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 September 30, 1995 Commission File Number 0-6964
------
20TH CENTURY INDUSTRIES
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-1935264
- - -------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) number)
Suite 700, 6301 Owensmouth Avenue, Woodland Hills, California 91367
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 704-3700
-----------------------------
None
- - --------------------------------------------------------------------------------
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 October 13, 1995
Common Stock, Without Par Value 51,493,406 shares
<PAGE> 1
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
September 30, December 31,
1995 1994
---- ----
(unaudited)
(Amounts in thousands)
Investments:
<S> <C> <C>
Fixed maturities - available-for-
sale, at fair value, (amortized
cost, 1995 $1,083,763; 1994
$1,002,831) - Note 3 $1,107,048 $ 941,406
Equity securities, at fair value
(cost, 1995 $539; 1994 $539) 1,267 768
---------- ----------
Total investments 1,108,315 942,174
Cash and cash equivalents 41,437 249,834
Accrued investment income 21,920 19,631
Premiums receivable 93,411 90,236
Income taxes receivable - 74,064
Deferred income taxes - Note 4 227,846 276,570
Deferred policy acquisition costs 10,756 14,776
Furniture, equipment and leasehold
improvements; at cost less accumulated
depreciation, 1995 $46,455; 1994
$42,171 10,179 13,307
Other assets 88,864 22,218
---------- ----------
$1,602,728 $1,702,810
========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE> 2
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1995 1994
---- ----
(unaudited)
(Amounts in thousands, except share data)
<S> <C> <C>
Unpaid losses and loss
adjustment expenses $ 611,811 $ 756,243
Unearned premiums 296,249 298,519
Bank credit facility payable - Note 5 170,000 160,000
Claims checks payable 53,466 70,725
Proposition 103 payable - Note 6 - 78,307
Other liabilities 43,701 21,072
---------- ----------
Total liabilities 1,175,227 1,384,866
---------- ----------
Stockholders' equity - Note 8
Capital stock
Preferred stock, par value $1.00 per
share; authorized 500,000 shares,
none issued
Series A convertible preferred
stock, stated value $1,000 per
share, authorized 376,126 shares,
outstanding 224,950 in 1995 and
200,000 in 1994 224,950 200,000
Common stock without par value;
authorized 110,000,000 shares,
outstanding 51,495,636 in 1995
and 51,472,471 in 1994 69,747 69,340
Common stock warrants 16,000 16,000
Unrealized investment gains (losses), net 15,609 (39,777)
Retained earnings 101,195 72,381
---------- ----------
Total stockholders' equity 427,501 317,944
---------- ----------
$1,602,728 $1,702,810
========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE> 3
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1995 1994 1995 1994
---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Net premiums earned $ 237,588 $ 252,805 $ 726,410 $ 777,809
Net investment income 20,305 19,853 62,118 65,621
Realized investment gains 3,200 8,216 5,404 61,550
---------- ---------- ---------- ----------
261,093 280,874 793,932 904,980
---------- ---------- ---------- ----------
LOSSES AND EXPENSES:
Net losses and loss
adjustment expenses 192,705 232,165 639,233 705,871
Net earthquake losses
and related
expenses - Notes 6 and 7 - 129,764 14,576 757,564
Policy acquisition costs 7,615 10,880 28,612 34,701
Other operating expenses 12,480 12,570 38,194 39,218
Proposition 103 expense - 69,844 - 71,581
Interest expense 3,429 3,775 11,130 3,825
---------- ---------- ---------- ----------
216,229 458,998 731,745 1,612,760
---------- ---------- ---------- ----------
Income (loss) before
federal income taxes 44,864 (178,124) 62,187 (707,780)
Federal income taxes (benefit) 14,732 (63,870) 18,862 (258,413)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 30,132 $ (114,254) $ 43,325 $ (449,367)
========== ========== ========== ==========
EARNINGS (LOSS) PER COMMON SHARE - NOTE 2
- - -----------------------------------------
PRIMARY $ 0.44 $ (2.22) $ 0.52 $ (8.74)
========== ========== ========== ==========
FULLY DILUTED $ 0.39 $ - $ N/A $ -
========== ========== ========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE> 4
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1995
(unaudited)
Convertible
Preferred Stock Common Stock Unrealized
$1 Par Value Without Common Investment
Per Share Par Value Stock Gains Retained
Amount Amount Warrants (Losses) Earnings
--------- ---------- ---------- --------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $200,000 $ 69,340 $ 16,000 $(39,777) $ 72,381
