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 June 30, 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
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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 July 21, 1995
Common Stock, Without Par Value 51,495,636 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
June 30, December 31,
1995 1994
---- ----
(unaudited)
(Amounts in thousands)
Investments:
<S> <C> <C>
Fixed maturities - available-for-
sale, at fair value, (amortized
cost, 1995 $1,075,558; 1994
$1,002,831) - Note 3 $1,096,102 $ 941,406
Equity securities, at fair value
(cost, 1995 $539; 1994 $539) 1,024 768
---------- ----------
Total investments 1,097,126 942,174
Cash and cash equivalents 92,181 249,834
Accrued investment income 18,629 19,631
Premiums receivable 89,427 90,236
Income taxes receivable - 74,064
Deferred income taxes - Note 4 243,575 276,570
Deferred policy acquisition costs 10,859 14,776
Furniture, equipment and leasehold
improvements; at cost less accumulated
depreciation, 1995 $45,133; 1994
$42,171 10,842 13,307
Other assets 68,221 22,218
---------- ----------
$1,630,860 $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
June 30, December 31,
1995 1994
---- ----
(unaudited)
(Amounts in thousands, except share data)
<S> <C> <C>
Unpaid losses and loss
adjustment expenses $ 659,313 $ 756,243
Unearned premiums 298,323 298,519
Bank loan payable - Note 5 170,000 160,000
Claims checks payable 59,013 70,725
Proposition 103 payable - Note 6 - 78,307
Other liabilities 43,799 21,072
---------- ----------
Total liabilities 1,230,448 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 69,669 69,340
Common stock warrants 16,000 16,000
Unrealized investment gains (losses), net 13,669 (39,777)
Retained earnings 76,124 72,381
---------- ----------
Total stockholders' equity 400,412 317,944
---------- ----------
$1,630,860 $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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1995 1994 1995 1994
---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Net premiums earned $ 240,085 $ 262,107 $ 488,822 $ 525,004
Net investment income 20,644 21,570 41,813 45,767
Realized investment gains 2,019 49,829 2,204 53,334
Other (6) (25) (37) (64)
---------- ---------- ---------- ----------
262,742 333,481 $ 532,802 624,041
---------- ---------- ---------- ----------
LOSSES AND EXPENSES:
Net losses and loss
adjustment expenses 201,535 230,098 446,528 473,706
Net earthquake losses
and related
expenses - Notes 6 and 7 14,576 76,473 14,576 627,800
Policy acquisition costs 9,548 11,433 20,997 23,821
Other operating expenses 12,412 15,276 25,677 28,320
Interest expense 3,628 50 7,701 50
---------- ---------- ---------- ----------
241,699 333,330 515,479 1,153,697
---------- ---------- ---------- ----------
Income (loss) before
federal income taxes 21,043 151 17,323 (529,656)
Federal income taxes (benefit) 6,432 (4,729) 4,130 (194,543)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 14,611 $ 4,880 $ 13,193 $ (335,113)
========== ========== ========== ==========
PRIMARY INCOME (LOSS) PER
COMMON SHARE - Note 2 $ 0.18 $ 0.09 $ 0.07 $ (6.52)
========== ========== ========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE>- 4 -
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six Months Ended June 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 six
months 13,193
Effects of common stock issued
under restricted shares plan 329
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 $28,779 53,446
Stock dividends - Note 8 4,950 (4,950)
Cash dividends paid on
preferred stock (4,500)
-------- -------- -------- -------- ---------
Balance at June 30, 1995 $224,950 $ 69,669 $ 16,000 $ 13,669 $ 76,124
======== ======== ======== ======== =========
</TABLE>
<PAGE>- 5 -
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
-------------------------------
1995 1994
---- ----
(unaudited)
(Amounts in thousands)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 13,193 $ (335,113)
Adjustments to reconcile net income
(loss) to net cash used
by operating activities:
Provision for depreciation
and amortization 3,526 3,635
Provision for deferred income taxes 4,130 (120,669)
Realized gains on sale of investments,
fixed assets, etc. (2,146) (53,251)
Effects of common stock issued
under restricted shares plan 329 277
Decrease in premiums receivable 809 424
Decrease in accrued investment income 1,002 7,202
Decrease in deferred policy
acquisition costs 3,917 341
Increase (decrease) in unpaid losses
and loss adjustment expenses (96,930) 142,289
