<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, 1997 Commission File Number 0-6964
20TH CENTURY INDUSTRIES
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-1935264
- - --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
Suite 700, 6301 Owensmouth Avenue, Woodland Hills, California 91367
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 704-3700
None
- - --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 23, 1997
Common Stock, Without Par Value 51,629,861 shares
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
(Unaudited)
(Amounts in thousands)
<S> <C> <C>
Investments, available-for-sale, at fair value:
Fixed maturities - Note 3 $ 1,065,907 $ 1,063,703
Equity securities 1,709 925
------------ ------------
Total investments 1,067,616 1,064,628
Cash and cash equivalents 45,505 18,078
Accrued investment income 19,859 18,549
Premiums receivable 77,187 71,308
Reinsurance receivables and recoverables 72,594 79,183
Prepaid reinsurance premiums 39,682 33,020
Deferred income taxes - Note 4 140,980 190,857
Deferred policy acquisition costs 10,441 9,127
Other assets 30,282 29,005
------------ ------------
$ 1,504,146 $ 1,513,755
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
(Unaudited)
(Amounts in thousands, except share data)
<S> <C> <C>
Unpaid losses and loss adjustment expenses $ 450,781 $ 543,529
Unearned premiums 248,250 231,141
Bank loan payable 168,750 175,000
Claims checks payable 31,879 36,445
Reinsurance payable 21,977 19,730
Other liabilities 17,371 20,203
---------- ----------
Total liabilities 939,008 1,026,048
---------- ----------
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 1997 and 1996 224,950 224,950
Common stock without par value;
authorized 110,000,000 shares, out-
standing 51,629,861 in 1997 and
51,520,006 in 1996 70,973 70,263
Common stock warrants 16,000 16,000
Unrealized investment gains, net 11,840 2,820
Retained earnings 241,375 173,674
---------- ----------
Total stockholders' equity 565,138 487,707
---------- ----------
$ 1,504,146 $ 1,513,755
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Net premiums earned $ 197,676 $ 204,755 $ 587,752 $ 662,451
Net investment income 18,612 17,770 54,847 55,235
Realized investment gains 1,452 2,642 2,995 6,540
---------- ---------- ---------- ----------
217,740 225,167 645,594 724,226
LOSSES AND EXPENSES:
Net losses and loss adjustment expenses 143,238 165,746 439,681 530,572
Policy acquisition costs 10,590 8,830 31,202 25,319
Other operating expenses 9,887 10,143 25,828 35,031
Loan interest and fees expense 3,256 3,645 9,871 10,693
---------- ---------- ---------- ----------
166,971 188,364 506,582 601,615
---------- ---------- ---------- ----------
Income before federal income taxes 50,769 36,803 139,012 122,611
Federal income taxes - Note 4 17,551 12,458 47,415 40,755
---------- ---------- ---------- ----------
NET INCOME $ 33,218 $ 24,345 $ 91,597 $ 81,856
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS PER COMMON SHARE - NOTE 2
PRIMARY $ 0.46 $ 0.33 $ 1.27 $ 1.14
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FULLY DILUTED $ 0.41 $ 0.31 $ 1.12 $ 1.04
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997
----------------------------------------------------------
Convertible
Preferred Common Unrealized
Stock Stock Common Investment
$1 Par Value Without Stock Gains, Retained
Per Share Par Value Warrants Net Earnings
------------ --------- ---------- ---------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 224,950 $ 70,263 $ 16,000 $ 2,820 $173,674
Net Income 91,597
Cash dividends declared (22,927)
Other 710 9,020 (969)
------------ --------- ---------- ---------- --------
Balance at September 30, 1997 $ 224,950 $ 70,973 $ 16,000 $ 11,840 $241,375
------------ --------- ---------- ---------- --------
------------ --------- ---------- ---------- --------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
(Unaudited)
(Amounts in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 91,597 $ 81,856
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Provision for depreciation and amortization 4,013 3,721
Provision for deferred income taxes 45,020 38,022
Realized gains on sale of investments (2,995) (6,540)
Federal income taxes 1,098 (931)
Reinsurance balances 2,175 (40,697)
Unpaid losses and loss adjustment expenses (92,748) (70,442)
Unearned premiums 17,109 (41,357)
Claims checks payable (4,565) (10,232)
Other (7,671) 19,748
--------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 53,033 $ (26,852)
</TABLE>
6
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
(Unaudited)
(Amounts in thousands)
<S> <C> <C>
INVESTING ACTIVITIES:
Investments available-for-sale:
Purchases $ (526,819) $ (389,759)
Called or matured 4,300 16,519
Sales 536,137 397,632
Net purchases of property and equipment (10,047) (2,535)
----------- -----------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 3,571 21,857
FINANCING ACTIVITIES:
Bank loan principal repayment (6,250) -
Dividends paid (22,927) (15,185)
----------- -----------
NET CASH USED IN
FINANCING ACTIVITIES (29,177) (15,185)
----------- -----------
Net increase (decrease) in cash and cash equivalents 27,427 (20,180)
Cash and cash equivalents, beginning of year 18,078 50,609
----------- -----------
Cash and cash equivalents, end of quarter $ 45,505 $ 30,429
----------- -----------
----------- -----------
</TABLE>
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 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, 1997 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1997. For further information, refer to the consolidated financial
statements and notes thereto included in the 20th Century Industries Annual
Report on Form 10-K for the year ended December 31, 1996.
