<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
<TABLE>
<CAPTION>
<S> <C>
For Quarter Ended June 30, 1998 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 27, 1998
Common Stock, Without Par Value 87,588,347 shares
</TABLE>
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
(Amounts in thousands)
Investments, available-for-sale, at fair value:
Fixed maturities $ 1,057,742 $ 1,082,708
Equity securities 1,844 1,745
------------ ------------
Total investments - Note 3 1,059,586 1,084,453
Cash and cash equivalents 51,007 31,268
Accrued investment income 19,894 20,008
Premiums receivable 76,015 71,494
Reinsurance receivables and recoverables 67,685 70,050
Prepaid reinsurance premiums 42,033 32,154
Deferred income taxes - Note 4 93,967 126,877
Deferred policy acquisition costs 11,158 11,510
Other assets 44,364 34,639
------------ ------------
$ 1,465,709 $ 1,482,453
------------ ------------
------------ ------------
See accompanying notes to financial statements.
2
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C>
(Amounts in thousands, except share data)
Unpaid losses and loss adjustment expenses $ 382,928 $ 437,887
Unearned premiums 241,749 233,403
Bank loan payable 135,000 157,500
Claims checks payable 29,974 35,569
Reinsurance payable 32,060 19,347
Other liabilities 17,801 15,787
---------- ----------
Total liabilities 839,512 899,493
---------- ----------
Stockholders' equity
Capital stock
Preferred stock, par value $1.00 per share;
authorized 500,000 shares, none issued
Series A convertible preferred stock, par value
$1.00 per share, stated value $1,000 per share;
authorized 376,126 shares, outstanding 224,950
in 1998 and 1997 224,950 224,950
Common stock without par value; authorized
110,000,000, outstanding 51,728,381 in 1998
and 51,636,361 in 1997 72,569 71,230
Common stock warrants 16,000 16,000
Retained earnings 294,953 250,482
Accumulated other comprehensive income 17,725 20,298
---------- ----------
Total stockholders' equity 626,197 582,960
---------- ----------
$ 1,465,709 $ 1,482,453
---------- ----------
---------- ----------
</TABLE>
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,
--------------------------- -------------------------
1998 1997 1998 1997
----------- --------- ---------- ----------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Net premiums earned $ 191,883 $ 195,107 $ 385,384 $ 390,076
Net investment income 18,262 18,401 36,594 36,235
Realized investment gains 7,683 471 10,917 1,543
---------- ---------- ---------- ----------
217,828 213,979 432,895 427,854
LOSSES AND EXPENSES:
Net losses and loss
adjustment expenses expense 133,105 143,543 285,514 296,444
Policy acquisition costs 12,364 10,300 22,513 20,612
Other operating expenses 8,133 8,656 15,036 15,941
Interest and fees expense 2,677 3,322 5,515 6,615
---------- ---------- ---------- ----------
156,279 165,821 328,578 339,612
---------- ---------- ---------- ----------
Income before federal
income taxes 61,549 48,158 104,317 88,242
Federal income taxes - Note 4 21,376 16,651 36,276 29,864
---------- ---------- ---------- ----------
NET INCOME $ 40,173 $ 31,507 $ 68,041 $ 58,378
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS PER COMMON SHARE - Note 2
- - ----------------------------------
BASIC $ 0.68 $ 0.51 $ 1.12 $ 0.94
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
DILUTED $ 0.49 $ 0.39 $ 0.82 $ 0.73
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
Accumulated
Convertible Common Other
Preferred Common Stock Retained Comprehensive
Stock Stock Warrants Earnings Income Total
----------- --------- --------- ---------- ------------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ 224,950 $ 71,230 $ 16,000 $ 250,483 $ 20,298 $ 582,961
----------
Comprehensive income:
Net income 68,041 68,041
Change in accumulated other
comprehensive income, net -
Note 3 (2,573) (2,573)
---------
Total comprehensive income 65,468
Cash dividends declared (23,571) (23,571)
Other 1,339 1,339
----------- --------- --------- ---------- ------------- ----------
Balance at June 30, 1998 $ 224,950 $ 72,569 $ 16,000 $ 294,953 $ 17,725 $ 626,197
----------- --------- --------- ---------- ------------- ----------
----------- --------- --------- ---------- ------------- ----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
-------------------------
1998 1997
---------- ---------
(Unaudited)
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income $ 68,041 $ 58,378
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for depreciation and amortization 7,257 2,437
Provision for deferred income taxes 34,296 28,326
Realized gains on sale of investments (10,917) (1,543)
Federal income taxes 399 1,491
Reinsurance balances 5,198 8,781
Unpaid losses and loss adjustment expenses (54,959) (69,976)
Unearned premiums 8,345 20,718
Claims checks payable (5,595) (4,446)
Other (1,871) (5,627)
--------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 50,194 $ 38,539
6
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Six Months Ended June 30,
---------------------------
1998 1997
----------- -----------
(Unaudited)
(Amounts in thousands)
INVESTING ACTIVITIES:
Investments available-for-sale:
Purchases $ (417,815) $ (357,450)
Calls or maturities 16,262 -
Sales 433,301 369,544
Net purchases of property and equipment (16,132) (6,256)
---------- ----------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 15,616 5,838
FINANCING ACTIVITIES:
Bank loan principal repayment (22,500) -
Dividends paid (23,571) (15,284)
---------- ----------
NET CASH USED IN
FINANCING ACTIVITIES (46,071) (15,284)
---------- ----------
Net increase in cash and cash equivalents 19,739 29,093
Cash and cash equivalents, beginning of year 31,268 18,078
---------- ----------
Cash and cash equivalents, end of quarter $ 51,007 $ 47,171
---------- ----------
---------- ----------
See accompanying notes to financial statements.