Increase (decrease) in unearned premiums (196) 8,902
Increase (decrease) in claims checks payable (11,712) 79,249
Decrease in Proposition 103 payable (78,307) -
Change in other assets, other liabilities
and accrued income taxes 50,873 (79,889)
---------- ----------
NET CASH USED BY
OPERATING ACTIVITIES $ (111,512) $ (346,603)
</TABLE>
<PAGE>- 6 -
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Six Months Ended June 30,
-------------------------------
1995 1994
---- ----
(unaudited)
(Amounts in thousands)
INVESTING ACTIVITIES:
<S> <C> <C>
Investments purchased - available-
for-sale $ (285,982) $ (482,664)
Investments called or matured - available-
for-sale 8,207 14,009
Investments sold - available-for-sale 207,119 820,427
Net purchases of furniture, equipment
and leasehold improvements (985) (2,774)
---------- ----------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (71,641) 348,998
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 20,000 -
Proceeds from bank loan 10,000 153,327
Dividends paid (4,500) (16,471)
---------- ----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 25,500 136,856
---------- ----------
Net increase (decrease) in cash (157,653) 139,251
Cash, beginning of year 249,834 17,894
---------- ----------
Cash, end of quarter $ 92,181 $ 157,145
========== ==========
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 six month periods
ended June 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) outstanding during the
period. Common equivalent shares 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. Warrants to purchase common stock are not
included in the six months ended June 30, 1995 primary earnings per
share calculation as doing so would be anti-dilutive. The weighted
average number of primary shares was 57,141,079 and 51,437,970 for the
three and six months ended June 30, 1995 and 51,384,684 and 51,398,020
for the three and six months ended June 30, 1994. Fully diluted
earnings per share for 1995, assuming conversion of the convertible
preferred stock, are not presented as the results are anti-dilutive.
<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 June 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 $ 228,426 $ 4,213 $ 39 $ 232,600
Obligations of states and
political subdivisions 239,552 2,698 10,929 231,321
Public utilities 115,970 5,444 24 121,390
Corporate securities 491,610 19,855 674 510,791
---------- ------- ------- ----------
Total $1,075,558 $32,210 $11,666 $1,096,102
========== ======= ======= ==========
4. Income Taxes
Income taxes do not bear the expected relationship to pre-tax income
primarily because of tax-exempt investment income. As of June 30,
1995, the Company has a net operating loss carryforward of
approximately $591,000,000 and $446,000,000 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:
Six Months Ended June 30,
--------------------------
1995 1994
---- ----
(Amounts in thousands)
Current tax expense (benefit) $ - $ (73,565)
Deferred tax expense (benefit) 4,130 (120,978)
--------- ---------
$ 4,130 $(194,543)
========= =========
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 1.25%. 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 June 30, 1995, the annual interest rate for the specified interest
period was approximately 7.3%. As certain financial conditions have
been met at June 30, 1995, the interest rate will be reduced to 1%
over LIBOR. Interest paid for the six months ending June 30, 1995 was
approximately $7,000,000.
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 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. At December 31, 1994,
$78 million was recorded as a liability.
During the second quarter of 1995, the Company completed its
Proposition 103 refunds 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 in accordance
with the settlement agreement. (See Note 7).
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 filed a lawsuit. An administrative
hearing was held in April 1995, and the settlement order was upheld.
<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 rose in the quarter to $990 million. As part of the
settlement agreement with the California Department of Insurance, the
Company offset this increase with approximately $32 million in funds
set aside for additional Proposition 103 rebates unless needed for
earthquake claims. (See Note 6). Estimated unallocated loss
adjustment expense, FAIR plan assessments and other earthquake related
expenses remain at approximately $20 million. The charge against
second quarter 1995 pre-tax earnings was $14.6 million.
