<PAGE>
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, 1996 Commission File Number 0-6964
------
20TH CENTURY INDUSTRIES
- - --------------------------------------------------------------------------------
(Exact name or 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 24, 1996
Common Stock, Without Par Value 51,512,006 shares
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1996 1995
------------ -----------
(Unaudited)
(Amounts in thousands)
Investments:
Fixed maturities - available-for-sale,
at fair value - Note 3 $ 1,042,041 $ 1,125,548
Equity securities, at fair value 2,767 1,564
------------ ------------
Total investments 1,044,808 1,127,112
Cash and cash equivalents 30,429 50,609
Accrued investment income 18,624 19,862
Premiums receivable 77,896 90,835
Reinsurance recoverables 72,225 48,314
Prepaid reinsurance premiums 44,223 28,823
Deferred income taxes - Note 4 190,595 206,230
Deferred policy acquisition costs 7,049 10,481
Other assets 26,752 26,620
------------ ------------
$ 1,512,601 $ 1,608,886
------------ ------------
------------ ------------
See accompanying notes to financial statements.
2
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1996 1995
------------ -----------
(Unaudited)
(Amounts in thousands, except share data)
Unpaid losses and loss adjustment expenses $ 514,392 $ 584,834
Unearned premiums 247,570 288,927
Bank loan payable 175,000 175,000
Claims checks payable 39,074 49,306
Reinsurance payable 21,790 23,176
Other liabilities 22,826 21,058
------------- -------------
Total liabilities 1,020,652 1,142,301
------------- -------------
Stockholders' equity
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, out-
standing 224,950 in 1996 and 1995 224,950 224,950
Common stock without par value;
authorized 110,000,000 shares, out-
standing 51,512,006 in 1996 and
51,493,406 in 1995 70,072 69,805
Common stock warrants 16,000 16,000
Unrealized investment gains (losses), net (8,066) 33,508
Retained earnings 188,993 122,322
------------- -------------
Total stockholders' equity 491,949 466,585
------------- -------------
$ 1,512,601 $ 1,608,886
------------- -------------
------------- -------------
See accompanying notes to financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Net premiums earned $ 204,755 $ 237,588 $ 662,451 $ 726,410
Net investment income 17,770 20,305 55,235 62,118
Realized investment gains 2,642 3,200 6,540 5,404
----------- ----------- ----------- -----------
225,167 261,093 724,226 793,932
----------- ----------- ----------- -----------
LOSSES AND EXPENSES:
Net losses and loss adjustment 165,746 192,705 530,572 653,809
expenses
Policy acquisition costs 8,830 7,615 25,319 28,612
Other operating expenses 10,143 12,176 35,031 37,326
Loan interest and fees expense 3,645 3,733 10,693 11,998
----------- ----------- ----------- -----------
188,364 216,229 601,615 731,745
----------- ----------- ----------- -----------
Income before federal
income taxes 36,803 44,864 122,611 62,187
Federal income taxes - Note 4 12,458 14,732 40,755 18,862
----------- ----------- ----------- -----------
NET INCOME $ 24,345 $ 30,132 $ 81,856 $ 43,325
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
EARNINGS PER COMMON SHARE - NOTE 2
----------------------------------
PRIMARY $ 0.33 $ 0.44 $ 1.14 $ 0.52
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
FULLY DILUTED $ 0.31 $ 0.39 $ 1.04 -
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1996
(Unaudited)
Convertible
Preferred Common
Stock 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, 1996 $ 224,950 $ 69,805 $ 16,000 $ 33,508 $ 122,322
Net Income 81,856
Effect of common stock
issued under restricted
shares plan 267
Net change in unrealized
gains (losses) on invest-
ments, net of taxes of $22,386 (41,574)
Cash dividends paid on
on preferred stock (15,185)
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1996 $ 224,950 $ 70,072 $ 16,000 $ (8,066) $ 188,993
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
See accompanying notes to financial statements.