Net profit for the nine
months 43,325
Effects of common stock issued
under restricted shares plan 407
Issuance of Series A Pre-
ferred Stock - Note 8 24,950 (4,950)
Net change in unrealized
gains (losses) on
investments, net of
taxes of $29,823 55,386
Cash dividends paid on
preferred stock (9,561)
-------- -------- -------- -------- ---------
Balance at September 30, 1995 $224,950 $ 69,747 $ 16,000 $ 15,609 $ 101,195
======== ======== ======== ======== =========
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE> 5
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
---------------------------------
1995 1994
---- ----
(unaudited)
(Amounts in thousands)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 43,325 $ (449,367)
Adjustments to reconcile net
income (loss) to net cash
used by operating activities:
Provision for depreciation
and amortization 5,073 5,743
Provision for deferred income taxes 18,816 (184,848)
Realized gains on sale of investments,
fixed assets, etc. (5,346) (61,467)
Effects of common stock issued
under restricted shares plan 407 385
Increase in premiums receivable (3,175) (1,279)
(Increase) decrease in accrued
investment income (2,289) 8,180
Decrease in deferred policy
acquisition costs 4,020 696
Increase (decrease) in unpaid losses
and loss adjustment expenses (144,432) 130,797
Increase (decrease) in unearned premiums (2,270) 1,750
Increase (decrease) in claims checks payable (17,259) 35,294
Increase (decrease) in Proposition 103 payable (78,307) 71,580
Change in other assets, other liabilities
and accrued income taxes 30,132 (80,041)
---------- ----------
NET CASH USED BY
OPERATING ACTIVITIES $ (151,305) $ (522,577)
</TABLE>
<PAGE> 6
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Nine Months Ended September 30,
---------------------------------
1995 1994
---- ----
(unaudited)
(Amounts in thousands)
INVESTING ACTIVITIES:
<S> <C> <C>
Investments purchased $ (466,249) $ (858,257)
Investments called or matured 10,540 20,595
Investments sold 379,879 1,310,026
Net purchases of furniture, equipment
and leasehold improvements (1,701) (3,065)
---------- ----------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (77,531) 469,299
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 20,000 -
Proceeds from bank credit facility 10,000 153,327
Cash dividends paid (9,561) (16,471)
---------- ----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 20,439 136,856
---------- ----------
Net increase (decrease) in cash (208,397) 83,578
Cash, beginning of year 249,834 17,894
---------- ----------
Cash, end of quarter $ 41,437 $ 101,472
========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE> 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 with 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 and nine month periods
ended September 30, 1995 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1995. For
further information, refer to the consolidated financial statements
and notes thereto included in the 20th Century Industries and
Subsidiaries annual report on Form 10-K for the year ended December
31, 1994.
2. Earnings (Loss) Per Common Share
Primary earnings (loss) per common share were computed using the
weighted average number of common shares plus the net effect of
dilutive common equivalent shares (warrants and stock options)
outstanding during the period. Common equivalent shares outstanding
are computed using the modified treasury stock method. Prior to
December 16, 1994, the Company had a simple capital structure in which
there were no securities in existence allowing common stock to be
acquired as a result of exercising the conversion rights of such
securities. On December 16, 1994, the Company issued convertible
preferred stock and warrants to purchase common stock. The weighted
average number of shares for the primary earnings per share
calculation was 57,305,434 and 57,194,373 for the three and nine
months ended September 30, 1995 and 51,384,548 and 51,393,529 for the
three and nine months ended September 30, 1994, respectively. The
weighted average number of fully diluted shares was 77,159,803 for the
three months ended September 30, 1995 assuming conversion of the
convertible preferred stock. Fully
<PAGE> 8
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Earnings (Loss) Per Common Share (continued)
diluted earnings per share for the nine months ended September, 1995
are not presented as the results are anti-dilutive.
3. Investments
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" which was adopted in January, 1994, the Company classifies
all of its bond portfolio as available-for-sale.
