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 March 31, 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 April 27, 1999
Common Stock, Without Par Value 87,635,364 shares
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
(Amounts in thousands)
<S> <C> <C>
Investments, available-for-sale, at fair value:
Fixed maturities $ 999,148 $ 1,067,248
Equity securities 1,775 1,373
------------ ------------
Total investments - Note 3 1,000,923 1,068,621
Cash and cash equivalents 205,098 167,856
Accrued investment income 17,914 19,542
Premiums receivable 68,078 70,884
Reinsurance receivables and recoverables 66,177 66,823
Prepaid reinsurance premiums 33,304 31,589
Deferred income taxes - Note 4 78,029 74,330
Deferred policy acquisition costs 19,369 16,100
Other assets 72,550 77,411
------------ ------------
$ 1,561,442 $ 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
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
(Amounts in thousands, except share data)
<S> <C> <C>
Unpaid losses and loss adjustment expenses $ 338,224 $ 382,003
Unearned premiums 235,070 233,689
Bank loan payable 101,250 112,500
Claims checks payable 41,266 34,311
Reinsurance payable 26,564 20,628
Other liabilities 39,004 24,423
------------ ------------
Total liabilities 781,378 807,554
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 87,635,364
in 1999 and 87,624,531 in 1998 462,436 462,268
Accumulated other comprehensive income 2,789 23,387
Retained earnings 314,839 299,947
------------ ------------
Total stockholders' equity 780,064 785,602
------------ ------------
$ 1,561,442 $ 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
March 31,
----------------------------
1999 1998
------------ ------------
(Amounts in thousands, except per share data)
REVENUES
<S> <C> <C>
Net premiums earned $ 194,345 $ 193,501
Net investment income 17,899 18,332
Realized investment gains 7,248 3,234
------------ ------------
219,492 215,067
LOSSES AND EXPENSES
Net losses and loss adjustment expenses 154,679 152,409
Policy acquisition costs 17,114 14,183
Other operating expenses 2,610 2,869
Interest and fees expense 1,952 2,838
------------ ------------
176,355 172,299
------------ ------------
Income before federal income taxes 43,137 42,768
Federal income taxes - Note 4 14,224 14,900
------------ ------------
NET INCOME $ 28,913 $ 27,868
============ ============
EARNINGS PER COMMON SHARE - Note 2
- - - - - - - - - - - - - ----------------------------------
BASIC $ 0.33 $ 0.44
============ ============
DILUTED $ 0.33 $ 0.34
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Three Months Ended March 31, 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 28,913 28,913
Change in accumulated other
comprehensive income, net -
Note 3 (20,598) (20,598)
Total comprehensive income 8,315
Cash dividends declared (14,021) (14,021)
Other 168 168
--------- ---------- ------------- ---------
Balance at March 31, 1999 $ 462,436 $ 314,839 $ 2,789 $ 780,064
========= ========== ============= =========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
----------------------------
1999 1998
------------ ------------
(Unaudited)
(Amounts in thousands)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 28,913 $ 27,868
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for depreciation and amortization 3,239 1,812
Provision for deferred income taxes 7,393 14,070
Realized gains on sale of investments (7,346) (3,234)
Federal income taxes 10,932 750
Reinsurance balances 4,867 760
Unpaid losses and loss adjustment expenses (43,779) (19,249)
Unearned premiums 1,381 (483)
Claims checks payable 6,955 (2,555)
Other 17,219 7,147
------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 29,774 $ 26,886
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
20TH CENTURY INDUSTRIES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Three Months Ended
March 31,
----------------------------
1999 1998
------------ ------------
(Unaudited)
(Amounts in thousands)
<S> <C> <C>
INVESTING ACTIVITIES:
Investments available-for-sale:
Purchases $ (232,493) $ (169,304)
Calls or maturities 5,040 8,062
Sales 270,463 161,069
Net purchases of property and equipment (10,271) (6,159)
------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 32,739 (6,332)
FINANCING ACTIVITIES:
Bank loan principal repayment (11,250) (11,250)
Dividends paid (14,021) (10,231)
------------ ------------
NET CASH USED IN
FINANCING ACTIVITIES (25,271) (21,481)
------------ ------------
Net increase (decrease) in cash 37,242 (927)
Cash and cash equivalents, beginning of year 167,856 31,268
------------ ------------
Cash and cash equivalents, end of year $ 205,098 $ 30,341
============ ============
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(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 month period ended March 31,
1999, are not necessarily indicative of the results that may be expected for the
year ending 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>
