<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 June 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 July 23, 1997
Common Stock, Without Par Value 51,613,861 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
JUNE 30, DECEMBER 31,
1997 1996
----------- -------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
Investments, available-for-sale, at fair value:
Fixed maturities - Note 3 $ 1,044,857 $ 1,063,703
Equity securities 1,300 925
------------ -----------
Total investments 1,046,157 1,064,628
Cash and cash equivalents 47,171 18,078
Accrued investment income 19,114 18,549
Premiums receivable 78,894 71,308
Reinsurance receivables and recoverables 72,910 79,183
Prepaid reinsurance premiums 44,247 33,020
Deferred income taxes - Note 4 165,252 190,857
Deferred policy acquisition costs 8,891 9,127
Other assets 30,104 29,005
------------ -----------
$ 1,512,740 $ 1,513,755
------------ -----------
------------ -----------
See accompanying notes to financial statements.
2
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31,
1997 1996
-------------- -------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Unpaid losses and loss adjustment expenses $ 473,553 $ 543,529
Unearned premiums 251,859 231,141
Bank loan payable 175,000 175,000
Claims checks payable 31,999 36,445
Reinsurance payable 33,464 19,730
Other liabilities 21,838 20,203
---------- ----------
Total liabilities 987,713 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 51,613,861 in 1997 and
51,520,006 in 1996 70,510 70,263
Common stock warrants 16,000 16,000
Unrealized investment gains (losses), net (2,233) 2,820
Retained earnings 215,800 173,674
---------- ----------
Total stockholders' equity 525,027 487,707
---------- ----------
$1,512,740 $1,513,755
---------- ----------
---------- ----------
See accompanying notes to financial statements.
3
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ---------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Net premiums earned $ 195,107 $ 225,068 $ 390,076 $ 457,696
Net investment income 18,400 18,776 36,235 37,465
Realized investment gains 471 1,310 1,543 3,898
---------- ---------- ---------- ---------
213,978 245,154 427,854 499,059
LOSSES AND EXPENSES:
Net losses and loss adjustment expenses 143,542 173,230 296,443 364,826
Policy acquisition costs 10,300 8,321 20,612 16,489
Other operating expenses 8,656 12,516 15,941 24,888
Loan interest and fees expense 3,322 3,483 6,615 7,048
---------- ---------- ---------- ---------
165,820 197,550 339,611 413,251
---------- ---------- ---------- ---------
Income before federal income taxes 48,158 47,604 88,243 85,808
Federal income taxes - Note 4 16,651 15,676 29,864 28,297
---------- ---------- ---------- ---------
NET INCOME $ 31,507 $ 31,928 $ 58,379 $ 57,511
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
EARNINGS PER COMMON SHARE - Note 2
- - -----------------------------------
PRIMARY $ 0.44 $ 0.46 $ 0.81 $ 0.80
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
FULLY DILUTED $ 0.39 $ 0.41 $ 0.73 $ 0.73
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
CONVERTIBLE -------------------------------------------------------
PREFERRED COMMON UNREALIZED
STOCK STOCK COMMON INVESTMENT
$1 PAR VALUE WITHOUT STOCK GAINS RETAINED
PER SHARE PAR VALUE WARRANTS (LOSSES), 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 58,379
Cash dividends declared (15,284)
Other 247 (5,053) (969)
---------- --------- --------- --------- ----------
Balance at June 30, 1997 $ 224,950 $ 70,510 $ 16,000 $ (2,233) $ 215,800
---------- --------- --------- --------- ----------
---------- --------- --------- --------- ----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
--------------------------
1997 1996
----------- ---------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net Income $ 58,379 $ 57,511
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for depreciation and amortization 2,437 2,543
Provision for deferred income taxes 28,326 26,665
Realized gains on sale of investments (1,543) (3,898)
Federal income taxes 1,491 (1,383)
Reinsurance balances 8,781 (8,038)
Unpaid losses and loss adjustment expenses (69,976) (51,028)
Unearned premiums 20,718 (18,798)
Claims checks payable (4,446) (8,378)
Other (5,628) 9,560
---------- ---------
NET CASH PROVIDED
BY OPERATING ACTIVITIES $ 38,539 $ 4,756
6
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
SIX MONTHS ENDED JUNE 30,
---------------------------
1997 1996
------------- -----------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
INVESTING ACTIVITIES:
Investments available-for-sale:
Purchases $ (357,450) $ (231,136)
Called or matured - 13,451
Sales 369,544 208,334
Net purchases of property and equipment (6,256) (1,185)
---------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 5,838 (10,536)
FINANCING ACTIVITIES:
Dividends paid (15,284) (10,122)
---------- ----------
NET CASH USED IN
FINANCING ACTIVITIES (15,284) (10,122)
---------- ----------
Net increase (decrease) in cash and
cash equivalents 29,093 (15,902)
Cash and cash equivalents, beginning of year 18,078 50,609
---------- ----------
Cash and cash equivalents, end of quarter $ 47,171 $ 34,707
---------- ----------
---------- ----------
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 six month periods ended June 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 60,058,242 and 59,680,873 for the three
and six months ended June 30, 1997, respectively, and 58,485,420 and
58,952,256 for the three and six months ended June 30, 1996, respectively.