2. Earnings Per Common Share
Earnings per common share are computed using the weighted average number of
common share equivalents outstanding during the respective periods
utilizing the modified treasury stock method in accordance with APB
Opinion No. 15, "Earnings Per Share." The primary weighted average number
of common share equivalents was 61,578,857 and 60,382,306 for the three and
nine months ended September 30, 1997, respectively, and 58,094,200 and
58,739,877 for the three and nine months ended September 30, 1996,
respectively. The fully diluted weighted average number of common share
equivalents was 81,961,139 and 81,914,689 for the three and nine months
ended September 30, 1997, respectively, and 79,113,330 and 79,106,858
for the
8
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Earnings Per Common Share (continued)
three and nine months ended September 30, 1996, respectively. The primary
and fully diluted earnings per share amounts reflect a 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. Under the modified treasury stock method, the number of primary
and fully diluted common share equivalents deemed to be outstanding generally
tends to rise or fall with the market price of the underlying stock.
3. Investments
The amortized cost, gross unrealized gains and losses, and fair values of
fixed maturities as of September 30, 1997 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 $ 2,776 $ 47 $ 32 $ 2,791
Obligations of states and political
subdivisions 47,329 2,672 15 49,986
Public Utilities 176,662 2,287 468 178,481
Corporate Securities 822,382 13,789 1,522 834,649
---------- ------- ------ ----------
Total Fixed Maturities $1,049,149 $18,795 $2,037 $1,065,907
---------- ------- ------ ----------
---------- ------- ------ ----------
</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, 1997,
the Company has a net operating loss carryforward of approximately
$290,000,000 and $155,000,000 for regular and alternative minimum tax
purposes, respectively, and an alternative tax credit carryforward of
$13,605,000. 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,
-------------------------------
1997 1996
---- ----
(Amounts in thousands)
Current tax expense $ 2,395 $ 2,733
Deferred tax expense 45,020 38,022
--------- ---------
$ 47,415 $ 40,755
--------- ---------
--------- ---------
5. New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," which is required to be adopted as of December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements, primary earnings per share will be replaced by a
simpler calculation called "basic" earnings per share. This calculation will
exclude all common stock equivalents and other dilutive securities (i.e.
options, warrants and convertible instruments). Under the new standard, basic
earnings per share would be $0.55 and $0.37 for the quarters ending September
30, 1997 and 1996, respectively, and $1.48 and $1.30, respectively,
10
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. New Accounting Standard (continued)
for the nine month periods then ended. Under the new requirements, "diluted"
earnings per share will replace the existing fully diluted earnings per
share calculation. The new diluted earnings per share will include the
effect of all dilutive instruments if they meet certain requirements. Under
the new standard, diluted earnings per share would be $0.41 and $0.31 for the
quarters ended September 30, 1997 and 1996, respectively, and $1.12 and
$1.04, respectively, for the nine month periods then ended.
11
<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 strong performance in the first nine months of 1997 reinforced
the turnaround in unit growth in the core automobile business that began in
the last quarter of 1996. The number of written vehicles increased by 55,233
in the first nine months of 1997 compared to a decrease of 54,338 for the
same period of 1996. As of September 30, 1997, the Company's insurance
sub-sidiaries had a combined statutory surplus of $543.2 million, and a net
written premium to surplus ratio of 1.5:1. In addition, during the third
quarter, the Company announced its intention to expand its automobile
insurance business into three additional states -- Nevada, Oregon and
Washington.
Strong unit growth in the auto business remains the Company's priority for
1997. Through its aggressive marketing efforts and the introduction of 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 of new business. Thus far,
the Company's strategy for growth, as well as continued downward trends in
the frequency and severity of claims, is producing the desired results: the
combined ratio for the first nine months of 1997 was 84.5 versus 89.2 for the
same period last year.