The amortized cost, gross unrealized gains and losses, and fair values
of fixed maturities as of September 30, 1995 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
(Amounts in thousands)
Available-For-Sale
- - ------------------
U.S Treasury securities and
obligations of U.S. government
corporations and agencies $ 145,718 $ 2,671 $ 46 $ 148,343
Obligations of states and
political subdivisions 214,679 1,813 6,519 209,973
Public utilities 144,103 5,853 95 149,861
Corporate securities 579,263 20,246 638 598,871
---------- ------- ------- ----------
Total $1,083,763 $30,583 $ 7,298 $1,107,048
========== ======= ======= ==========
4. Income Taxes
Income taxes do not bear the expected relationship to pre-tax income
primarily because of tax-exempt investment income. As of
September 30, 1995, the Company has a net operating loss
carryforward of approximately $549,000,000 and $402,000,000 for
regular tax and
<PAGE> 9
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Income Taxes (continued)
alternative minimum tax, respectively, and an alternative tax credit
carryforward of $8,130,000. 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:
Nine Months Ended September 30,
--------------------------------
1995 1994
---- ----
(Amounts in thousands)
Current tax expense (benefit) $ 46 $ (73,565)
Deferred tax expense (benefit) 18,816 (184,848)
--------- ---------
$ 18,862 $(258,413)
========= =========
5. Debt
Effective June 30, 1994, the Company secured a five and one-half year
reducing-revolver bank credit facility (the Facility), with an
aggregate commitment of $175 million.
As of December 31, 1994, the Company's outstanding advances against
the Facility totalled $160 million. Loan fees of $7.2 million are
being amortized over the five-and-one-half year life of the Facility.
Interest is charged at a variable rate based, at the option of the
Company, on either (1) the higher of (a) the prime rate or (b) the sum
of the Federal Funds Effective Rate plus 0.5%, plus a margin of 2.0%,
or (2) the Eurodollar rate plus a margin of 1.00%. Margins will be
reduced in relation to certain financial and operational levels of the
Company. Interest is payable at the end of each interest period. The
stock of the Company's insurance subsidiaries is pledged as collateral
under the loan agreement.
In March 1995, as part of the Proposition 103 settlement (see Note 6)
with the California Department of Insurance, the Company was
<PAGE> 10
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Debt (continued)
instructed to contribute an additional $30 million to the insurance
subsidiaries' surplus by March 31, 1995. In order to fund the
additional capital contribution, the Company received an additional
$10 million from the existing bank credit facility and $20 million
from an additional preferred stock issuance to AIG (see Note 8).
These funds were then contributed to the insurance subsidiaries'
surplus.
At September 30, 1995, the interest rate for the facility was
approximately 7%. Interest paid for the nine months ending
September 30, 1995 was approximately $10,100,000.
6. Proposition 103
On January 27, 1995, the Company announced a settlement of rebate
liabilities associated with Proposition 103, which was passed by
California voters on November 8, 1988. The settlement applied to both
insurance subsidiaries, 20th Century Insurance Company and 21st
Century Casualty Company, and applied to those customers insured
between November 8, 1988 and November 7, 1989. The settlement reduced
the Company's previously-recorded obligation of $122 to $78 million.
The settlement required the Company to immediately process rebates to
customers of $46 million. The remaining $32 million was set aside for
additional customer refunds, but subject to reduction dependent on the
ultimate level of claim costs associated with the 1994 Northridge
Earthquake.
During the second quarter of 1995, the Company completed payment of
the $46 million initial rebate amount, reducing the liability to
$32 million. This remaining $32 million was reduced to $0 as a result
of the increase in estimated earthquake losses associated with the
1994 Northridge Earthquake (see Note 7). In addition, the settlement
<PAGE> 11
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Proposition 103 (continued)
required the Company to withdraw its request for a hearing with the
United States Supreme Court to appeal the California Supreme Court
decision in the Proposition 103 test case "20th Century vs. Garamendi"
and abide by the terms of the settlement. A consumer group has
challenged the Commissioner's authority to enter into the settlement
as structured. The challenge is currently pending in the California
Superior Court.
Another condition of the settlement required the Company to obtain new
capital of $50 million and contribute the funds to the surplus of the
insurance subsidiaries, consisting of $30 million by March 31, 1995
and $20 million by December 31, 1995.