</TABLE>
5
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
(Unaudited)
(Amounts in thousands)
OPERATING ACTIVITIES:
Net Income $ 81,856 $ 43,325
Adjustments to reconcile net income to
net cash used in operating activities:
Provision for depreciation and amortization 3,721 5,073
Provision for deferred income taxes 38,022 18,816
Realized gains on sale of investments,
fixed assets, etc. (6,383) (5,346)
Federal income taxes (931) 74,110
Change in reinsurance balances (40,697) (92,365)
Unpaid losses and loss adjustment expenses (70,442) (144,432)
Unearned premiums (41,357) (2,270)
Claims checks payable (10,232) (17,259)
Proposition 103 payable - (78,307)
Other 19,591 47,350
----------- -----------
NET CASH USED
IN OPERATING ACTIVITIES $ (26,852) $(151,305)
6
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(continued)
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
(Unaudited)
(Amounts in thousands)
INVESTING ACTIVITIES:
Investments available-for-sale:
Purchases $ (389,759) $ (466,249)
Called or matured 16,519 10,540
Sales 397,632 379,879
Net purchases of property and equipment (2,535) (1,701)
----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 21,857 (77,531)
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock - 20,000
Proceeds from bank loan - 10,000
Dividends paid on preferred stock (15,185) (9,561)
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (15,185) 20,439
----------- -----------
Net decrease in cash (20,180) (208,397)
Cash and cash equivalents, beginning of year 50,609 249,834
----------- -----------
Cash and cash equivalents, end of quarter $ 30,429 $ 41,437
----------- -----------
----------- -----------
See accompanying notes to financial statements.
7
<PAGE>
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,
1996 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1996. 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, 1995.
2. Earnings Per Common Share
Primary earnings per common share are computed using the weighted average
number of common shares plus the net effect of dilutive common share
equivalents (i.e., warrants and stock options) outstanding during the
period. Common share equivalents outstanding are computed using the
modified treasury stock method. The primary weighted average number of
shares was 58,094,200 and 58,739,877 for the three and nine months ended
September 30, 1996 and 57,305,434 and 57,194,373 for the three and nine
months ended September 30, 1995, respectively. The fully diluted weighted
average number of shares was 79,113,330 and 79,106,858 for the three and
nine months ended September 30, 1996, respectively, and 77,159,803 for the
three months ended September 30, 1995, assuming conversion of the con-
8
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
vertible preferred stock. Fully diluted earnings per share for the nine
months ended September 30, 1995 are not presented because the results are
anti-dilutive.
3. Investments
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
Company classifies all of its investments as available-for-sale.
The amortized cost, gross unrealized gains and losses, and fair values of
fixed maturities as of September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 30,972 $ 45 $ 559 $ 30,458
Obligations of states and political
subdivisions 380,805 3,041 5,919 377,927
Public Utilities 169,564 873 4,696 165,741
Corporate Securities 473,808 5,190 11,083 467,915
------------ ------------ ------------ ------------
Total Fixed Maturities $ 1,055,149 $ 9,149 $ 22,257 $ 1,042,041
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
9
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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,
1996, the Company has a net operating loss carryforward of approximately
$394,000,000 and $255,000,000 for regular tax and alternative minimum tax,
respectively, and an alternative tax credit carryforward of $11,388,000.
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,
-------------------------------
1996 1995
---- ----
(Amounts in thousands)
Current tax expense $ 2,733 $ 46
Deferred tax expense 38,022 18,816
----------- -----------
$ 40,755 $ 18,862
----------- -----------
----------- -----------
10
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's financial condition continued to improve in the third quarter
of 1996. Due to the lower overall premium rates which were introduced to
stimulate growth and re-establish the Company as one of California's lowest
cost personal auto insurance providers, the 10,351 decline in the number of
vehicles in force in the third quarter of 1996 was approximately one-half of
the 20,307 decline in the third quarter of 1995. For October 1996, the auto
line showed growth in the number of insured vehicles in force for the first
time since June 1994. Operating cash flow for the first nine months of 1996,
adjusted for the non-recurring $28.7 million ($32.7 million less commission)
100% quota share homeowners cession in July, was a positive $1.8 million
compared to a negative $151.3 million in the first nine months of last year.
As of September 30, 1996, the Company's insurance subsidiaries had a combined
statutory surplus of $464.2 million, and a net written premium to surplus
ratio of 1.9:1.
The Company has implemented three new rating plans in the current year with
combined overall rate level reductions of approximately 11.5%: 3.2%
effective March 15, 1996; 2.3% effective June 1, 1996; and 6.0% effective
September 1, 1996. Underwriting profits in the near term may decline as a
result of the rate actions; however, by targeting its marketing efforts and
introducing rating plans that offer lower rates to its more profitable
preferred customers and higher rates for drivers deemed to represent greater
risks, the Company expects to achieve a more profitable customer mix. Thus,
the 11.5% overall rate reduction may not necessarily result in proportionately
lower future underwriting profits.
