;
interest payments for the first three months of 2000 totaled approximately $1.1
million. Principal repayments of $11.25 million are due on the first day of
each calendar quarter.
During the second quarter of 1999, 21st Century's Board of Directors authorized
the expenditure of $50 million to purchase shares of the Company's common stock.
Implementation of the stock repurchase program began in June of last year. As
of March 31, 2000, 2,515,484 shares had been repurchased at a cost of
approximately $47.4 million. This repurchase program was completed in April
2000.
In August 1996, 21st Century Insurance Company of Arizona, a joint venture owned
51% by AIG and 49% by 21st Century Insurance Group, began writing private
passenger automobile policies in that state. The Company's investment in and
advances to this venture totaled $3,990,000 at March 31, 2000, and are included
in other assets in the consolidated balance sheet. The Company's share of the
net loss of this venture was $175,000 for the three months ended March 31, 2000,
and $125,000 for the same 1999 period and is included in investment income in
the consolidated statements of income. The information presented hereinafter
does not include the activities of 21st Century Insurance Company of Arizona.
13
Underwriting Results
- - ---------------------
Gross premiums written in the first quarter of 2000 increased $10.0 million
(4.4%) to $233.9 million from $223.9 million in the same period of 1999
primarily as a result of increased sales of personal auto policies in Nevada,
Oregon, and Washington and sales of homeowners policies to new customers in
California. Net earned premiums increased $5.9 million (3.0%) mainly due to the
termination effective January 1, 2000, of the former 100% quota share
reinsurance program relating to the homeowners line.
The Company experienced an underwriting loss of $7.6 million in the first
quarter of 2000 compared to an underwriting gain of $19.9 million in the same
quarter last year. The combined ratio increased from 89.7% in the first quarter
of 1999 to 103.8% for the first quarter of 2000, mainly due to increased loss
costs and higher operating expenses.
Loss costs began trending upwards in the third quarter of 1999 after several
years in which the Company's underwriting results had benefited from declining
trends. The higher loss costs can be expected to negatively impact the
Company's underwriting results over the near term. A reevaluation of the
Company's pricing strategy is expected to be completed in the second quarter.
However, because premiums are earned over policy terms for financial operating
purposes, the effects of any rate increases would not be evident in the
Company's reported financial results for several months following any such
action.
Net underwriting expenses, which consist of policy acquisition costs and other
operating expenses, increased by $9.3 million (47.2%) for the first quarter of
2000 compared to the same quarter in 1999. The ratio of net underwriting
expenses (excluding loan interest and fees) to net premiums earned for the three
months ended March 31, 2000, was 14.5% compared to 10.1% for the same period in
1999, reflecting the Company's continuing investments in new technology,
customer-focused business practices and the impact of a 6.8% new rate decrease
that went into effect in February 1999.
14
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
INVESTMENT INCOME
In the fourth quarter of 1998, the Company began transitioning its investment
portfolio from taxable to nontaxable securities in anticipation of fully
utilizing its remaining net operating loss carryforward. At March 31, 2000,
$863.2 million or 89.8% of the Company's total cash and investments at fair
value was invested in tax-exempt bonds compared to $359.8 million or 29.8% at
March 31, 1999.
As a result of the transition of the portfolio into tax-exempt securities, which
generally have a lower pre-tax yield than taxable securities, net pre-tax
investment income decreased 26.1% during the quarter ended March 31, 2000,
compared to the same period in 1999. The average annual pre-tax yield on
invested assets for the three-month period ended March 31, 2000, was 5.1%
compared to 5.9% for the same period in 1999. On an after tax basis, the
comparable yields were 4.6% and 4.2% for the first quarters of 2000 and 1999,
respectively. Average invested assets decreased 14.3% for the quarter ended
March 31, 2000, compared to the same 1999 period.
Realized losses on sales of investments were $3.7 million for the first quarter
of 2000 compared to realized gains of $7.2 million for the same period in 1999.
FORWARD LOOKING-STATEMENT
Statements contained in this quarterly report which are not historical facts may
be considered forward-looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995 relating to, among other things, the
Company's future performance and operations, management's future plans and
goals, and business environment changes. Such forward-looking statements are
subject to risks and uncertainties, which could cause actual results to differ
materially from those projected. Such risks and uncertainties could include,
but are not limited to, the effect of competition, claims experience, service
issues, financial or invested considerations and unanticipated results of
regulatory or legal actions.
15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
A report on Form 8-K was filed on January 26, 2000, regarding the
Resignation of the Company's Chief Executive Officer and Director
William L. Mellick effective February 4, 2000.
A report on Form 8-K was filed on February 9, 2000, regarding the
Election of Bruce W. Marlow as President and Chief Executive
Officer of the Company effective February 8, 2000.
16
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.
21ST CENTURY INSURANCE GROUP
---------------------------------------
(Registrant)
Date May 10, 2000
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BRUCE W MARLOW
President and Chief Executive Officer
Date May 10, 2000
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ROBERT B. TSCHUDY
Senior Vice President and
Chief Financial Officer