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, 1995 Commission File Number 0-6964
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20TH CENTURY INDUSTRIES
- - --------------------------------------------------------------------------------
(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)
Suite 700, 6301 Owensmouth Avenue, Woodland Hills, California 91367
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 704-3700
-----------------------------
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 26, 1995
Common Stock, Without Par Value 51,495,636 shares
<PAGE> - 1 -
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
March 31, December 31,
1995 1994
---- ----
(unaudited)
(Amounts in thousands)
Investments:
<S> <C> <C>
Fixed maturities - available-for-
sale, at fair value, (amortized
cost, 1995 $1,032,956; 1994
$1,002,831) - Note 3 $1,015,518 $ 941,406
Equity securities, at fair value
(cost, 1995 $539; 1994 $539) 896 768
---------- ----------
Total investments 1,016,414 942,174
Cash and cash equivalents 234,523 249,834
Accrued investment income 20,198 19,631
Premiums receivable 89,214 90,236
Income taxes receivable - 74,064
Deferred income taxes - Note 4 263,346 276,570
Deferred policy acquisition costs 11,163 14,776
Furniture, equipment and leasehold
improvements; at cost less accumulated
depreciation, 1995 $43,622; 1994
$42,171 12,057 13,307
Other assets 47,103 22,218
---------- ----------
$1,694,018 $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
March 31, December 31,
1995 1994
---- ----
(unaudited)
(Amounts in thousands, except share data)
<S> <C> <C>
Unpaid losses and loss
adjustment expenses $ 685,708 $ 756,243
Unearned premiums 298,544 298,519
Bank loan payable - Note 5 170,000 160,000
Claims checks payable 66,712 70,725
Proposition 103 payable - Note 6 62,306 78,307
Other liabilities 49,797 21,072
---------- ----------
Total liabilities 1,333,067 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 220,000 in 1995 and
200,000 in 1994 220,000 200,000
Common stock without par value;
authorized 110,000,000 shares,
outstanding 51,495,636 in 1995
and 51,472,471 in 1994 69,590 69,340
Common stock warrants 16,000 16,000
Unrealized investment losses, net (11,102) (39,777)
Retained earnings 66,463 72,381
---------- ----------
Total stockholders' equity 360,951 317,944
---------- ----------
$1,694,018 $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
Three Months Ended March 31,
----------------------------
1995 1994
---- ----
(unaudited)
(Amounts in thousands, except per share data)
<S> <C> <C>
REVENUES:
Net premiums earned $ 248,737 $ 262,897
Net investment income 21,169 24,197
Realized investment gains 185 3,505
Other (31) (39)
---------- ----------
270,060 290,560
---------- ----------
LOSSES AND EXPENSES:
Net losses and loss
adjustment expenses 244,993 243,608
Net earthquake losses
and related expenses - 551,327
Policy acquisition costs 11,449 12,388
Other operating expenses 13,265 13,044
Interest expense 4,073 -
---------- ----------
273,780 820,367
---------- ----------
Loss before federal income taxes (3,720) (529,807)
Federal income taxes (benefit) (2,302) (189,814)
---------- ----------
NET LOSS $ (1,418) $ (339,993)
========== ==========
PRIMARY LOSS PER COMMON SHARE - Note 2 $ (0.12) $ (6.61)
========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE> - 4 -
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 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 loss for the three
months (1,418)
Effects of common stock issued
under restricted shares plan 250
Issuance of Series A Pre-
ferred Stock - Note 8 20,000
Net decrease in unrealized
losses on portfolio class-
ified as available-for-sale
net of taxes of $15,440 28,675
Cash dividends paid on
preferred stock (4,500)
-------- -------- -------- -------- ---------
Balance at March 31, 1995 $220,000 $ 69,590 $ 16,000 $(11,102) $ 66,463
======== ======== ======== ======== =========
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE> - 5 -
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
--------------------------------
1995 1994
---- ----
(unaudited)
(Amounts in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,418) $ (339,993)
Adjustments to reconcile net
loss to net cash provided (used)
by operating activities:
Provision for depreciation
and amortization 1,734 1,818
Provision for deferred income taxes (2,302) (115,642)