7. Northridge Earthquake
The Northridge, California Earthquake, which occurred on January 17,
1994, significantly affected the operating results and the financial
position of the Company. The earthquake occurred in an area in which
the Company's homeowners and earthquake coverages were concentrated.
Since the event occurred, the Company and other members of the
property and casualty insurance industry have revised their estimates
of claim costs and related expenses several times. Because of the
unusual nature of the ground motion during the earthquake, the
earthquake produced significant damage to structures beyond normal
expectations. Delayed discovery of the severity of damages has caused
claims to be reevaluated as the additional damage becomes known and
has made the estimation process extremely difficult. The Company's
estimate of gross losses and allocated loss adjustment expenses for
this catastrophe as of September 30 is $990 million, of which
$50 million was recorded in the second quarter of 1995. In accordance
with the terms of the settlement with the California Department of
Insurance, the Company offset the increase in earthquake losses with
approximately $32 million in funds previously set aside for potential
Proposition 103 rebates (see Note 6).
<PAGE> 12
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Capital Transaction
On December 16, 1994, the Company received $216 million of equity
capital from American International Group, Inc. ("AIG") and in
exchange, issued (i) 200,000 shares of Series A 9% Convertible
Preferred Stock, par value $1.00 per share, at a price and liquidation
value of $1,000 per share and convertible into common shares at a
conversion price of $11.33 per share, and (ii) 16,000,000 Series A
Warrants to purchase an aggregate 16,000,000 shares of the Company's
Common Stock at $13.50 per share (collectively, the "Investment
Agreement"). The Series A Preferred Stock ranks senior to the Common
Stock in respect to dividend and liquidation rights. Cash dividends
of $4,500,000 and $5,061,375 were paid on the preferred stock on
March 16, 1995 and September 15, 1995, respectively. Preferred stock
dividends of $4,950,000, representing 4,950 additional shares, were
issued on June 26, 1995. Per the Investment Agreement, the exercise
price of the Series A Warrants are reduced $.08 per share for each
million dollars of gross losses and allocated loss adjustment expenses
in excess of $945 million with respect to the Northridge Earthquake.
As the Company's estimate of the gross losses and loss adjustment
expenses for the Northridge Earthquake rose to $990 million at
June 30, 1995 (see Note 7), the exercise price of the Series A
Warrants declined to $9.90 per share. The Common Stock Warrants are
generally exercisable from February 1998 to February 2007.
As part of the Investment Agreement, a 10% quota-share reinsurance
agreement with AIG applicable to the Company's entire book of business
was implemented on January 1, 1995. In addition to AIG's capital
investment and quota-share agreement, the Company and AIG are
negotiating a strategic business alliance agreement for joint ventures
for the sale of automobile insurance outside California. The
Companies have agreed on Arizona as the initial western state, and the
venture expects to begin selling policies in early 1996.
<PAGE> 13
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Capital Transaction (continued)
The Company issued 20,000 additional shares of preferred stock to AIG
in exchange for $20 million to partially fund the capital contribution
required by the Proposition 103 settlement (see Note 6).
9. Stock Option Plan
On May 25, 1995, the shareholders of the Company approved the
1995 Stock Option Plan (the "Plan"), which provides for the grant of
stock options to key employees and nonemployee directors of the
Company.
The aggregate number of common shares issued and issuable under the
Plan shall not exceed 1,000,000. At September 30, 1995, options to
purchase 180,000 common shares have been granted with an average
exercise price of $12.56 per share.
<PAGE> 14
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
- - -------------------
Historically, the Company has experienced positive cash flow from operating
activities, excluding 1994 and 1995 due to the severe losses arising out of the
January 17, 1994 Northridge Earthquake. In 1994, the Company paid for these
earthquake losses with cash flow from operations, investment sales, loan pro-
ceeds and equity financing. For 1995, the Company expects to have a negative
cash flow from operations due to remaining earthquake related losses and
expenses and the payment of Proposition 103 rebates. Funds needed to pay these
claims have come from normal operating cash flows, available cash on deposit and
additional loan proceeds of $10 million and preferred stock proceeds of
$20 million in March, 1995. As of September 30, 1995, the Company had total
cash of $41,437,000 and total investments at fair value of $1,108,315,000. Of
the Company's total investments, $183,228,000 at fair value was invested in tax-
exempt state and municipal bonds and the balance was invested in taxable govern-
ment, corporate and municipal securities.