7
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(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, 1998, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998. 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, 1997.
8
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Earnings Per Common Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Net income $ 40,173 $ 31,507 $ 68,041 $ 58,378
Preferred stock dividends (5,062) (5,062) (10,123) (10,123)
--------- --------- --------- ---------
Numerator for basic securities per share:
Income available to common stockholders 35,111 26,445 57,918 48,255
Effect of dilutive securities:
Dividends on convertible preferred stock 5,062 5,062 10,123 10,123
--------- --------- --------- ---------
Numerator for diluted earnings per share:
Income available to common stockholders
after assumed conversions $ 40,173 $ 31,507 $ 68,041 $ 58,378
--------- --------- --------- ---------
Denominator:
Denominator for basic earnings per share:
Weighted-average shares outstanding 51,590 51,490 51,572 51,490
Effect of dilutive securities:
Restricted stock grants 136 121 136 121
Employee stock options 332 82 330 82
Warrants 10,866 8,452 10,802 8,452
Convertible preferred stock 19,854 19,854 19,854 19,854
--------- --------- --------- ---------
Dilutive potential common stock 31,188 28,509 31,122 28,509
Denominator for diluted earnings per share:
Adjusted weighted-average shares outstanding 82,778 79,999 82,694 79,999
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic earnings per share $ 0.68 $ 0.51 $ 1.12 $ 0.94
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted earnings per share $ 0.49 $ 0.39 $ 0.82 $ 0.73
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
9
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Investments
The amortized cost, gross unrealized gains and losses, and fair values of
investments as of June 30, 1998, 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 $ 7,104 $ 14 $ 33 $ 7,085
Obligations of states and political
subdivisions 32,725 2,545 - 35,270
Public utilities 165,704 4,206 83 169,827
Corporate securities 826,534 20,497 1,471 845,560
----------- --------- ------- ----------
Total fixed maturities 1,032,067 27,262 1,587 1,057,742
Equity securities 250 1,594 - 1,844
----------- --------- -------- -----------
Total investments $ 1,032,317 $ 28,856 $ 1,587 $ 1,059,586
----------- --------- -------- -----------
----------- --------- -------- -----------
</TABLE>
Details follow concerning the change during the six months ended June 30,
1998, in the after-tax net unrealized gain on investments, which is included
in accumulated other comprehensive income in the consolidated balance sheet
(amounts in thousands):
Unrealized gain on available-for-sale investments,
net of tax expense of $2,021 $ 3,754
Less: reclassification adjustment for gains included
in net income, net of tax benefit of $3,407 (6,327)
---------
Total $ (2,573)
----------
----------
10
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Federal Income Taxes
Income taxes do not bear the expected relationship to pre-tax income
primarily because of tax-exempt investment income. At June 30, 1998, the
Company had a net operating loss carryforward of approximately
$176.7 million and $55.0 million for regular and alternative minimum tax
purposes, respectively, and an alternative minimum tax credit
carryforward of $15.8 million. 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:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
--------- ---------
(Amounts in thousands)
<S> <C> <C>
Current tax expense $ 1,980 $ 1,538
Deferred tax expense 34,296 28,326
--------- ---------
$ 36,276 $ 29,864
--------- ---------
--------- ---------
</TABLE>
5. New Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 130, REPORTING
COMPREHENSIVE INCOME, became effective in the first quarter of 1998. SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement has no
impact on the Company's net income or stockholders' equity. Essentially,
under SFAS No. 130, the new label "accumulated other comprehensive income"
has replaced that of the former "unrealized investment gains, net" in the
stockholders' equity section of the
11
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
consolidated balance sheet. Also, the consolidated statement of
stockholders' equity has been reformatted to conform to the requirements of
SFAS No. 130. Total comprehensive income amounted to $39.1 million and
$65.5 million for the three and six months ended June 30, 1998,
respectively, and $47.6 million and $53.3 million for the same 1997 periods.