The fully diluted weighted average number of common share equivalents was
80,456,039 and 80,344,243 for the three and six months ended
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Earnings Per Common Share (continued)
June 30, 1997, respectively, and 78,604,029 and 78,806,625 for the three
and six months ended June 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 June 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 $ 3,818 $ 50 $ 65 $ 3,803
Obligations of states and political
subdivisions 87,643 2,367 69 89,941
Public Utilities 188,429 433 2,563 186,299
Corporate Securities 769,452 3,977 8,615 764,814
----------- -------- --------- ----------
Total Fixed Maturities $ 1,049,342 $ 6,827 $ 11,312 $ 1,044,857
----------- -------- ---------- -----------
----------- -------- ---------- -----------
</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 June 30, 1997,
the Company has a net operating loss carryforward of approximately
$335,000,000 and $193,000,000 for regular and alternative minimum tax
purposes, respectively, and an alternative tax credit carryforward of
$12,768,000. 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:
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
---- ----
(AMOUNTS IN THOUSANDS)
Current tax expense $ 1,538 $ 1,632
Deferred tax expense 28,326 26,665
-------- --------
$ 29,864 $ 28,297
-------- --------
-------- --------
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
10
<PAGE>
20th CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. New Accounting Standard (continued)
instruments). Under the new standard, basic earnings per share would
be $0.51 and $0.52 for the quarters ending June 30, 1997 and 1996,
respectively, and $0.94 and $0.92, respectively, for the six 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 $0.39 and $0.41 for the quarters ended
June 30, 1997 and 1996, respectively, and $0.73 for each of the six month
periods ended June 30, 1997 and 1996, respectively.
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 six 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 42,324 in the
first six months of 1997 compared to a decrease of 43,987 in the first half of
1996. As of June 30, 1997, the Company's insurance subsidiaries had a combined
statutory surplus of $510.9 million, and a net written premium to surplus ratio
of 1.5:1. In addition, during the second quarter, the Company's claims paying
ability rating from Standard & Poors was upgraded to A- from BBB+, and its
financial performance rating from A.M. Best was upgraded to A- from B+.
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 six months of 1997 was 85.4 versus 88.7 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
12
<PAGE>
20th CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
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 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.
In June 1997, the Company recorded an after-tax provision of $4.39 million
resulting from a punitive damage verdict on an earthquake-related lawsuit. The
Company intends to appeal the verdict and hopes that it will be set aside or
significantly reduced, although there are no assurances that the court will do
so. 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 June 30, 1997 were $1.0 billion. All investments in
fixed maturities are investment grade. Of the Company's total investments at
June 30, 1997, 6.1% at fair value were invested in tax-exempt state and
municipal bonds and 93.9% 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. Cash flow from operations was more
than sufficient to fund loss payments in the first half of 1997.
13
<PAGE>
20th CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
At July 1, 1997, the Company has a variable rate credit line available of
$168.75 million, all of which is outstanding. Presently, interest is paid
monthly; interest payments in 1997 totaled $7.6 million.
At June 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 $10,122,750 were paid on the preferred stock in the first six
months of 1997.
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 automobile policies in that state. As of June 30, 1997,
insured vehicles totaled 7,235, an increase of 141% 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 June 30 were as
follows:
1997 1996
---- ----
Private Passenger Automobile
(number of vehicles) 1,053,933 1,017,020
Homeowner and Condominium
(number of policies) 64,056 165,703
Personal Excess Liability
(number of policies) 10,293 10,396
--------- ---------
Total 1,128,282 1,193,119
--------- ---------
--------- ---------
The overall decrease in units in force of 5.4% is attributable primarily to the
decrease in homeowners and condominium policies.