Loss and loss expense payments are the most significant cash flow requirements
of the Company. The Company continually monitors the loss payments to provide
projections of future cash requirements. The Company maintains appropriate cash
and short-term investment positions based upon future cash flow needs. As the
earthquake claims are paid, the Company expects to lengthen the duration of its
investment portfolio depending on cash flow needs and general market conditions
at that time.
In 1994, the Company restructured its investment portfolio to increase the pro-
portion of investment-grade taxable instruments to realize capital gains to
increase statutory surplus, to provide cash for earthquake claim payments and to
maximize taxable investment income in order to more quickly utilize the existing
tax loss carryforwards. Accordingly, the entire portfolio is shown as
available-for-sale. As of September 30, 1995, the portfolio contained 82% tax-
able instruments compared to 75% a year earlier. Statutory regulations require
the majority of the Company's investments to be made in high-grade securities to
<PAGE> 15
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
provide ample protection for policyholders. The Company primarily invests in
long-term maturity investments such as bonds. All investments are readily
marketable.
In prior years, the Company's most significant capital requirement resulted from
its need to maintain an acceptable ratio of net premiums written to policy-
holders' surplus. However, the losses from the 1994 Northridge Earthquake were
so severe that the Company obtained a $175 million bank credit facility and an
equity financing from American International Group, Inc. See Notes 5 and 8 of
the Notes to Consolidated Financial Statements.
During the first quarter, the insurance subsidiaries acquired $30 million in new
capital, consistent with the Proposition 103 rebate settlement with the Califor-
nia Department of Insurance (DOI). See Note 6 of the Notes to Consolidated
Financial Statements. Of this amount, $20 million was funded through an addi-
tional preferred stock issuance to AIG, convertible into common stock at $11.33
per share, and $10 million was funded through additional bank debt from the
existing credit line.
At September 30, 1995, the Company has $225 million of preferred stock outstand-
ing, bearing dividends at 9% per year payable quarterly in cash or in kind.
Cash dividends paid in the first quarter 1995, based on $200 million preferred
stock outstanding, were $4,500,000, and in kind stock dividends were issued in
the second quarter of $4,950,000 or 4,950 shares, based on $220 million
preferred stock outstanding. Cash dividends of $5,061,375 were paid in the
third quarter, based on $225 million preferred stock outstanding.
Interest on the $170 million outstanding bank credit facility varies according
to market conditions. For the first nine months of 1995, interest payments were
approximately $10,100,000 and as of September 30, 1995, the current interest
rate is approximately 7%.
Funds required by 20th Century Industries to pay dividends are provided by the
insurance subsidiaries. The ability of the insurance subsidiaries to pay
dividends to the holding company is regulated by state law. Because of
<PAGE> 16
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
statutory regulations which require dividends to be paid from earned surplus, no
dividends may be paid by the subsidiaries in 1995 without prior approval. The
Company has requested approval from the DOI for an extraordinary dividend to pay
the required dividends and interest, and a response is still pending.
As of June 30, 1995, in accordance with the Proposition 103 settlement, the Com-
pany paid all of the $46 million initial rebate amount, reducing the liability
to $32 million. The remaining $32 million was then reduced to $0 in accordance
with the settlement partially offsetting the increase in estimated earthquake
losses. See Note 6 of the Notes to Consolidated Financial Statements.
Total stockholders' equity increased $109.6 million between December 31, 1994
and September 30, 1995 from $317.9 million to $427.5 million, respectively.
Book value per common share increased $1.64 from $2.29 to $3.93 for the same
time period.
In 1994, the losses caused by the Northridge Earthquake resulted in a net opera-
ting loss of $788.5 million and $759.5 million for regular tax and alternative
minimum tax, respectively. Of these amounts, $238.0 million and $350.0 million
for regular tax and alternative minimum tax, respectively, were carried back to
the previous three years offsetting most of the taxable income for those years
and resulting in a tax refund of $74.1 million. As of September 30, 1995, the
Company has a net operating loss carryforward of approximately $549,000,000 and
$402,000,000 for regular tax and alternative minimum tax, respectively, and an
alternative tax credit carryforward of $8,130,000. For the next two to three
years, the Company expects to have very small cash outlays for income taxes,
specifically alternative minimum tax. Until the net operating losses are fully
utilized, the Company expects that cash outlays for income taxes will be less
than income tax expense recorded in accordance with generally accepted account-
ing principles. The net operating loss carryforwards will expire in the year
2009.