<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 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. 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 will be 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 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. 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.
<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 and 1995 due to the severe earthquake losses. In
1994, the Company paid for these earthquake losses with cash flow from
operations, investment sales, loan proceeds 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 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 June 30, 1995,
the Company had total cash of $92,181,000 and total investments of
$1,097,126,000. Of the Company's total investments, $231,321,000 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 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 order 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, 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 June 30, 1995, the portfolio contained 78% taxable
instruments compared to 49% 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 had 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 first 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 June 30, 1995, the Company has approximately $225 million of preferred stock
outstanding, bearing interest at 9% per year payable quarterly in cash or in
kind. This results in a dividend of $20,245,500 million a year, or $5,061,375
per quarter beginning in September 1995. Cash dividends paid in the first
quarter 1995, based on $200 million preferred stock outstanding, were
$4,500,000, and in kind stock dividends issued in the second quarter 1995, based
on $220 million preferred stock outstanding, were $4,950,000 or 4,950 shares.
Interest on the $170 million outstanding credit facility varies according to
market conditions. For the first six months of 1995, interest payments were
approximately $7,000,000.
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 a response is still pending.
<PAGE>- 16 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
As of June 30, 1995, in accordance with an order from the DOI regarding the
settlement of rebate liabilities associated with Proposition 103, the Company
has refunded all of the $46 million initial rebate amount, reducing the
liability to $32 million. This remaining $32 million was then reduced to $0
partially offsetting the increase in estimated earthquake losses in accordance
with the settlement agreement. See Note 6 of the Notes to Consolidated
Financial Statements.
Total stockholders' equity increased $82.5 million between December 31, 1994
and June 30, 1995 from $317.9 million to $400.4 million, respectively. Book
value per common share increased $1.12 from $2.29 to $3.41 for the same time
period.
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. As of
June 30, 1995, the Company has a net operating loss carryforward of
approximately $591,000,000 and $446,000,000 for regular tax and alternative
minimum tax, respectively, and an alternative tax credit carryforward of
$8,084,000. 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 accounting principles. The net operating
loss carryforwards will expire in the year 2009.
Results of Operations
- ---------------------
Six Months Ended June 30, 1995 Compared to Six Months Ended June 30, 1994.
Although direct premiums written for the first six months of 1995
($538.7 million) reflected little change from the first six months of 1994
<PAGE>- 17 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
($547.7 million), net premiums written for the six months ended June 30, 1995 of
$461.0 million decreased $59,900,000 or 11.5% 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 half of 1995, $53.6 million was ceded under the
quota-share agreement, and $7.8 million was ceded for the additional catastrophe
reinsurance. The decrease in net premiums written during the first six months
of 1995 also reflected a decrease in total policies in force of 7.6% below the
same period of 1994 partially offset by rate increases.
Premiums earned decreased $23,182,000 or 4.5% during the six months ended
June 30, 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 $27.9 million for the first six
months of 1995 compared to an underwriting loss of $582.4 million during the
same period of 1994 reflecting the impact of the Northridge Earthquake.
Excluding the effect of the Northridge Earthquake, the Company had an
underwriting profit of $18.6 million for the first six months of 1995 compared
to an underwriting profit of $300,000 for the same period a year ago. As of
June 30, 1995, the Company had received a total of 36,015 homeowner and
condominium claims and 10,205 automobile claims as a result of the Northridge
Earthquake. Total paid loss and allocated loss adjustment expense from the
catastrophe have reached $893.5 million compared to $785.4 million as of
December 31, 1994, and $96.8 million remains reserved for open claims that
numbered 3,153 at June 30, 1995 compared to $154.3 million at year-end 1994.
The Company's automobile insurance line declined 2.8% during the first six
months of 1995 from approximately 1,132,600 policies in force at December 31,
1994 to approximately 1,101,400 such policies in force at June 30, 1995.
