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, 1999 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 29, 1999
Common Stock, Without Par Value 86,802,464 shares
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1999 1998
-------------- -------------
(Unaudited)
(Amounts in thousands)
<S> <C> <C>
Investments, available-for-sale, at fair value:
Fixed maturities . . . . . . . . . . . . . . . $ 967,729 $ 1,067,248
Equity securities. . . . . . . . . . . . . . . 2,125 1,373
-------------- -------------
Total investments - Note 3. . . . . . . . 969,854 1,068,621
Cash and cash equivalents. . . . . . . . . . . . 79,909 167,856
Accrued investment income. . . . . . . . . . . . 16,736 19,542
Premiums receivable. . . . . . . . . . . . . . . 72,813 70,884
Reinsurance receivables and recoverables . . . . 55,874 66,823
Prepaid reinsurance premiums . . . . . . . . . . 36,775 31,589
Deferred income taxes. . . . . . . . . . . . . . 88,156 74,330
Deferred policy acquisition costs. . . . . . . . 20,868 16,100
Other assets . . . . . . . . . . . . . . . . . . 89,722 77,411
-------------- -------------
$ 1,430,707 $ 1,593,156
============== =============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1999 1998
--------------- -------------
(Unaudited)
(Amounts in thousands, except share data)
<S> <C> <C>
Unpaid losses and loss adjustment expenses . . . . . . $ 276,620 $ 382,003
Unearned premiums. . . . . . . . . . . . . . . . . . . 238,518 233,689
Bank loan payable. . . . . . . . . . . . . . . . . . . 78,750 112,500
Claims checks payable. . . . . . . . . . . . . . . . . 34,172 34,311
Reinsurance payable. . . . . . . . . . . . . . . . . . 21,527 20,628
Other liabilities. . . . . . . . . . . . . . . . . . . 29,192 24,423
--------------- -------------
Total liabilities. . . . . . . . . . . . . . . . 678,779 807,554
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, none outstanding
in 1999 and 1998 . . . . . . . . . . . . . . . . - -
Common stock, without par value; authorized
110,000,000 shares, outstanding 86,886,164
in 1999 and 87,624,531 in 1998 . . . . . . . . . 448,526 462,268
Accumulated other comprehensive income (loss) . . . (34,776) 23,387
Retained earnings . . . . . . . . . . . . . . . . . 338,178 299,947
--------------- -------------
Total stockholders' equity . . . . . . . . . . . 751,928 785,602
--------------- -------------
$ 1,430,707 $ 1,593,156
=============== =============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1999 1998 1999 1998
---------- --------- --------- ---------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Net premiums earned . . . . . . . . . . . . . $ 191,234 $ 193,506 $ 577,879 $ 578,890
Net investment income . . . . . . . . . . . . 14,681 19,197 48,781 55,791
Realized investment gains (losses). . (7,195) 6,920 3,343 17,837
---------- --------- --------- ---------
198,720 219,623 630,003 652,518
LOSSES AND EXPENSES:
Net losses and loss
adjustment expenses. . . . . . . . . . 148,086 139,182 436,465 424,696
Policy acquisition costs. . . . . . . 21,270 12,027 60,034 43,141
Other operating expenses. . . . . . . . . 3,786 7,408 13,237 13,842
Interest and fees expense . . . . . . . 1,691 2,515 5,408 8,030
---------- --------- --------- ---------
174,833 161,132 515,144 489,709
---------- --------- --------- ---------
Income before federal
income taxes . . . . . . . . . . 23,887 58,491 114,859 162,809
Federal income taxes - Note 4 . . . . 5,515 20,306 34,650 56,583
---------- --------- --------- ---------
NET INCOME. . . . . . . . . . . . . . . . . . $ 18,372 $ 38,185 $ 80,209 $ 106,226
========== ========= ========= =========
EARNINGS PER COMMON SHARE - Note 2
- - ----------------------------------