The Company's voluntary auto units in force increased by 3.0% compared to a year
ago from 1,010,322 units in force at June 30, 1996 to 1,040,899 units in
force at June 30, 1997. Voluntary auto units grew 36,137 (3.6%) in the first
half of 1997, 16,586 (1.6%) of which occurred in the second quarter. This
compared favorably to a decline in units of 42,481 (4.0%) for the first six
months of 1996 and 20,998 (2.0%) for the second 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
15
<PAGE>
20th CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
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 in the
fourth quarter of 1997.
Assigned Risk units increased by 94.6% from the same period a year ago, from
6,698 units in force at June 30, 1996 to 13,034 units in force at June 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 61.3% between June 30, 1996 and June 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 28.0% and 8.6% for the first six months
and the second 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Gross Premiums Written
Automobile $ 222,016 $ 226,785 $ 440,783 $ 463,080
Homeowners and Condo 15,999 16,919 24,604 31,896
PELP 617 616 1,110 1,091
---------- ---------- ---------- ----------
Total $ 238,632 $ 244,320 $ 466,497 $ 496,067
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net Premiums Earned
Automobile $ 194,917 $ 212,200 $ 387,305 $ 431,923
Homeowners and Condo - 12,675 2,392 25,383
PELP 190 193 379 390
---------- ---------- ---------- ----------
Total $ 195,107 $ 225,068 $ 390,076 $ 457,696
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Underwriting Profit (Loss)
Automobile $ 41,259 $ 28,630 $ 65,807 $ 49,134
Homeowners and Condo (8,835) 2,131 (9,092) 1,903
PELP 184 239 364 455
---------- ---------- ---------- ---------
Total $ 32,608 $ 31,000 $ 57,079 $ 51,492
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
17
<PAGE>
20th CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Net premiums earned for the second quarter decreased 13.3% to $195.1 million
compared to the second quarter of 1996. The net decline of $30.0 million
includes the effects of higher average vehicles in force of approximately
$3.3 million, net reductions in auto rates of approximately $20.6 million and
a reduction of $12.7 million in homeowner and condominium premiums due to
non-renewals and ceded reinsurance premiums.
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 record underwriting
profits of $41.8 million for the three months ended June 30, 1997 compared to
$28.7 million for the comparable 1996 period. Underwriting profits for the
first half of the year were $66.8 million compared to $49.1 million in the
prior year. The improvement came despite decreases in gross premiums written
of 4.0% and 6.5% in the second quarter and six months ended June 1997,
respectively, 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 underwriting losses of $515,000 and $952,000 in
the three and six month periods ending June 30, 1997, respectively, compared
to underwriting losses of $40,000 and $303,000 for comparable periods in
1996. The increased underwriting losses reflect a 94.6% 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:
<TABLE>
<CAPTION>
REINSURER PARTICIPATION
- - --------- -------------
<S> <C>
National Union Fire Insurance Co. of Pittsburgh, PA (AIG subsidiary) 50%
United States Fidelity & Guaranty Company 25%
Risk Capital Reinsurance Company 25%
</TABLE>
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 June 30, 1997, more
than 55,000 policies had been renewed, which is
19
<PAGE>
20th CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
approximately 86.5% of those eligible. Homeowners and condominium 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 is effective until the underlying policies expire or
are 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
$8.8 million and $9.1 million for the second quarter and six months ending
June 30, 1997, respectively, compared to underwriting profits of $2.1 million
and $1.9 million for the same periods in 1996. The 1997 underwriting losses
reflect the provision for punitive damages on an earthquake-related lawsuit
recorded in June, as previously mentioned. 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 June 30, 1996 to June 30, 1997.
Gross premiums written remained flat in the second quarter of 1997 compared
to that of 1996 and increased slightly in the six month period ended June 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 second
quarter and six months ending June 30, 1997 decreased by $1.9 million (9.0%)
and $4.8 million (11.7%), respectively, compared to the same periods in 1996.
These decreases reflect a reduction in general operating expenses due to the
decline in the number of units in force and steps taken to achieve operating
cost efficiencies, as well as a benefit from the ceding commission earned on
reinsurance. Ceding commissions accounted for approximately $1.1 million and
$1.8 million of the reduction in underwriting expenses in the second quarter
and six months ending June 30, 1997, respectively, compared to the same
periods a year ago.