<PAGE> 17
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Results of Operations
- - ---------------------
Nine Months Ended September 30, 1995 Compared to Nine Months Ended
- - --------------------------------------------------------------------------------
September 30, 1994
- - ------------------
Although direct premiums written for the first nine months of 1995
($804 million) reflected little change from the first nine months of 1994
($811.7 million), net premiums written for the nine months ended September 30,
1995 of $696 million decreased $83.6 million or 10.7% below the same period dur-
ing 1994. This decrease reflects the start of the 10% quota-share reinsurance
agreement with AIG plus a decline in direct premiums written. For the nine
months of 1995, $79.9 million was ceded under the quota-share agreement. The
decrease in direct premiums written during the first nine months of 1995
reflected a decrease in total policies in force of 8.3% below the same period of
1994 substantially offset by rate increases.
Premiums earned decreased $51.4 million or 6.6% during the nine months ended
September 30, 1995 compared to the same period of 1994, again reflecting the
quota-share agreement with AIG and the decline in direct premiums written.
The Company experienced an underwriting profit of $5.8 million for the first
nine months of 1995 compared to an underwriting loss of $759.6 million during
the same period of 1994 reflecting primarily the impact of the Northridge
Earthquake. As of September 30, 1995, the Company had received a total of
36,079 homeowner and condominium claims and 10,211 automobile claims as a result
of the Northridge Earthquake. Total paid loss and allocated loss adjustment
expense from the catastrophe have reached $930.2 million compared to $785.4 mil-
lion as of December 31, 1994, and $59.8 million remains reserved for 2,494 open
claims at September 30, 1995. Excluding the effects of the Northridge
Earthquake and Proposition 103, the Company had an underwriting profit of
$20.4 million for the first nine months of 1995 compared to an underwriting loss
of $2.0 million for the same period a year ago. This improvement is primarily
attributable to a 6% rate increase in October 1995 offset by severe storms in
January 1995.
<PAGE> 18
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
The Company's voluntary automobile insurance policies in force declined 4.7%
during the first nine months of 1995 from 1,125,300 policies in force at Decem-
ber 31, 1994 to 1,072,500 policies in force at September 30, 1995. Assigned
Risk increased to 8,497 policies in force at September 30, 1995 from 7,285
policies in force at December 31, 1994.
Excluding the effect of the Northridge Earthquake on automobile comprehensive
claims and the Proposition 103 settlement, the Company's voluntary automobile
programs experienced an underwriting profit of $52.5 million during the first
nine months of 1995 compared to an underwriting profit of $17.7 million during
the same period of 1994. Assigned Risk policies produced an underwriting loss
of $2.9 million in the first nine months of 1995 compared to a $3.3 million
underwriting loss for the first nine months of 1994.
In addition to the 6% automobile rate increase authorized in October 1994, a
3.6% increase was implemented June 15, 1995, and a 5.2% increase for involuntary
assigned risk automobile policies became effective June 1, 1995.
The Company began an aggressive marketing program within California during the
first nine months of 1995 focusing on Northern California and San Diego for the
first half of the year and on Los Angeles and Orange Counties in the second half
of 1995 which has resulted in the resumption of new business activity.
During the first nine months of 1995, total policies in force for the Company's
other programs, homeowners, condominiums, and personal excess liability,
declined to 190,700 from 217,200 policies in force as of December 31, 1994.
This decline is a result of the DOI's order for the Company to discontinue writ-
ing new homeowners, condominium owners and earthquake insurance in order to
reduce the Company's earthquake exposure.
Underwriting results for these programs are influenced by the variability caused
by weather-related claims in the homeowners program. Excluding the effects of
the Northridge Earthquake and Proposition 103, the underwriting loss for these
<PAGE> 19
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
programs was $29.2 million for the first nine months of 1995 compared to an
underwriting loss of $16.3 million for the same period in 1994. The 1995
underwriting loss includes 3,946 first-party property claims directly resulting
from a series of severe storms in the first quarter totaling $10.2 million in
losses on a pre-tax basis. The weather returned to more mild conditions in the
second and third quarters.