BASIC. . . . . . . . . . . . . . . $ 0.21 $ 0.49 $ 0.92 $ 1.60
========== ========= ========= =========
DILUTED. . . . . . . . . . . . . . $ 0.21 $ 0.44 $0.92 $ 1.27
========== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Nine Months Ended September 30, 1999
------------------------------------
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income Total
--------------- ---------- --------------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Balance at January 1, 1999. . . $ 462,268 $ 299,947 $ 23,387 $785,602
Comprehensive income:
Net income. . . . . . . . . . . 80,209 80,209
Change in accumulated other
comprehensive income, net -
Note 3 . . . . . . . . . . . (58,163) (58,163)
---------
Total comprehensive income. . . 22,046
Cash dividends declared . . . . (41,978) (41,978)
Common stock repurchased
(781,200 shares) . . . (14,381) (14,381)
Other . . . . . . . . . 639 639
--------------- ---------- --------------- --------
Balance at September 30, 1999 . $ 448,526 $ 338,178 $ (34,776) $751,928
=============== ========== =============== ========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
---------------------
1999 1998
---------- ---------
(Unaudited)
(Amounts in thousands)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income. . . . . . . . . . . . . . . . . . . $ 80,209 $106,226
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for depreciation and amortization. 9,853 6,202
Provision for deferred income taxes. . . . . 17,493 53,662
Realized gains on sale of investments. . . . (3,462) (17,837)
Federal income taxes . . . . . . . . . . . . 10,932 329
Reinsurance balances . . . . . . . . . . . . 6,662 1,613
Unpaid losses and loss adjustment expenses . (105,383) (86,297)
Unearned premiums. . . . . . . . . . . . . . 4,829 7,437
Claims checks payable. . . . . . . . . . . . (139) (2,981)
Other. . . . . . . . . . . . . . . . . . . . (1,238) (1,888)
---------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES. . . . . . . . . . $ 19,756 $ 66,466
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Nine Months Ended
September 30,
---------------------
1999 1998
---------- ---------
(Unaudited)
(Amounts in thousands)
<S> <C> <C>
INVESTING ACTIVITIES:
Investments available-for-sale:
Purchases. . . . . . . . . . . . . . . . . . . $(718,136) $(674,399)
Calls or maturities. . . . . . . . . . . . . 5,040 16,262
Sales. . . . . . . . . . . . . . . . . . . . . 725,115 688,360
Net purchases of property and equipment. . . (29,613) (22,721)
---------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES. . . . . . (17,594) 7,502
---------- ---------
FINANCING ACTIVITIES:
Proceeds from exercise of common stock warrants. - 145,600
Bank loan principal repayment. . . . . . . . (33,750) (33,750)
Common stock repurchased . . . . . . .. (14,381) -
Dividends paid . . . . . . . . . . . . . (41,978) (37,587)
---------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES. . . . . .. (90,109) 74,263
---------- ---------
Net increase (decrease) in cash . . . . . (87,947) 148,231
Cash and cash equivalents, beginning of year. . . 167,856 31,268
---------- ---------
Cash and cash equivalents, end of quarter . . . . . $ 79,909 $ 179,499
========== ==========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1999
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 either the three or the nine-month period
ended September 30, 1999, are not necessarily indicative of the results that may
be expected for the year ended December 31, 1999. 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,
1998.
Certain amounts in the 1998 financial statements have been reclassified to
conform to the 1999 presentation.