Thus far, this more competitive pricing strategy and an intensified
California-wide marketing campaign have slowed the decline in vehicles in force
to only about 900 autos in September
11
<PAGE>
ITEM 2. (CONTINUED)
compared to approximately 9,100 for the first two months of the third
quarter. For the month of October 1996 (latest figures available), vehicles
in force had grown by 2,249 autos from the end of the previous month,
despite the continuing adverse effect of the homeowner non-renewals on
automobile retention.
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
Pursuant to an order issued by the California Department of Insurance ("DOI") in
June, 1994, the Company began non-renewing the homeowner and condominium
policies as they expire starting in July, 1996, and will be fully withdrawn from
this line by the end of July, 1997.
Invested assets as of September 30, 1996 were $1.0 billion. All investments in
fixed maturities are investment grade. Equity securities include the Company's
investment in 20th Century Insurance Company of Arizona (refer to page 13) of
approximately $1.8 million. Of the Company's total investments at September 30,
1996, 33.7% at fair value were invested in tax-exempt state and municipal bonds
and 66.2% were invested in taxable government, corporate and municipal
securities.
Loss and loss expense payments are the most significant cash flow requirements
of the Company. The Company continually monitors loss payments to provide
projections of future cash requirements.
At September 30, 1996, the Company had $225 million of preferred stock
outstanding, bearing dividends of 9% per year payable quarterly in cash or in
kind. Cash dividends of $15,185,000 were paid on the preferred stock in the
first nine months of 1996. In the first nine months of 1995, cash dividends of
$9,561,000 were paid and in kind stock dividends of $4,950,000 (4,950 shares)
were issued on the preferred stock.
12
<PAGE>
ITEM 2. (CONTINUED)
The Company has a variable rate credit line available of $202.5 million at
October 1, 1996, which had an outstanding balance of $175 million at September
30, 1996. Presently, interest is paid quarterly; interest payments in the first
nine months of 1996 totaled $9.8 million.
Funds required by 20th Century Industries to pay preferred stock dividends, debt
obligations and holding company expenses are provided by the insurance
subsidiaries. The ability of the insurance subsidiaries to pay dividends
to the holding company is regulated by state law. Both net income and earned
surplus were sufficient in 1996 to enable 20th Century Insurance Company to
declare a $10 million dividend to the parent in each of the three quarters
ending September 30, 1996. These dividends were paid on April 9, June 10, and
September 16, 1996. No dividends were paid to the parent in 1995. As of
September 30, 1996, earned surplus of the insurance subsidiary available to
pay dividends to the Parent Company was approximately $95.2 million.
On June 27, 1996, the Arizona Department of Insurance issued a certificate of
authority, licensing 20th Century Insurance Company of Arizona to market and
service private passenger automobile insurance. This joint venture company is
owned 51% by American International Group, Inc. ("AIG") and 49% by 20th Century
Industries. The Company began writing auto policies in August, 1996. The
Company's investment in 20th Century Insurance Company of Arizona, (the
operations of which, to date, have not been material), is accounted for by the
equity method. The statistical and other information presented below do not
include the activities of 20th Century Insurance Company of Arizona.
13
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
RESULTS OF OPERATIONS
UNITS IN FORCE
Units in force for the Company's insurance programs as of September 30 were as
follows:
1996 1995
---- ----
Private Passenger Automobile
(number of vehicles) 1,006,669 1,081,046
Homeowner and Condominium
(number of policies) 130,048 180,226
Personal Excess Liability
(number of policies) 10,308 10,505
---------- ----------
Total 1,147,025 1,271,777
---------- ----------
---------- ----------
The overall decrease in units in force is attributable to rate increases
totaling 9.6% implemented between late 1994 and mid-1995 and the run-off of
homeowners' business.
The Company's voluntary auto units in force declined by 6.8% compared to a year
ago from 1,072,549 units in force at September 30, 1995 to 999,745 units in
force at September 30, 1996. Voluntary auto units in force declined 1.0% in the
third quarter of 1996 compared to a 2% decline in each of the first two quarters
of the year, with the improvement being attributable to the rate decreases and
intensified marketing discussed earlier. Assigned Risk units decreased by 18.5%
from the same period a year ago, from 8,497 units in force at September 30, 1995
to 6,924 units in force at September 30, 1996. The third quarter increased 3.4%
from 6,698 units in force at June 30, 1996.