Realized gains on sale of investments,
fixed assets, etc. (136) (3,458)
Effects of common stock issued
under restricted shares plan 250 169
Decrease in premiums receivable 1,022 343
(Increase) decrease in accrued investment
income (567) 478
Decrease in deferred policy
acquisition costs 3,613 494
Increase (decrease) in unpaid losses
and loss adjustment expenses (70,535) 479,706
Increase in unearned premiums 25 5,749
Increase (decrease) in claims checks payable (4,013) 76,181
Decrease in Proposition 103 payable (16,001) -
Change in other assets, other liabilities
and accrued income taxes 77,989 (92,107)
---------- ----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES $ (10,339) $ 13,738
</TABLE>
<PAGE> - 6 -
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Three Months Ended March 31,
--------------------------------
1995 1994
---- ----
(unaudited)
(Amounts in thousands)
INVESTING ACTIVITIES:
<S> <C> <C>
Investments purchased - available-
for-sale $ (47,180) $ (39,327)
Investments called or matured - available-
for-sale 1,128 8,774
Investments sold - available-for-sale 16,101 37,668
Net purchases of furniture, equipment
and leasehold improvements (521) (1,310)
---------- ----------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (30,472) 5,805
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 20,000 -
Proceeds from bank loan 10,000 -
Dividends paid (4,500) (8,236)
---------- ----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 25,500 (8,236)
---------- ----------
Net increase (decrease) in cash (15,311) 11,307
Cash, beginning of quarter 249,834 17,894
---------- ----------
Cash, end of quarter $ 234,523 $ 29,201
========== ==========
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-month period ended
March 31, 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
Earnings (loss) per common share were computed using the weighted
average number of common shares outstanding. The weighted average
number of shares was 51,435,734 for the three months ended March 31,
1995 and 51,411,356 for the three months ended March 31, 1994.
Primary loss per share for 1994 reflects 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. The 1995 primary and fully diluted loss per share amounts
reflect a more complex capital structure in which securities exist
that allow for the acquisition of additional common stock through the
exercise of conversion rights in these securities. Primary loss per
share reflects a reduction to the net loss for the quarter of $4.5
million for cash dividends paid on the preferred stock. Fully diluted
loss per share for 1995 is not presented as there is a net loss for
the quarter and including the convertible securities in the
computation of the loss per share would be antidilutive.
<PAGE> - 8 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 March 31, 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 $ 247,692 $ 147 $ 2,318 $ 245,521
Obligations of states and
political subdivisions 277,764 1,181 13,114 265,831
Public utilities 147,291 105 1,825 145,571
Corporate securities 360,209 3,316 4,930 358,595
---------- ------- ------- ----------
Total $1,032,956 $ 4,749 $22,187 $1,015,518
========== ======= ======= ==========
4. Income Taxes
Income taxes do not bear the expected relationship to pre-tax income
primarily because of tax-exempt investment income. As of March 31,
1995, the Company has a net operating loss carryforward of
approximately $561,000,000 and $417,000,000 for regular tax and
alternative minimum tax, respectively, and an alternative tax credit
carryforward of $8,084,000. The net operating loss carryforwards
will expire in 2009. Alternative minimum tax credits may be carried
forward indefinitely to offset future regular tax liabilities.
<PAGE> - 9 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Income Taxes (continued)
Federal income tax expense consists of:
Three Months Ended March 31,
-----------------------------
1995 1994
---- ----
(Amounts in thousands)
Current tax expense (benefit) $ - $ (74,172)
Deferred tax expense (benefit) (2,302) (115,642)
--------- ---------
$ (2,302) $(189,814)
========= =========
5. Debt
Effective June 30, 1994, the Company secured a five and one-half year
reducing-revolver credit facility (the Facility), with an aggregate
commitment of $175 million through The First National Bank of Chicago
and Union Bank (the Agents).