8
<PAGE>
2. Earnings Per Common Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- -----------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Net income. . . . . . . . . . . . . . . . . . $ 18,372 $ 38,185 $ 80,209 $ 106,226
Preferred stock dividends . . . . . - - - (10,123)
---------- ---------- ---------- -----------
Numerator for basic earnings per share:
Income available to common stockholders . . . 18,372 38,185 80,209 96,103
Effect of dilutive securities:
Dividends on convertible preferred stock. . . - - - 10,123
---------- ---------- ---------- -----------
Numerator for diluted earnings per share:
Income available to common stockholders
after assumed conversions . . . . . . . . . . $ 18,372 $ 38,185 $ 80,209 $ 106,226
========== ========== ========== ===========
Denominator:
Denominator for basic earnings per share:
Weighted-average shares outstanding . . . . 86,995 77,148 87,393 60,098
Effect of dilutive securities:
Restricted stock grants . . . . . . . . . . . . 50 45 50 105
Employee stock options. . . . . . . . . . . 56 289 57 344
Warrants. . . . . . . . . . . . . . . - 2,995 - 8,194
Convertible preferred stock . . . . . . . . . - 5,764 - 15,157
---------- ---------- ---------- -----------
Dilutive potential common shares. . . . . . . 106 9,093 107 23,800
Denominator for diluted earnings per share:
Adjusted weighted-average shares outstanding. 87,101 86,241 87,500 83,898
========== ========== ========== ===========
Basic earnings per share. . . . . . . . . . . . $ 0.21 $ 0.49 $ 0.92 $ 1.60
========== ========== ========== ===========
Diluted earnings per share. . . . . . . . . . . $ 0.21 $ 0.44 $ 0.92 $ 1.27
========== ========== ========== ===========
</TABLE>
9
<PAGE>
3. Investments
The amortized cost, gross unrealized gains and losses, and fair values of
investments as of September 30, 1999, 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. . . . $ 15,560 $ 14 $ 560 $ 15,014
Obligations of states and political
subdivisions . . . . . . . . . . 859,906 1,441 46,065 815,282
Corporate securities. . . . . 147,640 201 10,408 137,433
---------- ----------- ----------- ----------
Total fixed maturities . . . . 1,023,106 1,656 57,033 967,729
Equity securities . . . . . . . . 250 1,875 - 2,125
---------- ----------- ----------- ----------
Total investments. . . . . . . . $1,023,356 $ 3,531 $ 57,033 $ 969,854
========== =========== =========== ==========
</TABLE>
Details follow concerning the change during the nine months ended September 30,
1999, in the after-tax net unrealized gain or loss on investments, which is
included in the equity section of the consolidated balance sheet under the
caption "accumulated other comprehensive income (loss)" (amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
Unrealized loss on available-for-sale investments, net of income
tax benefit of $30,106. . . . . . . . . . . . . . . . . . . . . . . $(55,912)
Less: reclassification adjustment for gains or losses included in net
income, net of income tax expense of $1,212 . . . . . . . . . . . . (2,251)
---------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(58,163)
=========
</TABLE>
10
<PAGE>
4. Federal Income Taxes
Income taxes do not bear the expected relationship to pre-tax income
because of tax-exempt investment income and other differences in the recognition
of revenue and expenses for tax and financial statement purposes. At September
30, 1999, the Company had a net operating loss carryforward of approximately
$82.4 million for regular tax purposes and an alternative minimum tax credit
carryforward of $34.5 million. The net operating loss carryforward 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>
Nine Months Ended September 30,
------------------
1999 1998
-------- --------
(Amounts in thousands)
<S> <C> <C>
Current tax expense. . $ 17,157 $ 2,921
Deferred tax expense . 17,493 53,662
-------- --------
$ 34,650 $ 56,583
======== ========
</TABLE>
11
<PAGE>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- - ----------------------------------
The Company is principally dependent on premiums and its portfolio of marketable
securities and the investment income thereon to pay claims and operating
expenses and to service outstanding debt. 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 has continued to be sufficient to fund
the Company's needs and planned future expenditures.
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, which allows the payment of up to the greater of prior
year statutory net income or 10% of surplus without prior approval from the
state. As of September 30, 1999, the Company's insurance subsidiaries had a
combined statutory surplus of $660.5 million compared to a combined statutory
surplus of $621.7 million at September 30, 1998. The Company's ratio of net
written premium to surplus remained unchanged between September 30, 1998, and
September 30, 1999, at 1.2:1.
Invested assets as of September 30, 1999, had a fair value of $1.0 billion
compared to $1.2 billion at December 31, 1998. The decrease includes a change in
unrealized losses of $89.5 million. All investments in fixed maturities are
investment grade. To the extent practicable, the Company's investment portfolio
is being transitioned from taxable to nontaxable securities to enable the
Company to minimize future tax payments in anticipation of fully utilizing its
remaining net operating loss carryforward. Of the Company's total investments at
September 30, 1999, 15.7% were invested in taxable fixed-income securities
compared to 74.9% at December 31, 1998 and 84.7% at September 30, 1998 .