As of February 15, 1997, the Company began offering renewal of policies for
68,000 homeowner insurance customers. The Company is complying with
California's requirement to offer earthquake coverage to those customers
through a separate residential earthquake insurance policy underwritten and
issued by American Home Assurance Company, a subsidiary of American
International Group, Inc. (AIG). While the Company is not currently
authorized to offer homeowner insurance to new customers, continuing
requests from current auto policy customers and other California residents
make this an important strategic goal. Authority to sell new homeowner
policies requires the approval of the California Insurance Commissioner. The
Company has initiated discussions to
12
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
obtain that authorization. The Company's reentry into the homeowners market
is intended to complement its auto business and facilitate growth in that
line. All the risks associated with these homeowner policies have been ceded
to reinsurers since July 1, 1996.
The Company remains exposed to possible further upward development in the
estimated cost to resolve certain claims stemming from the 1994 Northridge
Earthquake. Although management believes current reserves are adequate, the
outcome of future events could require changes in previous estimates.
Invested assets as of September 30, 1997 were $1.1 billion. All investments
in fixed maturities are investment grade. Of the Company's total investments
at September 30, 1997, 2.3% at fair value were invested in tax-exempt state
and municipal bonds and 97.7% were invested in taxable government, corporate
and municipal securities.
Loss and loss expense payments are the most significant cash flow requirement
of the Company. The Company continually monitors loss payments to provide
projections of future cash require-ments. Cash flow from operations was more
than sufficient to fund loss payments in the first nine months of 1997.
At October 1, 1997, the Company has a variable rate credit line available of
$157.5 million, all of which is outstanding. Presently, interest is paid
monthly; interest payments in 1997 totaled $10.2 million.
At September 30, 1997, 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 $15,184,125 were paid on the preferred stock in the
first nine months of 1997.
13
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Funds required by 20th Century Industries to pay dividends, debt obligations
and holding company expenses are provided by the insurance subsidiaries. The
ability of the insurance subsidiaries to pay dividends to the holding company
is regulated by state law.
In August 1996, 20th Century Insurance Company of Arizona began writing
private passenger auto-mobile policies in that state. As of September 30,
1997, insured vehicles totaled 9,243, an increase of 207.5% over the total at
December 31, 1996. 20th Century Insurance Company of Arizona is a joint
venture owned 51% by AIG and 49% by 20th Century Industries. 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.
14
<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:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Private Passenger Automobile
(number of vehicles) 1,066,842 1,006,669
Homeowner and Condominium
(number of policies) 61,850 130,048
Personal Excess Liability
(number of policies) 10,914 10,308
--------- ---------
Total 1,139,606 1,147,025
--------- ---------
--------- ---------
</TABLE>
The overall decrease in units in force of less than 1% is attributable to the
decrease in homeowners and condominium policies, offset by an increase in
vehicles insured.
The Company's voluntary auto units in force increased by 5.4% compared to a
year ago from 999,745 units in force at September 30, 1996 to 1,053,779
units in force at September 30, 1997. Voluntary auto units grew 49,017 (4.9%)
in the nine months ended September of 1997, 12,880 (1.2%) of which occurred
in the third quarter. This compared favorably to a decline in units of
53,058 (5.0%) for the first nine months of 1996 and 10,577 (1.0%) for the
third quarter of 1996. The growth in units in force met the Company's
expectations and is the result of an aggressive marketing campaign, rate
reductions implemented in 1996 and, to some extent, new legislation to
enforce the state's mandatory insurance law. The Company expects to
continue this growth pattern through increased advertising, including a new
television advertising campaign, and through the implementation of another
3.2% overall rate reduction starting in the fourth quarter of 1997.
15
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Assigned Risk units increased by 88.7% from the same period a year ago, from
6,924 units in force at September 30, 1996 to 13,063 units in force at September
30, 1997. The overall increase in Assigned Risk units was an expected response
to the new legislation.
Units in force for the Company's homeowner and condominium programs
declined by 52.4% between September 30, 1996 and September 30, 1997 primarily
because the Company was required by the California Department of Insurance to
non-renew homeowner and condominium policies from July 1, 1996 until February
15, 1997. The decline in units slowed in 1997 to 30.5% and 3.4% for the first
nine months and the third quarter, respectively, as many of its remaining
homeowners renewed their policies with the Company.