14
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Units in force for the Company's homeowner and condominium programs
declined by 27.8% between September 30, 1995 and September 30, 1996 primarily
as a result of the DOI order requiring the Company to discontinue writing new
homeowners, condominium owners and earthquake insurance in order to reduce the
Company's earthquake exposure. The decline in this line for the third quarter
was 21.5%, reflecting the non-renewal of all homeowner and condominium policies
expiring on or after July 23, 1996.
UNDERWRITING RESULTS
Premium revenue and underwriting results for the Company's insurance programs
were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C>
Gross Premiums Written
Automobile $ 217,789 $ 247,959 $ 680,869 $ 749,454
Homeowners and Condo 1,663 16,695 33,559 52,820
PELP 581 579 1,672 1,699
------------ ------------ ------------ ------------
Total $ 220,033 $ 265,233 $ 716,100 $ 803,973
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net Premiums Earned
Automobile $ 204,563 $ 223,936 $ 636,486 $ 697,580
Homeowners and Condo - 13,447 25,383 28,187
PELP 192 205 582 643
------------ ------------ ------------ ------------
Total $ 204,755 $ 237,588 $ 662,451 $ 726,410
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Underwriting Profit (Loss)
Automobile $ 19,662 $ 27,380 $ 68,797 $ 80,329
Homeowners and Condo 133 (2,546) 2,036 (74,124)
PELP 241 258 696 458
------------ ------------ ------------ ------------
Total $ 20,036 $ 25,092 $ 71,529 $ 6,663
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
15
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Automobile
Automobile insurance is the primary line of business written by the Company and
has been consistently profitable. Approximately 52% of the Company's insured
autos are garaged in Los Angeles County; however, the Company continues to
expand its coverage throughout the state by aggressively marketing its business
in Northern California and San Diego County.
As expected, the effects of the lower overall rate levels in the third quarter
of 1996 dampened underwriting profits for the quarter as compared to either the
second quarter of 1996 or the third quarter of 1995. The overall rate level
reduction implemented in March and June 1996 did not fully impact the second
quarter, thereby contributing to its record results. The third quarter of 1996,
however, was impacted fully by the March 1996 rate level reduction and to a
lesser extent by the June and September 1996 reductions. By comparison, the
third quarter and nine month results in 1995 were favorably affected by rate
increases implemented in late 1994 and mid-1995.
The Company's voluntary automobile program realized underwriting profits for the
nine and three months ended September 30, 1996 of $69.2 million and $19.8
million compared to $53.1 million and $27.9 million for the comparable 1995
periods after adjustment for a credit of $30.1 million realized in June 1995
related to the elimination of the Company's remaining Proposition 103 liability.
The primary reasons for improvement in 1996 year-to-date underwriting results
were the effects of rate increases implemented in 1994 and 1995, partially
offset by the effects of rate declines taken in 1996, and good weather patterns.
The decrease in the third quarter 1996 underwriting profit in the voluntary auto
line compared to 1995 is principally the result of lower overall rate levels
partially offset by the effects of higher volume in 1996.
Assigned Risk units produced an underwriting loss of $393,000 in the first nine
months of 1996 compared to a $2.9 million underwriting loss for the first nine
months of 1995. This improvement
16
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
is largely due to a rate increase of 5.2% implemented in June 1995 and an
18.5% reduction in the number of insured units from a year ago. The
underwriting loss for the quarter ended September 30, 1996 was $90,000
compared to a loss of $534,000 a year ago.
Going forward, the 11.5% overall rate level reduction implemented in 1996
should not necessarily result in proportionately lower future underwriting
profits to the extent that the Company's growth and marketing initiatives
attract a higher proportion of more profitable preferred customers. However,
recent regulatory and legislative changes (discussed below) also can be
expected to have an as yet unquantifiable impact on the Company's future
operations.
In the third quarter of 1996, new regulations were adopted that will require
all California personal auto insurance providers to file new rating plans,
subject to the DOI's review and approval, by February 18, 1997. The Company
has not yet determined the changes, if any, these new regulations may have
on the Company's existing rates.