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 March 31,
----------------------------
1999 1998
------------ ------------
(Amounts in thousands, except per share data)
<S> <C> <C>
Numerator:
Net income $ 28,913 $ 27,868
Preferred stock dividends - (5,061)
------------ ------------
Numerator for basic earnings per share:
Income available to common stockholders 28,913 22,807
Effect of dilutive securities:
Dividends on convertible preferred stock - 5,061
------------ ------------
Numerator for diluted earnings per share:
Income available to common stockholders
after assumed conversions $ 28,913 $ 27,868
============ ============
Denominator:
Denominator for basic earnings per share:
Weighted-average shares outstanding 87,633 51,555
Effect of dilutive securities:
Restricted stock grants - 135
Employee stock options 75 367
Warrants - 10,721
Convertible preferred stock - 19,854
------------ ------------
Dilutive potential common shares 75 31,077
Denominator for diluted earnings per share:
Adjusted weighted-average shares
outstanding 87,708 82,632
============ ============
Basic earnings per share $ 0.33 $ 0.44
============ ============
Diluted earnings per share $ 0.33 $ 0.34
============ ============
</TABLE>
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Earnings per Common Share (Continued)
As a result of AIG's conversion of preferred stock and exercise of common stock
warrants in the third quarter of 1998, the complexity of the Company's capital
structure has been significantly reduced. Accordingly, the Company's diluted
earnings per share calculation has been greatly simplified since the fourth
quarter of 1998.
3. Investments
The amortized cost, gross unrealized gains and losses, and fair values of
investments as of March 31, 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
government corporations and
agencies $ 15,909 $ 52 $ 138 $ 15,823
Obligations of states and
political subdivisions 381,371 2,589 4,132 379,828
Public utilities 92,196 2,790 110 94,876
Corporate securities 506,906 9,633 7,918 508,621
---------- ----------- ----------- ----------
Total fixed maturities 996,382 15,064 12,298 999,148
Equity securities 250 1,525 - 1,775
---------- ----------- ----------- ----------
Total investments $ 996,632 $ 16,589 $ 12,298 $1,000,923
========== ========== =========== ==========
</TABLE>
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Investments (Continued)
Details follow concerning the change during the three months ended March 31,
1999, 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):
<TABLE>
<CAPTION>
<S> <C>
Unrealized loss on available-for-sale investments, net of income
tax benefit of $8,520 $(15,823)
Less: reclassification adjustment for gains included in net income,
net of income tax expense of $2,571 (4,775)
---------
Total $(20,598)
=========
</TABLE>
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 March 31,
1999, the Company had a net operating loss carryforward of approximately $124.1
million for regular tax purposes and an alternative minimum tax credit
carryforward of $23.8 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>
Three Months Ended March 31,
----------------------------
1999 1998
------------ ------------
(Amounts in thousands)
<S> <C> <C>
Current tax expense $ 6,831 $ 830
Deferred tax expense 7,393 14,070
------------ ------------
$ 14,224 $ 14,900
============ ============
</TABLE>
11
<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 quarter
of 1999 despite increased competition in the industry. During the 4th quarter
of 1998, the Company began writing private passenger automobile policies in
Nevada, Oregon and Washington, insuring more than 1,800 vehicles at March 31,
1999. These new markets collectively represent approximately six million
vehicles.
In August 1996, 20th Century Insurance Company of Arizona, a joint venture owned
51% by American International Group, Inc. ("AIG") and 49% by 20th Century
Industries, began writing private passenger automobile policies in that state.
As of March 31, 1999, insured vehicles totaled 17,064, an increase of 33.9% over
the total at March 31, 1998. The Company's investment in and advances to this
venture totaled $4,006,000 at March 31, 1999, and is included in other assets in
the consolidated balance sheet. The Company's equity in the net loss of this
venture was $(125,000) and $(165,000) for the three months ended March 31, 1999
and 1998, respectively, 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.
Invested assets as of March 31, 1999 were approximately $1.2 billion. All
investments in fixed maturities are investment grade. Of the Company's total
investments at March 31, 1999, 59.6% were invested in taxable fixed-income
securities compared to 97.4% at March 31, 1998. To the extent practicable, the
Company's investment portfolio is being switched from taxable to nontaxable
securities in order to minimize future tax payments in anticipation of fully
utilizing its remaining net operating loss carryforward during 1999.