Assigned Risk increased to 8,544 policies in force at June 30, 1995 from 7,285
policies in force at December 31, 1994.
<PAGE>- 18 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Excluding the effect of the Northridge Earthquake on automobile comprehensive
claims, the Company's automobile programs experienced an underwriting profit of
$52.3 million during the first half of 1995 compared to an underwriting profit
of $3.6 million during the same period of 1994. Assigned Risk policies produced
an underwriting loss of $2.4 million for both the first six months of 1995 and
the first six months of 1994. As of June 30, 1995, the Company has 8,544
Assigned Risk policies, up 17.8% when compared with the same period in 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 resumed an aggressive marketing program within California during the
first six months of 1995 focusing on Northern California and San Diego.
Compared to the fourth quarter of 1994, 20th Century automobile new business
applications were up 28% in the second quarter of 1995 and 10% in the first
quarter. The focus will be on Los Angeles and Orange Counties in the second
half of 1995.
During the first six months of 1995, total policies in force for the Company's
other programs, homeowners, condominiums, and personal excess liability,
declined to approximately 197,800 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.
Underwriting results for these programs are influenced by the variability caused
by weather-related claims in the homeowners program. Excluding the effect of
the Northridge Earthquake, the underwriting loss for these programs was $33.6
million for the first half of 1995 compared to an underwriting loss of
$3.3 million for the same period in 1994. The 1995 underwriting loss includes
5,823 first-party property claims directly resulting from a series of severe
storms in the first quarter totaling $14.2 million in losses on a pre-tax basis.
The weather returned to more mild conditions in the second quarter.
<PAGE>- 19 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Results for the first half of 1995 also include approximately $7.8 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. As scheduled, the homeowner earthquake endorsement non-renewal
was completed in July 1995 in accordance with the 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 an annual cost of $13 million, or
approximately $3.3 million in the third and fourth quarters, respectively.
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 9.8% for the first six months of 1995 and 10.6% for the first
six months of 1994, excluding the effect of the Northridge Earthquake.
Net investment income decreased 8.6% during the first six months of 1995
compared 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 6.7% for the first
six months of 1995 and 6.8% for the first six months of 1994. The Company's
investment portfolio was converted from primarily tax-exempt to primarily
taxable 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
investments decreased in the first six months of 1995 to $2.2 million from
$53.3 mil-lion for the same period of 1994.
Net profit during the first six months of 1995 was $13.2 million compared to a
net loss for the same period of 1994 of $335 million, reflecting the substantial
decrease in earthquake losses and related expenses. The Northridge Earthquake
contributed $409.8 million to first six months of 1994's loss and a
$9.5 reduction in the first six months of 1995's income.
<PAGE>- 20 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
The effect of inflation on net income during both these periods was not
significant.
Three Months Ended June 30, 1995 Compared to Three Months Ended June 30,
1994.
Net premiums written for the three months ended June 30, 1995 decreased
$32.7 million or 12.3% below the same period of 1994, reflecting the 10% quota-
share reinsurance agreement with AIG, the reduction in homeowners premiums, and
the total policies in force decrease of 7.6% for the three months ended June 30,
1995 below the same period of 1994.
The Company's automobile insurance line declined 1.0% during the second quarter
of 1995 from approximately 1,112,200 policies in force at March 31, 1995 to
approximately 1,101,400 such policies in force at June 30, 1995. Assigned Risk
increased to 8,544 policies in force at June 30, 1995 from 7,952 policies in
force at March 31, 1995. Premiums earned decreased $22 million or 8.4% during
the three months ended June 30, 1995 compared to the same period of 1994, again
reflecting the quota-share reinsurance agreement with AIG.
The Company experienced an underwriting loss of $2.9 million for the second
quarter of 1995 compared to an underwriting loss of $71.2 million during the
same period of 1994. Assigned Risk policies produced an underwriting loss of
$1.2 million for the second quarter of 1995 compared to a $1.3 million loss
in the second quarter of 1994. As previously stated, 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 9.7% in the second quarter of 1995 and 10.3% in the second quarter of 1994.