12
<PAGE>
The fixed maturity available-for-sale portfolio is subject to decline in fair
value as interest rates rise. As of September 30, 1999, the after-tax
unrealized loss on investments was $34.8 million, compared with a net unrealized
gain of $23.4 million as of December 31, 1998. The Company's strategy has been
to minimize the realization of these losses by holding the underlying
investments, to the extent practicable, until they regain their value. However,
as previously mentioned, the Company is currently transitioning its investment
portfolio to a primarily nontaxable basis and expects that some unrealized
losses may be realized in the future.
At October 1, 1999, the Company has a variable rate credit line available of
$67.5 million, all of which is outstanding. Presently, interest is paid monthly;
interest payments for the first nine months of 1999 totaled $4.2 million.
Principal repayments of $11.25 million are due on the first day of each calendar
quarter.
During the second quarter of 1999, 20th Century's Board of Directors authorized
the expenditure of $50 million to purchase shares of the Company's common stock.
Implementation of the stock repurchase program began in June and continued
through the third quarter. As of September 30, 1999, 781,200 shares had
been repurchased at a cost of approximately $14.5 million.
In August 1996, 20th Century Insurance Company of Arizona, a joint venture owned
51% by AIG and 49% by 20th Century Industries, began writing private passenger
automobile policies in that state. As of September 30, 1999, insured vehicles
totaled 20,484, an increase of 38.5% over the total at September 30, 1998. The
Company's investment in and advances to this venture totaled $4.8 million at
September 30, 1999, and is included in other assets in the consolidated balance
sheet. The Company's equity in the net loss of this venture was $(61,000) and
$(333,000) for the three and nine months ended September 30, 1999, respectively,
and $(84,000) and $(312,000) for the same 1998 periods, and is included in
investment income in the consolidated statements of
13
<PAGE>
income. The statistical and other information presented hereinafter do not
include the activities of 20th Century Insurance Company of Arizona.
14
Results of Operations
- - -----------------------
UNITS IN FORCE
Units in force for the Company's insurance programs as of September 30 were as
follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Private Passenger Automobiles
(number of vehicles). . . . 1,173,449 1,127,006
Homeowners
(number of policies). . . . 51,564 56,305
Personal Umbrella
(number of policies). . . . 12,887 12,161
--------- ---------
Total. . . . . . . . . . . . . 1,237,900 1,195,472
========= =========
</TABLE>
The core automobile business continued to grow in the first nine months of 1999.
During the fourth quarter of 1998, the Company began writing private passenger
automobile policies in Nevada, Oregon and Washington, insuring more than 11,300
vehicles in these states at September 30, 1999. These new markets collectively
represent approximately six million vehicles.
The Company's voluntary auto units in force increased by 4.3% compared to a year
ago from 1,121,615 units in force at September 30, 1998 to 1,170,316 units in
force at September 30, 1999. Voluntary auto units grew 44,772 (4.0%) in the
first nine months of 1999, 19,576 (1.7%) of which occurred in the third quarter.
This compared to an increase in units of 56,872 (5.3%) for the first nine months
of 1998, 12,079 (1.1%) of which occurred in the third quarter. In view of
favorable trends in loss costs in 1997 and 1998, the Company lowered overall
rate levels approximately 3.4% and 3.2% in 1998 and 1997, respectively, and by
an additional 6.85% in February 1999.
14
<PAGE>
The Company's position in the homeowners market has always been intended to
complement its auto business and facilitate growth in that line. Prior to its
mid-1994 suspension of homeowner sales, 20th Century insured more than 210,000
homeowners in California, of which more than 40 percent also had their
automobiles insured by the Company. Although the Company has continued to renew
its existing homeowners policies, receiving permission to do so from the
California Department of Insurance ("CDOI") in mid February 1997, the number of
units in force for the homeowners program has been declining since 1994. In late
April 1999, the Company and the CDOI reached an agreement whereby the Company
was permitted to resume sales of new homeowners policies in California.