The ratio of net underwriting expenses (excluding loan interest and fees) to
net premiums earned for the second quarter and six months ended June 1997 was
9.7% and 9.4%, respectively, compared to 9.3% and 9.0%, respectively, for
the same periods in 1996. The increase in the expense ratios is mainly due
to the decline in premiums earned.
INVESTMENT INCOME
Net pre-tax investment income decreased 2.0% and 3.3% during the second
quarter and six months ended June 1997, respectively, compared to the same
periods in 1996. Average invested assets decreased 3.5% and 4.0% for the
second quarter and six month periods ended June 30, 1997, respectively, as
compared to the same periods last year, primarily due to the decline in
premiums
21
<PAGE>
20th CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
written and the payment of earthquake-related claims. The average annual
pre-tax yield on invested assets for the three and six month periods ended
June 30, 1997 was 6.8% and 6.7%, respectively, compared to 6.7% and 6.6%,
respectively, for the same periods of 1996.
Realized gains on sales of investments decreased in the first six months of
1997 to $1.5 million from $3.9 million for the same period of 1996. Realized
gains for the second quarter of 1997 decreased to $471,000 from $1.3 million
for the same period last year. Unrealized after-tax gains on investments
decreased $5.1 million since December 31, 1996 to a net unrealized after-tax
loss of $2.2 million as of June 1997, primarily because of unfavorable
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
June 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 August 8, 1997 /s/ William L. Mellick
----------------- _______________________________
WILLIAM L. MELLICK
President and Chief Executive Officer
Date August 8, 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1996 1997 1996
------------- ------------ ----------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Primary:
Average shares outstanding 51,547 51,460 51,538 51,459
Net effect of dilutive stock
warrants and options based
on the modified treasury
stock method using average
market price 8,511 7,025 8,143 7,493
------- -------- -------- --------
Totals 60,058 58,485 59,681 58,952
------- -------- -------- --------
------- -------- -------- --------
Net income $31,507 $31,928 $ 58,379 $ 57,511
Dividends on preferred stock (5,061) (5,061) (10,122) (10,122)
------- -------- -------- --------
Net income applicable
to common stock $26,446 $26,867 $ 48,257 $ 47,389
------- -------- -------- --------
------- -------- -------- --------
Earnings per common share $ 0.44 $ 0.46 $ 0.81 $ 0.80
------- -------- -------- --------
------- -------- -------- --------
</TABLE>
25
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
EXHIBIT 11: COMPUTATION OF EARNINGS PER COMMON SHARE (continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1996 1997 1996
------------- ------------ ----------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Fully diluted:
Average shares outstanding 51,547 51,460 51,538 51,459
Net effect of dilutive stock
warrants and options based
on the modified treasury
stock method using average
market price 9,054 7,289 8,951 7,493
Assuming conversion
of convertible
preferred stock 19,855 19,855 19,855 19,855
------- -------- -------- --------
Totals 80,456 78,604 80,344 78,807
------- -------- -------- --------
------- -------- -------- --------
Net income $31,507 $31,928 $ 58,379 $ 57,511
Net interest expense reduction - - - -
------- -------- -------- --------
Net income applicable
to common stock $31,507 $31,928 $ 58,379 $ 57,511
------- -------- -------- --------
------- -------- -------- --------
Earnings per common share $ 0.39 $ 0.41 $ 0.73 $ 0.73
------- -------- -------- --------
------- -------- -------- --------
</TABLE>
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 1,044,857
<DEBT-CARRYING-VALUE> 1,044,857
<DEBT-MARKET-VALUE> 1,044,857
<EQUITIES> 1,300
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,046,157
<CASH> 47,171
<RECOVER-REINSURE> 72,910
<DEFERRED-ACQUISITION> 8,891
<TOTAL-ASSETS> 1,512,740
<POLICY-LOSSES> 473,553
<UNEARNED-PREMIUMS> 251,859
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
224,950
<COMMON> 70,510
<OTHER-SE> 229,567
<TOTAL-LIABILITY-AND-EQUITY> 1,512,740
390,076
<INVESTMENT-INCOME> 36,235
<INVESTMENT-GAINS> 1,543
<OTHER-INCOME> 0
<BENEFITS> 296,443
<UNDERWRITING-AMORTIZATION> 20,612
<UNDERWRITING-OTHER> 15,941
<INCOME-PRETAX> 88,243
<INCOME-TAX> 29,864
<INCOME-CONTINUING> 58,379
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,379
<EPS-PRIMARY> .81
<EPS-DILUTED> .73
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