As of December 31, 1994, the Company's outstanding advances against
the Facility totalled $160 million for which loan origination fees to
the Agents of $7.2 million were incurred. Loan fees 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 3.25%. 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
instructed to contribute an additional $30 million to the insurance
subsidiaries' surplus by March 31, 1995. 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 contributed to the insurance subsidiaries'
surplus.
<PAGE> - 10 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Debt (continued)
At March 31, 1995, the annual interest rate for the specified interest
period was approximately 9.375%. Per amendments to the bank
agreement, the interest rate was reduced to 7.375% at April 10, 1995
due to the Company's improved financial condition. Interest paid for
the three months ending March 31, 1995 was approximately $3,700,000.
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 agreement applies to both
insurance subsidiaries, 20th Century Insurance Company and 21st
Century Casualty Company, and applies to those customers insured
between November 8, 1988 and November 7, 1989. At December 31, 1994,
$78 million was recorded as a liability.
By March 31, the Company had refunded $16 million of its $46 million
initial rebate amount, reducing the liability to $62 million as of
March 31, 1995. The Company expects to complete issuance of the
initial rebates by mid-May, 1995. The remaining $32 million has been
set aside for additional customer refunds conditioned on the ultimate
level of claim costs associated with the 1994 Northridge Earthquake.
This settlement 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 Commissioner Quackenbush's
order. Upon announcement of the settlement, a consumer group objected
to the settlement terms, and threatened legal action. The Company is
advised by counsel, and believes that any challenge to the settlement
will be unsuccessful.
<PAGE> - 11 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Proposition 103 (continued)
Another condition of this agreement 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. In March 1995, the Company
received $10 million from the existing bank credit facility and $20
million from the issuance of preferred stock to AIG. Refer to Notes 5
and 8 for further discussion.
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 for 1994. 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 remains unchanged in the quarter at $940 million.
Estimated unallocated loss adjustment expense, FAIR plan assessments
and other earthquake related expenses remain at approximately $20
million. The charge against first quarter 1994 pre-tax earnings,
after reduction for $76.3 million of reinsurance, was $551.3 million.
The earthquake did not materially affect the results of first quarter
1995.
Should the earthquake losses increase above $974 million, future
financial periods will be impacted and additional capital may be
required.
<PAGE> - 12 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Capital Transaction
As a result of the earthquake losses discussed in Note 7, the Company
found it necessary to obtain additional capital to increase the
combined statutory surplus of the insurance subsidiaries.
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 Company received aggregate consideration of
$200,000,000 for the shares of the Preferred Stock and $16,000,000
for the Warrants. The Series A Preferred Stock ranks senior to the
Common Stock in respect to dividend and liquidation rights. Cash
dividends of $4,500,000 were paid on the preferred stock on March 16,
1995. 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 applicable to the Company's entire book of business was
implemented on January 1, 1995, thereby improving the Company's
ability to sustain growth.
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. This alliance will enable the Company to expand
its business into other geographic areas. The Companies have agreed
on Arizona as the initial western state. It is expected that the
Company will write its first out-of-state policies before the end of
the year.
<PAGE> - 13 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Capital Transaction (continued)
In March 1995, in accordance with an order from the California
Department of Insurance to contribute an additional $30 million to
the insurance subsidiaries' surplus by March 31, 1995 (as part of the
Proposition 103 settlement-see Note 6), the Company received $20
million from the issuance of 20,000 additional shares of preferred
stock to AIG and $10 million from its existing credit line and
contributed such funds to the insurance subsidiaries' surplus.