In 1997, the Financial Accounting Standards Board also issued SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The
Company plans to adopt this Statement effective December 31, 1998, and
believes that this Statement will not require disclosure of any significant
information beyond that already provided in the Company's financial
statements.
6. Subsequent Event
On July 27, 1998, American International Group Inc. ("AIG") exercised its 16
million warrants to purchase shares of common stock at a price of $9.10 per
share, which increased the Company's stockholders' equity by $145.6 million.
AIG also tendered 224,750 shares of Series A preferred stock for conversion
to 19,836,716 shares of common stock. These transactions raised AIG's
ownership interest in the voting securities of the Company to more than 50%.
12
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The core automobile business experienced continued growth in the first six
months of 1998 despite increased competition in the industry. The number of
voluntary insured autos during the first six months of 1998 increased by 44,793
compared to an increase of 36,137 for the same period of 1997. As of June 30,
1998, the Company's insurance subsidiaries had a combined statutory surplus of
$586.5 million and a net written premium to surplus ratio of 1.3:1. Having
been recently granted licenses in the states of Nevada, Oregon and Washington,
the Company expects to begin writing policies by the end of the year in these
new markets, which collectively represent approximately six million vehicles.
In addition, Standard and Poor's recently upgraded its rating of the Company's
claims-paying ability to A-plus, and A.M. Best reaffirmed it's A- rating of the
Company.
The recent $145.6 million infusion by AIG (see Note 6 to the accompanying
financial statements) has boosted capitalization to its highest point in the
Company's 40-year history. Because near-term growth plans can be supported by
a lower level of capital, management is reviewing alternatives for rebalancing
the Company's equity position.
Invested assets as of June 30, 1998 were approximately $1.1 billion. All
investments in fixed maturities are investment grade. Of the Company's total
investments at June 30, 1998, 96.9% were invested in taxable fixed-income
securities, in keeping with the Company's strategy of maximizing the
realization of its remaining net operating loss carryover.
13
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
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 requirements. Cash flow from operations, which
rose 30% in the first half of 1998 compared to the first half of 1997, has
continued to be more than sufficient to fund loss payments.
At July 1, 1998, the Company has a variable rate credit line available of
$123,750,000, all of which is outstanding. Presently, interest is paid
monthly; interest payments for the first six months of 1998 totaled $4.7
million.
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, 1998, insured
vehicles totaled 13,982, an increase of 93.3% over the total at June 30, 1997.
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 and advances
to this venture totaled $4,026,000 at June 30, 1998, and is included in other
assets in the consolidated balance sheet. The Company's equity in the net loss
of this venture was $(63,000) and $(228,000) for the three and six months ended
June 30, 1998, respectively, and $(149,000) and $(332,000) for the same 1997
periods, and is included in investment income in the consolidated statement of
income. The statistical and other information presented hereinafter 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:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Private Passenger Automobiles
(number of vehicles) 1,116,410 1,053,933
Homeowner and Condominium
(number of policies) 57,561 64,056
Personal Excess Liability
(number of policies) 12,114 10,293
--------- ---------
Total 1,186,085 1,128,282
--------- ---------
--------- ---------
</TABLE>
The overall increase in units in force of approximately 5.1% is attributable
mainly to an increase in vehicles insured.
Strong unit growth in the auto business remains the Company's priority for
1998. The Company's voluntary auto units in force increased by 6.6% compared
to a year ago to 1,109,536 units in force at June 30, 1998 from 1,040,899 units
in force at June 30, 1997. Voluntary auto units grew 44,793 (4.2%) in the
first six months of 1998, 20,348 (1.9%) of which occurred in the second
quarter. This compared to an increase in units of 36,137 (3.6%) for the first
six months of 1997, 16,586 (1.6%) of which occurred in the second quarter.