Results for the first nine months of 1995 also include $7.8 million in premiums
for catastrophe reinsurance purchased in January 1995 in order to provide addi-
tional coverage for the declining homeowners earthquake exposure. The addi-
tional coverage began at $200 million effective January 23, 1995 and declined
throughout its term to expiration on May 15, 1995. As scheduled, the homeowner
earthquake endorsement non-renewal was completed in July 1995 in accordance with
an order from the California Department of Insurance. Consequently, the
extremely high-limit, high premium reinsurance required during the run-off
period is no longer necessary. Effective July 1, 1995, the Company purchased a
more typical catastrophe reinsurance program of $100 million at a cost of
approximately $3.3 million per quarter.
The Company's policy acquisition and general operating expense ratio continues
to be one of the lowest in the industry. The ratio of net underwriting expenses
to net earned premium was 9.2% for the first nine months of 1995 and 9.5% for
the first nine months of 1994.
Net investment income decreased 5.3% during the first nine months of 1995 com-
pared to the same period of 1994, resulting from a decrease in investments in
order to provide cash for earthquake claim payments and Proposition 103 rebates.
The average annual yield on the Company's invested assets was 6.8% for the first
nine months of 1995 and 6.9% for the first nine months of 1994. The Company's
investment portfolio was converted from primarily tax-exempt to primarily tax-
able bonds during the second and third quarters of 1994 and more taxable bonds
were purchased in the first quarter of 1995. Realized gains on sales of invest-
ments decreased in the first nine months of 1995 to $5.4 million from $61.6 mil-
lion for the same period of 1994.
<PAGE> 20
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Net income during the first nine months of 1995 was $43.3 million compared to a
net loss of $449.4 million for the same period of 1994, reflecting the substan-
tial decrease in earthquake losses and related expenses. The Northridge
Earthquake contributed $492.4 million and $9.5 million of after-tax losses to
the first nine months of 1994 and the first nine months of 1995 results, respec-
tively. The Proposition 103 rollback contributed $45.9 million of after-tax
loss to the first nine months of 1994.
The effect of inflation on net income during both these periods was not sig-
nificant.
Three Months Ended September 30, 1995 Compared to Three Months Ended Septem-
- - --------------------------------------------------------------------------------
ber 30, 1994
- - ------------
Net premiums written for the three months ended September 30, 1995 decreased
$10.6 million or 4.3% below the same period of 1994, reflecting the 10% quota-
share reinsurance agreement with AIG, the reduction in homeowners premiums par-
tially offset by a 6% rate increase effective in October 1994.
The Company's voluntary automobile insurance policies in force declined 1.9%
during the third quarter of 1995 from 1,092,800 at June 30, 1995 to 1,072,500 at
September 30, 1995. Assigned Risk policies in force decreased to 8,497 at Sep-
tember 30, 1995 from 8,544 at June 30, 1995. Premiums earned decreased
$15.2 million or 6.0% during the three months ended September 30, 1995 compared
to the same period of 1994, again reflecting the quota-share reinsurance agree-
ment with AIG offset partially by rate increases.
The Company experienced an underwriting profit of $21.3 million for the third
quarter of 1995 compared to an underwriting loss of $206.2 million during the
same period of 1994, reflecting primarily the impact of the Northridge
Earthquake. Excluding the effects of the Northridge Earthquake and
Proposition 103, the Company experienced an underwriting profit of $21.3 million
for the third quarter of 1995 compared to an underwriting profit of $1.1 million
during the same period of 1994. Assigned Risk policies produced an underwriting
loss of $543,000 for the third quarter of 1995 compared to a $930,000 loss in
<PAGE> 21
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
the third quarter of 1994. As previously stated, the Company's policy acquisi-
tion and general operating expense ratio continues to be one of the lowest in
the industry. The ratio of underwriting expenses to earned premium was 8.5% in
the third quarter of 1995 and 9.8% in the third quarter of 1994.