<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 due to the severe earthquake losses. The Company
paid for these losses with cash from operations, investment sales, loan proceeds
and equity financing. In 1995, funds needed to pay remaining earthquake-related
losses and expenses have come from normal positive operating cash flows and from
available cash on deposit. As of March 31, 1995, the Company had total cash of
$234,523,000 and total investments of $1,016,414,000. Of the Company's total
investments, $265,831,000 at fair value was invested in tax-exempt state and
municipal bonds and the balance was invested in taxable government, corporate
and municipal securities.
Statutory regulations require the majority of the Company's investments to be
made in high-grade securities to provide ample protection for policyholders.
The Company primarily invests in long-term maturity investments such as bonds.
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 generally generates enough
cash flow to allow for monthly investments in the Cash Management Fund which is
the source for purchasing long-term investments such as bonds. In order to help
pay for the earthquake losses in 1994, the Company capitalized on the
substantial unrealized gain in its bond portfolio by selling off bonds with
higher market values, resulting in substantial capital gains.
In order to realize capital gains to increase statutory surplus, to provide cash
for earthquake claims payments and to maximize investment income, the Company
has restructured its investment portfolio to increase the proportion of
investment-grade taxable instruments. Accordingly, the entire portfolio is
shown as available-for-sale. As of March 31, 1995, the portfolio contained 73%
taxable instruments compared to 13% a year earlier. All of the Company's
investments are of high-quality and very liquid.
<PAGE> - 15 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
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 has obtained a $170 million bank loan for its
subsidiaries and equity financing from American International Group, Inc. See
Notes 5 and 8 of the Notes to Consolidated Financial Statements.
During the quarter, the insurance subsidiaries acquired $30 million in new
capital, consistent with the Proposition 103 rebate settlement and order from
the California Department of Insurance (DOI). See Note 6 of the Notes to
Consolidated Financial Statements. Of this amount, $20 million was funded
through an additional preferred stock issuance to AIG, convertible to common
stock at $11.33 per share, and $10 million was funded through additional bank
debt from the existing credit line.
At March 31, 1995, the Company has $220 million of preferred stock outstanding,
bearing interest at 9% per year payable quarterly. This results in a dividend
of $19.8 million a year, or $4,950,000 per quarter beginning in June 1995. Cash
dividends paid in the first quarter 1995, based on $200 million preferred stock
outstanding, were $4,500,000.
Interest on the $170 million credit facility varies according to market
conditions. First quarter 1995 interest payments were approximately $3,700,000.
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
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
order from the DOI in January, 1995 specifically provides that the insurance
subsidiaries may pay dividends to service existing debt and preferred stock
obligations, and to service the additional contributions. The Company has
requested approval from the DOI for an extraordinary dividend to pay the
required dividends and interest, and anticipates a favorable response.
<PAGE> - 16 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
As of March 31, 1995, in accordance with an order from the DOI regarding the
settlement of rebate liabilities associated with Proposition 103, the Company
has refunded approximately $16 million of its $46 million initial rebate amount.
The Company expects to complete issuance of these rebates by mid-May 1995. The
$46 million has previously been recorded as a liability and an additional
$32 million has been reserved for additional customer refunds conditioned on the
ultimate level of claim costs associated with the 1994 Northridge Earthquake.
Total stockholders' equity increased $43.1 million between December 31, 1994
and March 31, 1995 from $317.9 million to $361.0 million, respectively. Book
value per common share increased $0.45 from $2.29 to $2.74 for the same time
period.
For years prior to 1994, the Company's cash outlays for income taxes generally
exceeded income tax expense recorded in accordance with generally accepted
accounting principles. This resulted primarily because of the reduction of the
unearned premium deduction and the discounting of unpaid loss reserve mandated
by the Tax Reform Act of 1986.
In 1994, the losses caused by the Northridge Earthquake resulted in a net
operating loss of approximately $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. The
balance of the 1994 net operating loss ($550.0 million and $408.0 million for
regular tax and alternative minimum tax, respectively) will offset taxable
income for future years. 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
<PAGE> - 17 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
for income taxes will be less than income tax expense recorded in accordance
with generally accepted accounting principles. The net operating loss
carryforwards will expire in the year 2009.