Net investment income decreased 4.3% during the second quarter of 1995 compared
to the same period of 1994, reflecting the 5.8% decline in average invested
assets. The average annual yield on the Company's invested assets was 6.8% for
the second quarter of 1995 and 6.7% for the second quarter of 1994.
<PAGE>- 21 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Realized gains on sales of investments in the second quarter were $2 million
compared to $49.8 million in the second quarter of 1994. The Company invests in
high-quality securities, of which approximately 22% is in state and municipal
bonds and 78% is in government and corporate bonds. The Company has no
investments in real estate or non-investment grade bonds.
Net income during the second quarter of 1995 was $14.6 million compared to
$4.9 million for the second quarter of 1994. The Northridge Earthquake
contributed $9.5 million and $49.8 million in losses to the 1995 and 1994
quarters' profitability, respectively.
The effect of inflation on net income of the Company during both these periods
was not significant.
<PAGE>- 22 -
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
The Registrant filed two Form 8-K's during the three months ended June 30, 1995
as follows:
1. June 2, 1995 The Company announced that William L. Mellick,
president and chief executive officer, and Gregory M.
Shepard, president of Union Automobile Insurance
Company, were elected to its Board of Directors at
the annual meeting of shareholders on May 25, 1995.
2. June 26, 1995 The Company announced that Robert Tschudy has been
named senior vice president and chief financial
officer.
<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 August 09, 1995 WILLIAM L. MELLICK
------------------- ----------------------------------------
President and Chief Executive Officer
Date August 09, 1995 MARGARET CHANG
------------------- ----------------------------------------
Treasurer and Assistant Secretary
<PAGE>- 24 -
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
EXHIBIT 11: COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1995 1994 1995 1994
---- ---- ---- ----
(Amounts in thousands, except per share data)
Primary:
<S> <C> <C> <C> <C>
Average shares outstanding 51,440 51,385 51,438 51,398
Net effect of dilutive stock
warrants based on the
modified treasury stock
method using average
market price 5,701 - - -
---------- --------- ---------- ---------
Totals 57,141 51,385 51,438 51,398
========== ========= ========== =========
Net income (loss) $ 14,611 $ 4,880 $ 13,193 $(335,113)
Dividends on preferred stock (4,950) - (9,450) -
Net interest expense reduction 436 - - -
---------- --------- ---------- ---------
Net income (loss) applicable
to common stock $ 10,097 $ 4,880 $ 3,743 $(335,113)
========== ========= ========== =========
Per share amount $ 0.18 $ 0.09 $ 0.07 $ (6.52)
========== ========= ========== =========
</TABLE>
<PAGE>- 25 -
<TABLE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
EXHIBIT 11: COMPUTATION OF EARNINGS PER COMMON SHARE (continued)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1995 1994 1995 1994
---- ---- ---- ----
(Amounts in thousands, except per share data)
Fully diluted:
<S> <C> <C> <C> <C>
Average shares outstanding 51,440 51,385 51,438 51,398
Net effect of dilutive stock
warrants based on the
modified treasury stock
method using the higher
of average market price
or closing price 5,701 - 5,701 -
Assuming conversion
of convertible
preferred stock 19,442 - 18,625 -
---------- --------- ---------- ---------
Totals 76,583 51,385 75,764 51,398
========== ========= ========== =========
Net income (loss) $ 14,611 $ 4,880 $ 13,193 $(335,113)
Net interest expense reduction 363 - 806 -
---------- --------- ---------- ---------
Net income (loss) applicable
to common stock $ 14,974 $ 4,880 $ 13,999 $(335,113)
========== ========= ========== =========
Per share amount $ 0.20 $ 0.09 $ 0.18 $ (6.52)
========== ========= ========== =========
</TABLE>
<PAGE>- 26 -
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 1096102
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<UNEARNED-PREMIUMS> 298323
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0
224950
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488822
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<NET-INCOME> 13193
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