16
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
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,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C>
Gross Premiums Written
Automobile $ 220,429 $ 217,789 $ 661,213 $ 680,869
Homeowners and Condo 1,852 1,663 26,455 33,559
PELP 702 581 1,812 1,672
---------- ---------- ---------- ----------
Total $ 222,983 $ 220,033 $ 689,480 $ 716,100
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net Premiums Earned
Automobile $ 197,481 $ 204,563 $ 584,787 $ 636,486
Homeowners and Condo - - 2,392 25,383
PELP 195 192 573 582
---------- ---------- ---------- ----------
Total $ 197,676 $ 204,755 $ 587,752 $ 662,451
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Underwriting Profit (Loss)
Automobile $ 36,050 $ 19,663 $ 101,858 $ 68,797
Homeowners and Condo (2,108) 133 (11,200) 2,036
PELP 20 242 383 697
---------- ---------- ---------- ----------
Total $ 33,962 $ 20,038 $ 91,041 $ 71,530
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
17
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Net premiums earned for the third quarter decreased 3.5% to $197.7 million
compared to the third quarter of 1996. The net decline of $7.1 million includes
the effects of higher average vehicles in force of approximately $9.7 million,
offset by net reductions in auto rates of approximately $16.8 million.
Automobile
Automobile insurance is the primary line of business written by the Company and
has been consistently profitable. Approximately 50% of the Company's insured
autos are located 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.
The Company's voluntary automobile program realized underwriting profits of $36
million for the three months ended September 30, 1997 compared to $19.8 million
for the comparable 1996 period. Underwriting profits for the first three
quarters of 1997 were $102.7 million compared to $69.2 million in the prior
year. The improvement came despite a relatively small 1.2% increase in gross
premiums written in the third quarter and a decrease in gross premium written of
4.1% in the nine months ended September 1997, versus the same periods last year.
The impact of relatively dry weather, a continued strong decline in claim
frequencies and severities and the attraction and retention of a higher
percentage of more profitable, preferred customers all contributed to the
improvement in underwriting results.
While a growth in business generally indicates the need for an increase in
incurred but not reported (IBNR) reserves, favorable development in older case
reserves and the lower severity of new claims
18
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
have resulted in the Company making a smaller provision for IBNR reserves than
in the past, favorably impacting the underwriting results.
Assigned Risk units produced an underwriting gain of $84,000 and an underwriting
loss of $868,000 in the three and nine month periods ending September 30, 1997,
respectively, compared to underwriting losses of $101,000 and $419,000 for
comparable periods in 1996. The year-to-date increase in underwriting losses
reflects an 88.7% rise in the number of Assigned Risk vehicles over the same
period last year, as new mandatory insurance enforcement legislation became
effective January 1, 1997.
Homeowners and Condominium
In December 1996, the Company was granted authority to offer renewals on its
existing homeowner policies beginning February 15, 1997. This renewal business
is covered in full by quota share reinsurance agreements with three reinsurers,
as follows:
Reinsurer Participation
- - --------- -------------
National Union Fire Insurance Co. of Pittsburgh, PA
(AIG subsidiary) 50%
United States Fidelity & Guaranty Company 25%
Risk Capital Reinsurance Company 25%
Earthquake coverage, which the Company is obliged to offer in conjunction with
its homeowner policies, is provided through a subsidiary of AIG; no earthquake
exposures are assumed by the Company. As of September 30, 1997, more than
61,000 policies had been renewed, which is
19
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
approximately 85.8% of those eligible. Homeowners policies in force on June
30, 1996 or renewed before July 23, 1996 (which do not include earthquake
coverage) were ceded in full at equal percentages to United States Fidelity &
Guaranty Company and Risk Capital Reinsurance Company. This coverage was
effective until the underlying policies expired or were renewed.
Because of the reinsurance agreements in place, the Company's exposure under
these programs is limited and primarily relates to development on policies
incepted prior to July 1, 1996. The underwriting losses for this line were
$2.1 million and $11.2 million for the third quarter and nine months ending
September 30, 1997, respectively, compared to underwriting profits of
$132,000 and $2.0 million for the same periods in 1996. As a result of the
100% quota share agreements entered into as of July 1, 1996 and February 15,
1997, the Company's exposure to weather-related and disaster claims has been
significantly reduced.
Personal Excess Liability
Units in force increased nominally from September 30, 1996 to September 30,
1997. Gross premiums written increased by 20.7% in the third quarter of 1997
compared to that of 1996 and by 8.4% in the nine month period ended September
30, 1997 compared to the prior year. Underwriting profits for this line can
vary significantly with the number of claims, which occur infrequently.
Personal Excess Liability business is subject to two quota share reinsurance
agreements resulting in a net retention by the Company of approximately 36%.