12
<PAGE>
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. Additional cash requirements include
servicing the bank debt and paying dividends as approved from time to time by
the Company's Board of Directors. Cash flow from operations, which rose 10.7%
for the first three months of 1999 compared to the same 1998 period, has
continued to be sufficient to fund the Company's needs and planned future
expenditures.
At April 1, 1999, the Company has a variable rate credit line available of $90
million, all of which is outstanding. Presently, interest is paid monthly;
interest payments for the first three months of 1999 totaled $1.5 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. As of March 31, 1999, the Company's insurance
subsidiaries had a combined statutory surplus of $634.0 million and a net
written premium to surplus ratio of 1.2:1.
13
<PAGE>
ITEM 2. (CONTINUED)
Results of Operations
- - - - - - - - - - - - - -----------------------
UNITS IN FORCE
Units in force for the Company's insurance programs as of March 31 were as
follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Private Passenger Automobiles
(number of vehicles) 1,139,681 1,098,248
Homeowner (number of policies) 54,524 59,781
Personal Umbrella
(number of policies) 12,600 11,961
--------- ---------
Total 1,206,805 1,169,990
========= =========
</TABLE>
The Company's voluntary auto units in force increased by 4.3% compared to a year
ago from 1,089,188 units in force at March 31, 1998 to 1,135,822 units in force
at March 31, 1999. Voluntary auto units grew in the quarter by 10,278 (0.9%)
from December 31, 1998, compared to an increase in units of 24,445 (2.3%) for
the same period in 1998. 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 6.8% in February 1999. The
Company's average customer retention rate for the first quarter of 1999 was an
excellent 96% despite a very competitive business climate.
14
<PAGE>
ITEM 2. (CONTINUED)
The Company's position in the homeowners market has always been intended to
complement its auto business and facilitate growth in that line. While the
Company has continued to renew its existing homeowners policies, it has not
marketed home insurance for new customers since mid-1994 in accordance with an
agreement reached with the California Department of Insurance ("CDOI"). As a
result, units in force for the homeowners program declined by 8.8% between March
31, 1998, and March 31, 1999. In late April 1999, the Company and the CDOI
reached a mutual agreement whereby the Company will resume sales of new
homeowners policies in California, expected to begin in the second half of 1999.
The Company will record a pre-tax charge to its second quarter 1999 earnings of
$6.85 million for payments it will be obligated to make under the agreement.
Prior to its suspension of homeowner sales in 1994, 20th Century insured more
than 210,000 residences in California, of which more than 40 percent also had
their automobiles insured by the Company.
15
<PAGE>
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 March 31,
----------------------------
1999 1998
------------ ------------
(Amounts in thousands)
<S> <C> <C>
Gross Premiums Written
Automobile $ 215,333 $ 212,255
Homeowners 8,025 8,586
Personal Umbrella 587 545
------------ ------------
Total $ 223,945 $ 221,386
============ ============
Net Premiums Earned
Automobile $ 194,126 $ 193,283
Homeowners - -
Personal Umbrella 219 218
------------ ------------
Total $ 194,345 $ 193,501
============ ============
Underwriting Profit (Loss)
Automobile $ 20,869 $ 25,330
Homeowners (1,055) (1,469)
Personal Umbrella 128 179
------------ ------------
Total $ 19,942 $ 24,040
============ ============
Combined Ratios (GAAP)
Automobile 89.25% 86.89%
Homeowners - -
Personal Umbrella 41.58% 18.08%
Total 89.74% 87.58%
</TABLE>
16
<PAGE>
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 and San Diego County, which accounted for approximately 49% of all
new business written in the first three months of 1999.
The Company's voluntary automobile program realized an underwriting profit of
$20.9 million for the three months ended March 31, 1999, compared to $25.0
million for the comparable 1998 period. These results were achieved despite
increased competition and the effects of premium rate reductions previously
mentioned. The 1999 increase in gross premiums written reflects the 4.3%
increase in insured units offset by the effect of the premium rate reductions.
The combined ratio for the first quarter of 1999 was 89.2% versus 86.9% for the
same period last year. Unallocated loss adjustment expenses and underwriting
expenses for the first three months of 1999 include approximately $590,000
incurred to modify computer systems to make them "Year 2000 compliant" compared
to $1.1 million for the first three months of 1998. Underwriting expenses also
include an increase in depreciation expense of $1.1 million as a result of the
Company's strategy to upgrade its technology infrastructure and systems as well
as an increase in advertising expense of $2.8 million compared to the same prior
year period.