Resumption of sales began in September 1999. As part of the agreement, the
Company committed $6 million to create a non-profit fund to benefit certain
individuals and non-profit entities impacted by the Northridge earthquake. The
Company also committed $750,000 for general use by the California Research and
Assistance Fund and for public education and outreach activities. The total of
$6.75 million was recorded as a non-recurring pre-tax charge in the second
quarter of 1999.
15
<PAGE>
UNDERWRITING RESULTS
Premium revenue, underwriting results and combined ratios for the Company's
insurance programs were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -- -----------------
1999 1998 1999 1998
--------- -------- -------- --------
(Amounts in thousands)
Gross Premiums Written
<S> <C> <C> <C> <C>
Automobile . . . . . . . $216,188 $218,299 $640,729 $644,309
Homeowners . . . . . . 1,434 1,596 22,851 24,565
Personal Umbrella. . . . 744 727 2,085 1,925
-------- -------- -------- --------
Total. . . . . . . . . . $218,366 $220,622 $665,665 $670,799
======== ======== ======== =========
Net Premiums Earned
Automobile . . . . . . . $190,893 $193,283 $577,052 $578,226
Homeowners . . . . (7) - - (1)
Personal Umbrella. . 348 223 827 665
-------- -------- -------- --------
Total. . . . . . . . . . $191,234 $193,506 $577,879 $578,890
======== ======== ======== =========
Underwriting Profit (Loss)
Automobile . . . . . . . $ 19,811 $ 36,523 $ 78,926 $100,362
Homeowners . . . . . . . (2,097) (1,698) (11,377) (3,591)
Personal Umbrella. . . . 379 65 594 440
-------- -------- -------- --------
Total. . . . . . . . . . $ 18,093 $ 34,890 $ 68,143 $ 97,211
======== ======== ======== =========
Combined Ratios (GAAP)
Automobile . . . . . . . 89.62% 81.11% 86.32% 82.64%
Homeowners . . . . - - - -
Personal Umbrella. . (8.86)% 71.01% 28.08% 33.90%
Total. . . . . . . 90.54% 81.96% 88.21% 83.21%
</TABLE>
16
<PAGE>
AUTOMOBILE
Automobile insurance is the primary line of business written by the Company and
continues to be profitable. The majority of the Company's insured autos are
located in southern California. The Company continues to expand its coverage
throughout the state, particularly in northern California and San Diego County,
which accounted for approximately 47% of all new business written in the first
nine months of 1999. During the fourth quarter of 1998, the Company also began
writing automobile policies in Nevada, Oregon and Washington. Approximately $3.7
million of premiums were written in these states in the first nine months of
1999, representing 11% of all new business units written during this period.
The Company's voluntary automobile program realized an underwriting profit of
$20.2 million for the three months ended September 30, 1999, compared to $36.1
million for third quarter of 1998. Underwriting profits for the first nine
months of 1999 were $79.7 million compared to $99.3 million for the same period
last year. These results reflect a decrease in earned premiums due to the rate
reductions previously mentioned and an increase in incurred losses and loss
expenses.
The 1999 decrease in gross premiums written reflects the 4.0% increase in
insured units offset by the effect of the 6.85% premium rate reductions
effective in the first quarter of the year.
The combined ratios for the voluntary automobile program for the third quarter
and nine months ended September 30, 1999, were 89.4% and 86.1%, respectively,
versus 81.2% and 82.6%, respectively, for the same periods last year. During
1999, overall trends in loss costs have flattened whereas since 1997 and through
1998, the Company's underwriting results had benefited from declining trends.
Loss trends and provisions in the first nine months of 1999 may not be
indicative of conditions that will impact losses in the future, and future loss
premiums may exceed recent experience. Also, recent California legislation is
expected to raise average claim settlement costs
17
<PAGE>
starting after the first of the year if the law goes into effect. Although it is
impossible at this point to estimate the likely impact of this development on
the Company's future underwriting results, an industry study has estimated that
bodily injury liability costs could increase from 6 to 14 percent. A voter
referendum to overturn this law is being attempted.