Results of Operations
- - ---------------------
Three Months Ended March 31, 1995 Compared to Three Months Ended
March 31, 1994.
Although direct premiums written reflected little change from the first quarter
a year ago, net premiums written for the three months ended March 31, 1995
decreased $40,236,000 or 15.0% below the same period during 1994. This decrease
reflects the start of the 10% quota-share reinsurance agreement with AIG plus
the purchase of additional catastrophe reinsurance coverage in January 1995.
For the first quarter 1995, $26.9 million was ceded under the quota-share
agreement, and $6.0 million was ceded for the additional catastrophe
reinsurance. The decrease in net premiums written during the first three months
of 1995 also reflected a decrease in total policies in force of 5.49% below the
same period of 1994.
Premiums earned decreased $14,160,000 or 5.4% during the three months ended
March 31, 1995 compared to the same period of 1994, again reflecting the quota-
share agreement with AIG and the additional catastrophe reinsurance premiums.
The Company experienced an underwriting loss of $25 million for the first three
months of 1995 compared to an underwriting loss of $511.1 million during the
same period of 1994 reflecting the impact of the Northridge Earthquake.
Excluding the effect of the Northridge Earthquake, the underwriting loss for the
first quarter 1994 was $6.6 million. The earthquake impact on the first quarter
1995 was not material. As of March 31, 1995, the Company had received a total
of 35,856 homeowner and condominium claims and 10,193 automobile claims as a
result of the Northridge Earthquake. Total paid loss and allocated loss
adjustment expense from the catastrophe have reached $846.7 million compared to
$785.4 million as of December 31, 1994, and $93.3 million remains reserved for
open
<PAGE> - 18 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
claims that numbered 3,279 at quarter-end compared to $154.3 million at year-end
1994.
The Company's automobile insurance line declined 1.8% during the first three
months of 1995 from approximately 1,132,600 policies in force at December 31,
1994 to approximately 1,112,200 such policies in force at March 31, 1995.
Assigned Risk increased to 7,952 policies in force at March 31, 1995 from 7,285
policies in force at December 31, 1994.
The Company's automobile programs experienced an underwriting profit of $4.0
million during the first quarter of 1995 compared to an underwriting loss of
$5.3 million, excluding the effect of the Northridge Earthquake on automobile
comprehensive claims, during the same period of 1994. Assigned Risk policies
produced an underwriting loss of $1.2 million for the first quarter 1995
compared to a $1.1 million loss for the first quarter 1994. As of March 31,
1995, the Company has 7,952 Assigned Risk policies, up 16.3% when compared with
the same period in 1994.
During the first quarter of 1995, based on historical experience and trends, the
Company filed for an overall average rate adjustment of 3.65% on the automobile
line of business. The Company is awaiting a response from the Insurance
Commissioner. In the meantime, the Insurance Commissioner has granted a 5.2%
increase for assigned risk automobile policyholders, effective June 1, 1995.
The Company resumed an aggressive marketing program within California during the
quarter focusing on Northern California and San Diego, and expects the second
and third quarters to show strong results for automobile unit growth.
During the first three months of 1995, total policies in force for the Company's
other programs, homeowners, condominiums, and personal excess liability,
declined to approximately 208,200 from approximately 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 writing new homeowners, condominium owners and earthquake
insurance in order to reduce the Company's earthquake exposure.
<PAGE> - 19 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Underwriting results for these programs are influenced by the variability caused
by weather-related claims in the homeowners program. The underwriting loss for
these programs was $24.3 million for the first quarter 1995 compared to an
underwriting loss of $1.3 million, excluding the effect of the Northridge
Earthquake, for the first quarter 1994.