Assigned Risk units produced an underwriting loss of $14,000 for the three
months ending March 31, 1999, compared to an underwriting gain of $301,000 for
the same period in 1998. The decreased underwriting profit reflects a 57.4%
decline in the number of Assigned Risk vehicles coupled with a 28.3% rate
reduction effective February 1, 1999.
17
<PAGE>
ITEM 2. (CONTINUED)
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. This renewal business is covered by a quota share
reinsurance agreement, which cedes 100% of all risk to three reinsurers, as
follows:
<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>
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
March 31, 1999, more than 54,000 policies had been renewed, which are
approximately 80% of those eligible. Homeowners policies in force on June 30,
1996, or renewed before July 23, 1996, (which do not include earthquake
coverage) were ceded 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 $1.1 million and $1.5 million for the three months ending March 31, 1999
and
18
<PAGE>
ITEM 2. (CONTINUED)
1998, respectively. The Company plans to reevaluate its reinsurance
arrangements prior to resuming homeowners insurance sales later in 1999.
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 5.3% compared to a year ago to 12,600 units in force
at March 31, 1999 from 11,961 units in force at March 31, 1998. Gross premiums
written in the first quarter of 1999 increased by 7.8% compared to the same
period in 1998. The growth in this business is primarily attributable to a
cross-selling campaign, which began late in 1997. 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%.
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 $2.7 million (15.7%) for the
first quarter of 1999 compared to the same period in 1998. Underwriting
expenses included
19
<PAGE>
ITEM 2. (CONTINUED)
increases in depreciation expense of $1.1 million and advertising expense of
$2.8 million compared to the same prior year period. The ratio of net
underwriting expenses (excluding loan interest and fees) to net premiums earned
for the three months ended March 31, 1999 and 1998, was 10.1% and 8.8%,
respectively.
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.
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:
20
<PAGE>
ITEM 2. (CONTINUED)
<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 alternate sources, if required; and
implement alternative sources as needed 1999
</TABLE>
The Company plans to complete its compliance testing of all critical components
in the summer of 1999.
Y2K Remediation Costs
The total Year 2000 project cost is estimated to be approximately $9.7 million,
which is being expensed as incurred. Approximately one third of that amount
represents the direct cost of 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 quarters ended
March 31, 1999 and 1998 were $590,000 and $1.1 million, respectively. Total
costs incurred as of March 31, 1999 were $7.8 million.
21
<PAGE>
ITEM 2. (CONTINUED)
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 service 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 are scheduled to be tested and in place by
June 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 staffed by representatives from all key business departments.
Contingency planning currently under development includes the following
considerations:
- Defining a rapid response team including identification of resources and
responsibilities at a departmental level;
22
<PAGE>
- 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.
INVESTMENT INCOME
Net pre-tax investment income decreased 2.4% during the quarter ended March 31,
1999, compared to the same period in 1998. Average invested assets increased
10.9% for the quarter ended March 31, 1999, compared to the same 1998 period.
The increase in invested assets is primarily due to additional cash received
from the exercise of AIG's common stock warrants in the third quarter of 1998.
The average annual pre-tax yield on invested assets for the three months ended
March 31, 1999 was 5.9% compared to 6.7% for the same period in 1998. The
decrease is primarily due to the shift to non-taxable securities, which have a
lower pre-tax yield, as described in the following paragraph.
Realized gains on sales of investments increased in the first three months of
1999 to $7.2 million from $3.2 million for the same period in 1998. The
increase in realized gains is primarily due to implementation of the Company's
decision in late 1998 to begin switching its investment portfolio from taxable
to nontaxable securities in anticipation of fully utilizing its remaining net
operating loss carryforward in 1999. At March 31, 1999, $359.8 million of the
Company's total investments at fair value was invested in tax-exempt bonds with
the balance representing 66.5% of the portfolio invested in taxable securities
compared to 98.5% at March 31, 1998.
23
<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 March 31,
1999.
24
<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 May 7, 1999 /s/ William L. Mellick
-------------------------- -------------------------
WILLIAM L. MELLICK
President and Chief Executive Officer
Date May 7, 1999 /s/ Robert B. Tschudy
-------------------------- -------------------------
ROBERT B. TSCHUDY
Senior Vice President and
Chief Financial Officer
25
<PAGE>
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