Unallocated loss adjustment expenses and underwriting expenses for the first
nine months of 1999 include approximately $2.2 million ($606,000 in the third
quarter) incurred to modify computer systems to make them "Year 2000 compliant"
compared to $5.4 million for the first nine months of 1998 ($3.1 million in the
third quarter). These expenses also include an increase in depreciation expense
of $3.7 million for the first nine months of 1999 over last year as a result of
the Company's strategy to upgrade its technology infrastructure and systems.
Underwriting expenses for the first nine months of 1999 increased $10.1 million
compared to the same period last year due to higher advertising expense.
Assigned Risk units produced underwriting losses of $381,000 and $796,000 for
the three and nine months ending September 30, 1999, respectively, compared to
underwriting gains of $377,000 and $1,076,000 for the same periods in 1998. The
decreased underwriting profit reflects a 41.9% decline in the number of Assigned
Risk vehicles coupled with a 28.3% rate reduction effective February 1, 1999.
HOMEOWNERS
In December 1996, the Company was granted authority to offer renewals of
policies for approximately 68,000 homeowner insurance customers beginning
February 15, 1997. Starting in mid-September 1999, the Company resumed sales of
new homeowner policies in California.
This new and renewal business is covered by a quota share reinsurance agreement,
which cedes 100% of all risk to three reinsurers, as follows:
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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%
</TABLE>
Through August 1, 1999, earthquake coverage, which the Company is obliged to
offer in conjunction with its California homeowner policies, has been provided
through American Home Assurance Company, a subsidiary of AIG. For new and
renewal homeowners policies written on or after August 1, 1999 earthquake
coverage is being offered by GeoVera Insurance Company, a non-affiliated
insurer. No earthquake exposures are assumed by the Company.
Homeowners policies in force on June 30, 1996, or renewed before July 23, 1996,
(which do not include earthquake 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 and other 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 $2.1 million and $11.3 million for the three and nine months ending
September 30, 1999, respectively, compared to underwriting losses of $1.7
million and $3.6 million for the same periods in 1998. Non-recurring charges of
$6.75 million are included in the underwriting results for the nine
months ending September 30, 1999. These charges relate to the previously
discussed agreement between the Company and the CDOI.
19
<PAGE>
Now that sales of new homeowner policies have resumed, the Company expects to
terminate the existing reinsurance program in favor of a more traditional
catastrophe reinsurance program effective January 1, 2000. Management believes
this change will help reduce the underwriting loss for this line.
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 UMBRELLA POLICY (PUP)
Units in force increased by 6.0% compared to a year ago to 12,887 units in force
at September 30, 1999 from 12,161 units in force at September 30, 1998. Gross
premiums written in the third quarter of 1999 increased by 2.4% compared to the
same quarter in 1998 and by 8.3% in the first nine months of 1999 compared to
the same prior year period. Underwriting profits for this line can vary
significantly with the number of claims, which occur infrequently. The PUP line
is subject to two quota share reinsurance agreements resulting in a net
retention by the Company of approximately 36%.
20
<PAGE>
POLICY ACQUISITION COSTS AND OTHER OPERATING EXPENSES
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 $5.6 million (28.9%) for the third quarter of 1999 compared to the
same quarter in 1998 and by $16.3 million (28.6%) for the first nine months of
1999 compared to the same period a year ago. The increase in net underwriting
expenses in the third quarter resulted primarily from an additional $4.2 million
in advertising expenses incurred over the same quarter of last year. On a
year-to-date basis, advertising expenses increased by $10.1 million over the
same period last year. Year-to-date underwriting expenses also include the
previously discussed $6.75 million non-recurring homeowner charges. The ratio
of net underwriting expenses (excluding loan interest and fees, but including
the non-recurring charges and additional advertising expenses previously
discussed) to net premiums earned for the third quarter and nine months ended
September 30, 1999, was 13.1% and 12.7%, respectively, compared to 10.0% and
9.8% for the same periods in 1998.