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 has been able
to enhance its profitable customer mix. The Company's average customer
retention rate for second quarter 1998 was an excellent 97.0% despite a very
competitive business climate.
15
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Assigned Risk units decreased by 5,259 (43.3%) to 6,874 units during the first
six months of 1998 compared to an increase of 6,187 units (90.4%) for the same
period in 1997. This is a result of policyholders accepted into the voluntary
market as well as policyholders dropping out of the program after initially
responding to new legislation, effective January 1, 1997, aimed at decreasing
the number of uninsured motorists in California.
The Company's position in the homeowners market has always been intended to
complement its auto business and facilitate growth in that line. Units in
force for the homeowners program declined by 10.1% between June 30, 1997, and
June 30, 1998, mainly due to attrition resulting from the Company's inability
to write new homeowners policies in accordance with an order by the California
Department of Insurance. Although the Company continues to seek approval to
resume writing new business, it is unable to predict if or when the California
Insurance Commissioner will grant the Company's request which, in turn, has a
negative impact on customer retention.
16
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
UNDERWRITING RESULTS
Premium revenue, underwriting results and combined ratios for the Company's
insurance programs were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1998 1997 1998 1997
---------- ------------ ----------- -----------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Gross Premiums Written
Automobile $ 213,754 $ 222,016 $ 426,009 $ 440,783
Homeowners and Condo 14,383 15,999 22,969 24,604
PELP 654 617 1,199 1,110
---------- ------------ ----------- -----------
Total $ 228,791 $ 238,632 $ 450,177 $ 466,497
---------- ------------ ----------- -----------
---------- ------------ ----------- -----------
Net Premiums Earned
Automobile $ 191,660 $ 194,917 $ 384,943 $ 387,305
Homeowners and Condo - - - 2,392
PELP 223 190 441 379
---------- ------------ ----------- -----------
Total $ 191,883 $ 195,107 $ 385,384 $ 390,076
---------- ------------ ----------- -----------
---------- ------------ ----------- -----------
Underwriting Profit (Loss)
Automobile $ 38,509 $ 41,259 $ 63,839 $ 65,807
Homeowners and Condo (424) (8,835) (1,893) (9,092)
PELP 195 184 374 364
---------- ---------- ---------- -----------
Total $ 38,280 $ 32,608 $ 62,320 $ 57,079
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Combined Ratios
Automobile 79.90% 78.83% 83.42% 83.00%
Homeowners and Condo - - - -
PELP 12.02% 2.68% 15.02% 4.02%
Total 80.05% 83.29% 83.83% 85.37%
</TABLE>
17
<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. The majority of the Company's insured autos
are located in southern California; however, the Company continues to expand
its coverage throughout the state by aggressively marketing its business in
northern California. Approximately 28% of all new business written in the first
half of 1998 came from this region.
The Company's automobile program realized underwriting profits of $38.5 million
for the three months ended June 30, 1998, compared to $41.3 million for the
comparable 1997 period. Underwriting profits for the first six months of 1998
were $63.8 million compared to $65.8 million for the same prior year period.
The Company's 1998 second quarter and six month results were achieved despite
increased competition and the effects of rate reductions, resulting in a
combined ratio for the first six months of 1998 of 83.4 versus 83.0 for the
same period last year. Unallocated loss adjustment expenses and underwriting
expenses for the first half of 1998 include approximately $2.3 million incurred
to modify computer systems to make them "Year 2000 compliant," and underwriting
expenses also include an increase in advertising expense of $651,000 compared
to the first half of 1997.
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 have resulted in the
Company making a smaller provision for IBNR reserves than in the past,
favorably impacting underwriting results.
18
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Assigned Risk units produced underwriting gains of $397,000 and $698,000 for
the three and six months ending June 30, 1998, respectively, compared to
underwriting losses of $515,000 and $952,000 for the comparable periods in
1997. The underwriting profit for the six months in 1998 reflected a 47.3%
decline in the number of Assigned Risk vehicles coupled with an improved loss
ratio over the same period last year.