In November 1996, California voters approved Proposition 213, an initiative
that bars the award of general damages (sometimes referred to as "pain and
suffering") for uninsured motorists and in certain other instances. It is
anticipated that some liability claims savings will result when the measure
is implemented.
Legislative changes aimed at achieving broader compliance with the state's
mandatory auto insurance law will become effective on January 1, 1997. As a
result, the number of autos in the state's assigned risk pool, which is
characterized by relatively high combined ratios but which currently
represents an insignificant portion of the Company's total auto line, may
substantially increase, which could dampen future underwriting results in
this line.
17
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Homeowners and Condominium
As ordered by the DOI, the Company no longer writes new homeowners or
condominium policies or earthquake coverage endorsements. The Company continued
to renew existing homeowners and condominium policies without earthquake
coverage through July 23, 1996. Effective July 1, 1996, the Company entered
into a reinsurance agreement with U.S. Reinsurance Corporation to reinsure 100%
of the in force and renewal premiums through the expiration of all remaining
policies which will occur in July 1997. Due to the requirement to exit the
homeowners market, units in force for the homeowners and condominium programs
decreased 27.8% between September 1995 and September 1996 and 21.5% in the third
quarter of 1996. This decline in units resulted in lower gross premiums written
for both quarter and year-to-date periods ended September 30, 1996 compared to
the prior year.
Underwriting results for these programs are subject to the variability caused by
weather-related claims and infrequent disasters. The underwriting profit for
this line was $2.0 million for the first nine months of 1996 compared to an
underwriting loss of $74.1 million for the same period in 1995. Underwriting
profits of $133,000 were realized in the third quarter of 1996 compared to a
$2.5 million underwriting loss for the same period in 1995. Underwriting losses
in 1995 were primarily the result of adverse development of earthquake-related
losses of approximately $50 million in the second quarter of 1995 and
first-party property claims totaling $14.2 million related to a series of
severe winter storms in the first quarter of 1995. The underwriting results in
1996 were positively affected by the reduction in the reinsurance premium
expense, a decrease in the overall exposure during the period due to the runoff
of the business, and milder weather in the first quarter of 1996 compared to
that of 1995. As a result of the 100% quota share agreement entered into as of
July 1, 1996, the Company's exposure to weather-related and disaster claims has
been significantly reduced.
18
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Personal Excess Liability
Units in force decreased by 1.9% from September 30, 1995 to September 30, 1996
and less than 1% for the third quarter. Gross premiums written decreased 1.5%
in the first nine months and remained flat in the third quarter of 1996
compared to the same periods in 1995. The decline in this business
is primarily attributable to the runoff of the homeowner and condominium
programs, as some policyholders for this program are likely to purchase excess
liability coverage in conjunction with their homeowner policies. However, the
decline appears to have leveled off in the third quarter of 1996 as the decline
in units in force remained relatively flat compared to a 21.5% decrease in
homeowner policies for the same period. Underwriting profits for this line can
vary significantly with the number of claims which occur infrequently.
Policy Acquisition and General Operating Expenses
The Company's policy acquisition and general operating expense ratio continues
to be one of the lowest in the industry because as a direct writer, the Company
does not incur agent commissions and thus enjoys an expense advantage over most
of its competitors. Net underwriting expenses for the third quarter and nine
months ending September 30, 1996 decreased by $818,000 (4.1%) and $5.6 million
(8.5%), respectively, compared to the same periods in 1995. These decreases
reflect a reduction in general operating expenses due to the decline in the
number of units in force as well as steps taken to achieve operating cost
efficiencies. The ratios of net underwriting expenses (excluding loan interest
and fees) to net earned premium for the third quarter and nine months ended
September 1996 were 9.3% and 9.1% compared to 8.3% and 9.1% for comparable
periods in 1995, respectively. The increase in the expense ratio for the third
quarter is mainly due to the decline in earned premiums.
19
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
INVESTMENT INCOME
Net pre-tax investment income decreased 12.5% and 11.1% during the three and
nine months ended September 30, 1996, respectively, compared to the same periods
in 1995. Financial results of 20th Century of Arizona, which commenced
operations on August 1, 1996, are reflected in investment income and are not
material for the quarter. Average invested assets decreased 7.6% between
September 1995 and September 1996 primarily due to the decline in units in
force.