INVESTMENT INCOME
In the fourth quarter of 1998, the Company began transitioning its investment
portfolio from taxable to nontaxable securities in anticipation of fully
utilizing its remaining net operating loss carryforward. At September 30, 1999,
$802.9 million (76.5%) of the Company's total cash and investments at fair value
was invested in tax-exempt bonds with the balance, representing 23.5% of the
portfolio, invested in taxable securities compared to 98.9% at September 30,
1998.
As a result of the transition of the portfolio into tax-exempt securities, which
generally have a lower pre-tax yield than taxable securities, net pre-tax
investment income decreased 23.5% and 12.6% during the quarter and nine months
ended September 30, 1999, respectively, compared to the same
21
<PAGE>
periods in 1998. The average annual pre-tax yield on invested assets for the
three and nine-month periods ended September 30, 1999, was 5.2% and 5.5%,
respectively, compared to 6.4% and 6.6%, respectively, for the same periods in
1998. On an after tax basis, the comparable yields were 4.4% and 4.2% for the
third quarter and first nine months of 1999 versus 4.2% and 4.3% for the same
periods of 1998. Average invested assets decreased 4.9% for the quarter ended
September 30,1999, and increased 4.0% for the nine months ended September 30,
1999, compared to the same 1998 periods.
Realized gains on sales of investments decreased in the first nine months of
1999 to $3.3 million from $17.8 million for the same period in 1998. Realized
losses for the third quarter of 1999 were $7.2 million compared to realized
gains of $6.9 million for the same 1998 quarter. The decrease in realized gains
for the nine months ended September 30, 1999, and the realized losses for the
third quarter of 1999 are primarily due to a downturn in the bond market.
IMPACT OF YEAR 2000
The Y2K problem arose because some computer programs and hardware were designed
to use two digits rather than four to define the applicable year. As a result,
these systems, programs and hardware ("Information Technology systems" or "IT
systems") may not properly calculate dates beyond 1999, which may cause errors
or system failures. In addition, today's business environment contains many
non-IT systems, ranging from elevators to automobiles, which utilize
microprocessors, and these devices are also potentially susceptible to the same
or similar types of date problems.
The following discussion summarizes the Company's state of readiness, costs to
address its Y2K issues, the risks inherent in these issues, and the Company's
contingency plans.
22
<PAGE>
State of Readiness
- - --------------------
The Company has taken what it believes is a comprehensive approach to
remediating its Y2K issues as summarized in the following table:
<TABLE>
<CAPTION>
<S> <C>
MILESTONE. . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . COMPLETION YEAR
- - --------- ---------------
CRITICAL MAINFRAME APPLICATIONS
High level risk assessment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1997
Upgrade of base information systems to be Year 2000 compliant . . . . . . . . . . . 1998
Complete integration testing of 56 mainframe applications. . . . . . . . . . . . . 1998
Replacement of 14 systems with packaged software warranted to be Y2K compliant. . . 1999
OTHER IT HARDWARE (mainframe, client/server, network, telecommunications, etc.)
Assessment, installation or conversion,test, and implementation. 1999
NON-IT SYSTEMS - including IT systems maintained by third parties (e.g., banks,
vendors, etc.) Inventory and assessment; identify 1999
</TABLE>
Testing of critical computer applications was completed in November 1998.
Testing of all hardware and operating system software was successfully completed
by June 30, 1999. As of September 30, 1999, all critical business systems and
processes are either Year 2000 ready or have a contingency plan to insure that,
in the few cases where the Company is waiting for a vendor to be compliant,
there will be no interruption in service. Contingency planning activities were
completed by June 30, 1999. The Company's testing and progress made by the
Company's vendors indicate that it is very unlikely that these contingency plans
will need to be executed. Throughout the remainder of 1999, the Year 2000
project team will emphasize quality control measures to maintain the compliance
of our systems and will closely monitor the compliance efforts of the critical
vendors who provide key services to our customers.