Homeowners and Condominium
In December 1996, the Company was granted authority to offer renewals of
policies for approximately 68,000 homeowner insurance customers beginning
February 15, 1997. This renewal business is covered by a quota share
reinsurance agreement, which cedes 100% of all risk to three reinsurers, as
follows:
REINSURER PARTICIPATION
National Union Fire Insurance Co. of Pittsburgh, PA
(A subsidiary of AIG) 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 American Home Assurance
Company, a subsidiary of AIG; no earthquake exposures are assumed by the
Company. As of June 30, 1998, more than 57,000 policies had been renewed,
which are approximately 84.6% of those eligible. Homeowners policies in
force on June 30, 1996 or renewed before July 23, 1996 (which do not include
earthquake
19
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
coverage) were ceded 100% in equal participations 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 to
weather-related and disaster claims has been significantly reduced, and its
remaining exposure under these programs primarily relates to development on
policies incepted prior to July 1, 1996. The underwriting losses for this line
were $0.4 million and $1.9 million for the three and six months ending June 30,
1998, respectively, compared to underwriting losses of $8.8 million and
$9.1 million for the same periods in 1997. The 1997 results included a
$6.75 million pre-tax provision recorded in the second quarter in connection
with an earthquake-related lawsuit.
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.
Personal Excess Liability Program (PELP)
Units in force increased by 17.7% compared to a year ago to 12,114 units in
force at June 30, 1998 from 10,293 units in force at June 30, 1997. Gross
premiums written increased by 6.0% in the second quarter of 1998 compared to
the same quarter in 1997 and by 8.0% in the six month period of 1998 compared
to the same prior year period. The growth in this business from the prior year
is primarily attributable to a cross-selling campaign, which began late in
1997. Underwriting profits
20
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
for this line can vary significantly with the number of claims, which occur
infrequently. The PELP line is subject to two quota share reinsurance
agreements resulting in a net retention by the Company of approximately 36%.
Policy Acquisition Costs and Other Operating Expenses
The Company's policy acquisition and other 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, which consist of policy acquisition
costs and other operating expenses, increased by $1.5 million (8.1%) and
$996,000 (2.7%) for the second quarter and six months ended June 30, 1998,
respectively, compared to the same periods in 1997. This reflects the lower
earned premiums and "Year 2000" costs and higher advertising expenses discussed
earlier, which were offset in part by commissions earned on business ceded to
reinsurers. The ratio of net underwriting expenses (excluding loan interest
and fees) to net premiums earned for the second quarter and six months ended
June 30, 1998 was 10.7% and 9.7%, respectively, compared to 9.7% and 9.4% for
the same periods in 1997.
INVESTMENT INCOME
Net pre-tax investment income decreased 0.8% during the second quarter of 1998
and increased 1.0% for the six months ended June 30, 1998 compared to the same
periods in 1997. Average invested assets decreased 0.2% and increased 0.3% for
the second quarter and six months ended June 30, 1998, respectively, compared
to the same 1997 periods.
21
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. (CONTINUED)
The average annual pre-tax yield on invested assets for both the three and six
month periods ended June 30, 1998 was 6.7% compared to 6.8% and 6.7% for the
same periods in 1997.
Realized gains on sales of investments increased in the first six months of
1998 to $10.9 million from $1.5 million for the same period in 1997. Realized
gains for the second quarter of 1998 increased to $7.7 million from $471,000
for the same 1997 quarter.
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, 1998.
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 7, 1998 /s/ William L. Mellick
------------------------ -----------------------------------------
WILLIAM L. MELLICK
President and Chief Executive Officer
Date August 7, 1998 /s/ Robert B. Tschudy
------------------------ -----------------------------------------
ROBERT B. TSCHUDY
Senior Vice President and
Chief Financial Officer
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 1,057,742
<DEBT-CARRYING-VALUE> 1,057,742
<DEBT-MARKET-VALUE> 1,057,742
<EQUITIES> 1,844
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,059,586
<CASH> 51,007
<RECOVER-REINSURE> 67,685
<DEFERRED-ACQUISITION> 11,158
<TOTAL-ASSETS> 1,465,709
<POLICY-LOSSES> 382,928
<UNEARNED-PREMIUMS> 241,749
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 135,000
0
224,950
<COMMON> 72,569
<OTHER-SE> 328,678
<TOTAL-LIABILITY-AND-EQUITY> 1,465,709
385,384
<INVESTMENT-INCOME> 36,594
<INVESTMENT-GAINS> 10,917
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<UNDERWRITING-AMORTIZATION> 22,513
<UNDERWRITING-OTHER> 15,036
<INCOME-PRETAX> 104,317
<INCOME-TAX> 36,276
<INCOME-CONTINUING> 68,041
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,041
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 0.82
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
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