The average annual pre-tax yield on invested assets decreased from 6.8% for the
nine months ended September 30, 1995 to 6.6% for the nine months ended September
1996. The yield for the third quarter was 6.4% compared to 7.1% for the third
quarter of 1995. The decline in investment income from September 1995 levels is
primarily the result of lower investable funds.
Realized gains on sales of investments increased in the nine months ended
September 1996 to $6.5 million from $5.4 million for the same period of 1995.
Realized gains for the third quarter of 1996 decreased to $2.6 million from $3.2
million for the same period last year. Unrealized gains on investments
decreased $41.6 million (124.1%) since December 31, 1995, to a net unrealized
loss of $8.1 million as of September 30, 1996, primarily because of unfavorable
conditions in the bond market.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
The Registrant filed one Form 8-K during the three months ended September 30,
1996 as follows:
August 13, 1996 The Company announced its second quarter 1996 financial
results and its intention to grow its core business of
automobile insurance. The Company also announced that 20th
Century Insurance Company of Arizona began marketing
private passenger automobile insurance in Arizona on
August 1, 1996.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
20TH CENTURY INDUSTRIES
(Registrant)
Date NOVEMBER 08, 1996
------------------------- ------------------------------------------
WILLIAM L. MELLICK
President and Chief Executive Officer
Date NOVEMBER 08, 1996
------------------------- ------------------------------------------
ROBERT B. TSCHUDY
Senior Vice President and
Chief Financial Officer
22
<PAGE>
<TABLE>
<CAPTION>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
EXHIBIT 11: COMPUTATION OF EARNINGS PER COMMON SHARE
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Primary:
Average shares outstanding 51,465 51,455 51,461 51,444
Net effect of dilutive stock
warrants and options based
on the modified treasury
stock method using average
market price 6,629 5,850 7,279 5,750
--------- --------- --------- ---------
Totals 58,094 57,305 58,740 57,194
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income $ 24,345 $ 30,132 $ 81,856 $ 43,325
Dividends on preferred stock (5,061) (5,061) (15,185) (14,511)
Net interest expense reduction - 169 - 1,112
--------- --------- --------- ---------
Net income applicable
to common stock $ 19,284 $ 25,240 $ 66,671 $ 29,926
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per common share $ 0.33 $ 0.44 $ 1.14 $ 0.52
--------- --------- --------- ---------
--------- --------- --------- ---------
23
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
EXHIBIT 11: COMPUTATION OF EARNINGS PER COMMON SHARE (continued)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Fully diluted:
Average shares outstandin 51,465 51,455 51,461 51,444
Net effect of dilutive stock
warrants and options based
on the modified treasury
stock method using average
market price or closing price 7,794 5,850 7,791 5,750
Assuming conversion
of convertible
preferred stock 19,855 19,855 19,855 19,035
--------- --------- --------- ---------
Totals 79,114 77,160 79,107 76,229
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income $ 24,345 $ 30,132 $ 81,856 $ 43,325
Net interest expense reduction - 27 - 89
--------- --------- --------- ---------
Net income applicable
to common stock $ 24,345 $ 30,159 $ 81,856 $ 43,414
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per common share $ 0.31 $ 0.39 $ 1.04 $ .57 *
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
* Not presented in the financial statements as the results are anti-dilutive.
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 1,042,041
<DEBT-CARRYING-VALUE> 1,042,041
<DEBT-MARKET-VALUE> 1,042,041
<EQUITIES> 2,767
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,044,808
<CASH> 30,429
<RECOVER-REINSURE> 72,225
<DEFERRED-ACQUISITION> 7,049
<TOTAL-ASSETS> 1,512,601
<POLICY-LOSSES> 514,392
<UNEARNED-PREMIUMS> 247,570
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
224,950
<COMMON> 70,072
<OTHER-SE> 196,927
<TOTAL-LIABILITY-AND-EQUITY> 1,512,601
662,451
<INVESTMENT-INCOME> 55,235
<INVESTMENT-GAINS> 6,540
<OTHER-INCOME> 0
<BENEFITS> 530,572
<UNDERWRITING-AMORTIZATION> 25,319
<UNDERWRITING-OTHER> 35,031
<INCOME-PRETAX> 122,611
<INCOME-TAX> 40,755
<INCOME-CONTINUING> 81,856
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,856
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.04
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