Y2K Remediation Costs
- - -----------------------
The total Year 2000 project cost is estimated to be approximately $9.5 million,
which is being expensed as incurred. Approximately one third of that amount
represents the direct cost of
23
<PAGE>
personnel in the Company's Information Services department who have been
dedicated to this project, with most of the remainder representing external
consultants. Costs incurred during the first nine months of 1999 and 1998 were
$2.2 million and $5.4 million, respectively. Cumulative Y2K remediation costs
incurred through September 30, 1999, were $9.4 million.
Risks
- - -----
Without regard to the Company's remediation efforts, given the highly
computerized nature of the Company's operations, the Y2K problem would pose a
serious risk to the Company's ability to efficiently and effectively provide
service to its customers, or to conduct its affairs in a profitable manner.
Because of the nature of its operations and the availability of alternate
suppliers and service providers, the potential Y2K issues for the Company in the
non-IT area generally are less than for manufacturers or distributors of
non-financial products. Apart from written assurances the Company has or
expects to receive, the Company can offer no assurances that the impact of the
Y2K problem on certain services, such as those provided by third-party electric
utilities, will be insignificant or within the Company's ability to correct in a
fashion timely enough to avoid any potentially significant adverse impact.
Although no remediation plan is capable of foreseeing every possible contingency
that could have a potentially significant adverse effect, management is
confident that the steps taken to address the Company's Y2K issues will prevent
or promptly detect and correct any serious instances of noncompliance that are
reasonably within the Company's ability to control.
Contingency Plans
- - ------------------
For all critical systems within the Company's control, revised contingency plans
that take account of the Y2K issue were in place by the end of the second
quarter of 1999. These contingency plans generally cover steps the Company
would take, such as use of back-up computer facilities, in the event of a
business interruption from a variety of causes, including the remote possibility
of an interruption caused by one or more Y2K problems. The Company's
contingency planning team is
24
<PAGE>
staffed by representatives from all key business departments. Contingency
planning includes the following considerations and precautions:
- - - Defining a transition plan which describes all requirements for
information systems and business systems support as the Company enters the year
2000, including an event management team and the identification of resources and
responsibilities at each departmental level;
- - - Restrictions on vacations at the end of December 1999 and the beginning of
January 2000;
- - - Identifying manual procedures to be implemented until the automated
process is recovered, if necessary;
- - - For critical suppliers or service providers not expected to be compliant,
selecting feasible alternate suppliers;
- - - When alternate suppliers are infeasible, addressing any means the Company
can take to assist key suppliers in a timely manner;
- - - Determining key mission critical contingency plans and testing when
feasible before the Year 2000; and
- - - To minimize risk and ensure stability, the Company plans to "freeze"
changes to production programs from November 25, 1999 through January 15, 2000.
25
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30, 1999.
26
<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 12, 1999 /S/ William L. Mellick
-------------------------------- -------------------------
WILLIAM L. MELLICK
President and Chief Executive Officer
Date November 12, 1999 /S/ Robert B. Tschudy
-------------------------------- -------------------------
ROBERT B. TSCHUDY
Senior Vice President and
Chief Financial Officer
27
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 967729
<DEBT-CARRYING-VALUE> 967729
<DEBT-MARKET-VALUE> 967729
<EQUITIES> 2125
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 969854
<CASH> 79909
<RECOVER-REINSURE> 55874
<DEFERRED-ACQUISITION> 20868
<TOTAL-ASSETS> 1430707
<POLICY-LOSSES> 276620
<UNEARNED-PREMIUMS> 238518
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 78750
0
0
<COMMON> 448526
<OTHER-SE> 303402
<TOTAL-LIABILITY-AND-EQUITY> 1430707
577879
<INVESTMENT-INCOME> 48781
<INVESTMENT-GAINS> 3343
<OTHER-INCOME> 0
<BENEFITS> 436465
<UNDERWRITING-AMORTIZATION> 60034
<UNDERWRITING-OTHER> 13237
<INCOME-PRETAX> 114859
<INCOME-TAX> 34650
<INCOME-CONTINUING> 80209
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80209
<EPS-BASIC> .92
<EPS-DILUTED> .92
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