20
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
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. 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, 1997 increased by $1.5 million
(7.9%) and $3.3 million (5.5%), respectively, compared to the same periods in
1996. These increases reflect an increase in general operating expenses due
to the increase in the number of auto units in force. The rise in general
operating expenses was partly offset by ceding commissions earned on
reinsurance.
The ratio of net underwriting expenses (excluding loan interest and fees) to
net premiums earned for the third quarter and nine months ended September
1997 was 10.3% and 9.7%, respectively, compared to 9.2% and 9.1%,
respectively, for the same periods in 1996. The increase in the expense
ratios is mainly due to the decline in premiums earned coupled with a
reduction in ceding commissions earned on homeowner reinsurance as compared
to the prior year, and an increase in marketing expenses in the third quarter.
INVESTMENT INCOME
Net pre-tax investment income increased 4.8% during the third quarter and
decreased 1% during the nine months ended September 1997, compared to the
same periods in 1996. Average invested assets remained unchanged for the
third quarter and decreased 2.7% for the nine month period
21
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
ended September 30, 1997, as compared to the same periods last year, primarily
due to the decline in premiums written.
The average annual pre-tax yield on invested assets for the three and nine month
periods ended September 30, 1997 was 6.8% and 6.7%, respectively, compared to
6.4% and 6.6%, respectively, for the same periods of 1996.
Realized gains on sales of investments decreased in the first nine months of
1997 to $3.0 million from $6.5 million for the same period of 1996. Realized
gains for the third quarter of 1997 decreased to $1.5 million from $2.6 million
for the same period last year. Unrealized after-tax gains on investments
increased $9.0 million since December 31, 1996 to a net unrealized after-tax
gain of $11.8 million as of September 1997, primarily because of favorable
conditions in the bond market.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
September 30, 1997.
23
<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 11, 1997 /s/ William L. Mellick
--------------------------- ----------------------------------
WILLIAM L. MELLICK
President and Chief Executive Officer
Date November 11, 1997 /s/ Robert B. Tschudy
--------------------------- ----------------------------------
ROBERT B. TSCHUDY
Senior Vice President and
Chief Financial Officer
24
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
EXHIBIT 11: COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Primary:
Average shares outstanding 51,582 51,465 51,552 51,461
Net effect of dilutive stock
warrants and options based
on the modified treasury
stock method using average
market price 9,997 6,629 8,830 7,279
--------- --------- --------- --------
Totals 61,579 58,094 60,382 58,740
--------- --------- --------- --------
--------- --------- --------- --------
Net income
$ 33,218 $ 24,345 $ 91,597 $ 81,856
Dividends on preferred stock (5,061) (5,061) (15,185) (15,185)
--------- --------- --------- --------
Net income applicable
to common stock $ 28,157 $ 19,284 $ 76,412 $ 66,671
--------- --------- --------- --------
--------- --------- --------- --------
Earnings per common share $ 0.46 $ 0.33 $ 1.27 $ 1.14
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
25
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
EXHIBIT 11: COMPUTATION OF EARNINGS PER COMMON SHARE (continued)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Fully diluted:
Average shares outstanding 51,582 51,465 51,552 51,461
Net effect of dilutive stock
warrants and options based
on the modified treasury
stock method using average
market price
10,524 7,794 10,508 7,791
Assuming conversion
of convertible
preferred stock 19,855 19,855 19,855 19,855
--------- --------- --------- ---------
Totals 81,961 79,114 81,915 79,107
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income $ 33,218 $ 24,345 $ 91,597 $ 81,856
Net interest expense reduction - - - -
--------- --------- --------- ---------
Net income applicable
to common stock $ 33,218 $ 24,345 $ 91,597 $ 81,856
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per common share $ 0.41 $ 0.31 $ 1.12 $ 1.04
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 1065907
<DEBT-CARRYING-VALUE> 1065907
<DEBT-MARKET-VALUE> 1065907
<EQUITIES> 1709
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1067616
<CASH> 45505
<RECOVER-REINSURE> 72594
<DEFERRED-ACQUISITION> 10441
<TOTAL-ASSETS> 1504146
<POLICY-LOSSES> 450781
<UNEARNED-PREMIUMS> 248250
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
224950
<COMMON> 70973
<OTHER-SE> 269215
<TOTAL-LIABILITY-AND-EQUITY> 1504146
587752
<INVESTMENT-INCOME> 54847
<INVESTMENT-GAINS> 2995
<OTHER-INCOME> 0
<BENEFITS> 439681
<UNDERWRITING-AMORTIZATION> 31202
<UNDERWRITING-OTHER> 25828
<INCOME-PRETAX> 139012
<INCOME-TAX> 47415
<INCOME-CONTINUING> 91597
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91597
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.12
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