The first quarter 1995 results were affected by a series of severe storms
throughout the state. Total first-party property claims directly resulting from
adverse weather are 5,823, with losses reaching $14.2 million on a pre-tax
basis.
Results for the first quarter 1995 also include approximately $6.0 million of
catastrophe reinsurance premiums related to the additional reinsurance coverage
purchased in January 1995 in order to provide reinsurance coverage for the
declining earthquake exposure. The additional coverage began at $200 million
effective January 23, 1995 and declined throughout its term to expiration on
May 15, 1995. The catastrophe reinsurance premiums for this policy affecting
second quarter 1995 results will be approximately $1.8 million.
The Company's policy acquisition and general operating expense ratio continues
to be one of the lowest in the industry. The ratio of underwriting expenses to
earned premium was 9.9% for the first quarter of 1995 and for the first quarter
of 1994, excluding the effect of the Northridge Earthquake.
Net investment income decreased 12.5% during the first three months of 1995
compared to the same period of 1994, resulting from a decrease in investments in
order to increase statutory surplus and provide cash for earthquake claims
payments. The average annual yield on the Company's invested assets was 7.5%
for the first three months of 1995 and 6.6% for the first three months of 1994.
The increase in the investment yield results from the Company's investment
portfolio being converted from primarily tax-exempt to primarily taxable bonds
during the second and third quarters of 1994 and from buying more taxable bonds
in the
<PAGE> - 20 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
first quarter of 1995. Realized gains on sales of investments decreased in the
quarter to $185,000 from $3.5 million for the first quarter of 1994.
Net loss during the first three months of 1995 declined $338.6 million or 99.6%
below the same period of 1994 to $1.4 million from $340.0 million, reflecting
the substantial decrease in earthquake losses and related expenses. The
Northridge Earthquake contributed $360.0 million to the 1994 quarter's loss.
The effect of inflation on the net income of the Company during both these
periods was not significant.
<PAGE> - 21 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
The Registrant filed four Form 8-K's during the three months ended March 31,
1995 as follows:
1. January 3, 1995 The Company announced the appointment of Robert M.
Sandler and Howard I. Smith to its Board of
Directors. Both of the new directors are executives
with American International Group, Inc.
2. January 27, 1995 The Company announced a settlement of rebate
liabilities associated with Proposition 103, passed
by California voters on November 8, 1988.
3. February 13, 1995 The Company announced its 1994 financial results
including the Proposition 103 settlement and an
increase to the Company's earthquake claim reserves.
4. February 22, 1995 a) The Company announced the retirement of Neil H.
Ashley as chief executive officer, and the
appointment of William L. Mellick to that post.
b) The Company further announced that Neil H. Ashley
and Rex J. Bates will not stand for reelection at
the annual meeting of shareholders and that
Mr. Mellick will stand for election as a director,
in place of Mr. Ashley.
<PAGE> - 22 -
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 May 08, 1995 WILLIAM L. MELLICK
---------------- ----------------------------------------
President and Chief Executive Officer
Date May 08, 1995 MARGARET CHANG
---------------- ----------------------------------------
Treasurer and Assistant Secretary
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 20TH CENTURY
INDUSTRIES FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 1,015,518
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 896
<MORTGAGE> 0
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<TOTAL-INVEST> 1,016,414
<CASH> 234,523
<RECOVER-REINSURE> 7,782
<DEFERRED-ACQUISITION> 11,163
<TOTAL-ASSETS> 1,694,018
<POLICY-LOSSES> 685,708
<UNEARNED-PREMIUMS> 298,544
<POLICY-OTHER> 0
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<COMMON> 69,590
0
220,000
<OTHER-SE> 71,361
<TOTAL-LIABILITY-AND-EQUITY> 1,694,018
248,737
<INVESTMENT-INCOME> 21,169
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<UNDERWRITING-OTHER> 13,265
<INCOME-PRETAX> (3,720)
<INCOME-TAX> (2,302)
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