Although there was a minimal change in average invested assets, net investment
income increased 2.3% during the third quarter of 1995 compared to the same
period of 1994. This is indicative of a change in the investment portfolio
reflecting a decrease in cash balances and an increase in bond investments this
quarter compared to 1994. The average annual yield on the Company's invested
assets was 7.1% for the third quarter of 1995 and 6.9% for the third quarter of
1994.
Realized gains on sales of investments in the third quarter of 1995 were
$3.2 million compared to $8.2 million in the third quarter of 1994. The Company
invests in high-quality securities, of which approximately 18% is in state and
municipal bonds and 82% is in government and corporate bonds. The Company has
no investments in real estate or non-investment grade bonds.
Net income during the third quarter of 1995 was $30.1 million compared to a net
loss of $114.3 million for the third quarter of 1994, reflecting the substantial
decreases in earthquake losses and related expenses. The Proposition 103
settlement accounted for $44.7 million of after-tax loss for the third quarter
of 1994.
The effect of inflation on net income of the Company during both these periods
was not significant.
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the three months ended September 30,
1995.
<PAGE> 23
SIGNATURES
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.
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
----------------------------------------
(Registrant)
Date November 09, 1995 WILLIAM L. MELLICK
--------------------- ---------------------------------------
President and Chief Executive Officer
Date November 09, 1995 ROBERT B. TSCHUDY
--------------------- ----------------------------------------
Senior Vice President and
Chief Financial Officer
<PAGE> 24
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
EXHIBIT 11: COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1995 1994 1995 1994
---- ---- ---- ----
(Amounts in thousands, except per share data)
Primary:
<S> <C> <C> <C> <C>
Average shares outstanding 51,455 51,385 51,444 51,394
Net effect of dilutive stock
warrants and options based
on the modified treasury
stock method using average
market price 5,850 - 5,750 -
---------- --------- ---------- ---------
Totals 57,305 51,385 57,194 51,394
========== ========= ========== =========
Net income (loss) $ 30,132 $(114,254) $ 43,325 $(449,367)
Dividends on preferred stock (5,061) - (14,511) -
Net interest expense reduction 169 - 1,112 -
---------- --------- ---------- ---------
Net income (loss) applicable
to common stock $ 25,240 $(114,254) $ 29,926 $(449,367)
========== ========= ========== =========
Per share amount $ 0.44 $ (2.22) $ 0.52 $ (8.74)
========== ========= ========== =========
</TABLE>
<PAGE> 25
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
EXHIBIT 11: COMPUTATION OF EARNINGS PER COMMON SHARE (continued)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1995 1994 1995 1994
---- ---- ---- ----
(Amounts in thousands, except per share data)
Fully diluted:
<S> <C> <C> <C> <C>
Average shares outstanding 51,455 51,385 51,444 51,394
Net effect of dilutive stock
warrants and options based
on the modified treasury stock
method using the higher of
average market price or
closing price 5,850 - 5,750 -
Assuming conversion
of convertible
preferred stock 19,855 - 19,035 -
---------- --------- ---------- ---------
Totals 77,160 51,385 76,229 51,394
========== ========= ========== =========
Net income (loss) $ 30,132 $(114,254) $ 43,325 $(449,367)
Net interest expense reduction 27 - 89 -
---------- --------- ---------- ---------
Net income (loss) applicable
to common stock $ 30,159 $(114,254) $ 43,414 $(449,367)
========== ========= ========== =========
Per share amount $ 0.39 $ (2.22) $ 0.57 $ (8.74)
========== ========= ========== =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 1107048
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1267
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1108315
<CASH> 41437
<RECOVER-REINSURE> 43353
<DEFERRED-ACQUISITION> 10756
<TOTAL-ASSETS> 1602728
<POLICY-LOSSES> 611811
<UNEARNED-PREMIUMS> 296249
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 69747
0
224950
<OTHER-SE> 132804
<TOTAL-LIABILITY-AND-EQUITY> 1602728
726410
<INVESTMENT-INCOME> 62118
<INVESTMENT-GAINS> 5404
<OTHER-INCOME> 0
<BENEFITS> 639233
<UNDERWRITING-AMORTIZATION> 28612
<UNDERWRITING-OTHER> 38194
<INCOME-PRETAX> 62187
<INCOME-TAX> 18862
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43325
<EPS-PRIMARY> .52
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
