SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2000 Commission File Number 0-6964
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21ST CENTURY INSURANCE GROUP
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-1935264
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
6301 Owensmouth Avenue, Suite 700, Woodland Hills, California 91367
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 704-3700
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None
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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 31, 2000
Common Stock, Without Par Value 85,145,817 shares
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- -------------
(Unaudited)
(Amounts in thousands)
<S> <C> <C>
Investments, available-for-sale, at fair value:
Fixed maturities $ 913,955 $ 942,982
Equity securities 308 563
---------- -------------
Total investments - Note 3 914,263 943,545
Cash and cash equivalents 25,660 45,034
Accrued investment income 13,688 15,403
Premiums receivable 71,986 70,796
Reinsurance receivables and recoverables 51,020 56,616
Prepaid reinsurance premiums 20,702 32,212
Deferred income taxes - Note 4 90,336 91,251
Deferred policy acquisition costs 22,687 22,156
Property and equipment, net of accumulated
depreciation 104,059 84,455
Other assets 26,071 17,864
---------- -------------
$1,340,472 $ 1,379,332
========== =============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- --------------
(Unaudited)
(Amounts in thousands, except share data)
<S> <C> <C>
Unpaid losses and loss adjustment expenses $ 276,410 $ 276,248
Unearned premiums 249,300 232,702
Bank loan payable 33,750 67,500
Claims checks payable 32,303 31,912
Reinsurance payable 16,384 22,311
Other liabilities 32,918 27,822
----------- --------------
Total liabilities 641,065 658,495
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 2000 and 1999 - -
Common stock, without par value; authorized
110,000,000 shares, outstanding 85,145,817
in 2000 and 85,918,680 in 1999 414,798 429,623
Accumulated other comprehensive loss (28,413) (40,519)
Retained earnings 313,022 331,733
----------- --------------
Total stockholders' equity 699,407 720,837
----------- --------------
$1,340,472 $ 1,379,332
=========== ==============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
--------- -------- --------- --------
(Amounts in thousands, except per share data)
REVENUES:
<S> <C> <C> <C> <C>
Net premiums earned $207,062 $192,299 $407,334 $386,644
Net investment income 12,427 16,201 25,477 34,100
Realized investment gains (losses) (1,255) 3,290 (4,998) 10,538
--------- -------- --------- --------
218,234 211,790 427,813 431,282
LOSSES AND EXPENSES:
Net losses and loss
adjustment expenses 184,153 133,700 363,010 288,379
Policy acquisition costs 24,072 21,649 45,762 38,763
Other operating expenses 6,586 6,842 13,932 9,452
Interest and fees expense 960 1,765 2,097 3,717
--------- -------- --------- --------
215,771 163,956 424,801 340,311
--------- -------- --------- --------
Income before federal
income taxes 2,463 47,834 3,012 90,971
Federal income taxes (benefit) - Note 4 (2,497) 14,911 (5,603) 29,135
--------- -------- --------- --------
NET INCOME $ 4,960 $ 32,923 $ 8,615 $ 61,836
========= ======== ========= ========
EARNINGS PER COMMON SHARE - Note 2
----------------------------------
BASIC $ 0.06 $ 0.38 $ 0.10 $ 0.71
========= ======== ========= ========
DILUTED $ 0.06 $ 0.38 $ 0.10 $ 0.71
========= ======== ========= ========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Six Months Ended June 30, 2000
------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Common Retained Income
Stock Earnings (Loss) Total
--------- --------- --------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Balance at January 1, 2000 $429,623 $331,733 $(40,519) $720,837
Comprehensive income:
Net income 8,615 8,615
Change in accumulated other
comprehensive income, net -
Note 3 12,106 12,106
---------
Total comprehensive income 20,721
Cash dividends declared (27,326) (27,326)
Common stock repurchased
and retired (16,598) (16,598)
Other 1,773 1,773
--------- --------- --------- ---------
Balance at June 30, 2000 $414,798 $313,022 $(28,413) $ 699,407
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
2000 1999
----------- ---------
(Unaudited)
(Amounts in thousands)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 8,615 $ 61,836
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for depreciation and amortization 6,388 6,474
Provision for deferred income taxes (5,603) 15,834
Realized (gains) losses on sale of investments 4,899 (10,640)
Federal income taxes - 10,932
Reinsurance balances 11,179 2,578
Unpaid losses and loss adjustment expenses 162 (76,586)
Unearned premiums 16,598 4,751
Claims checks payable 391 (1,793)
Other (1,314) 4,468
----------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $41,315 $ 17,854
</TABLE>
6
<PAGE>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
2000 1999
---------- ----------
(Unaudited)
(Amounts in thousands)
<S> <C> <C>
INVESTING ACTIVITIES:
Investments available-for-sale:
Purchases $ (94,717) $(553,815)
Calls or maturities - 5,040
Sales 137,598 552,780
Net purchases of property and equipment (25,896) (19,179)
---------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 16,985 (15,174)
FINANCING ACTIVITIES:
Bank loan principal repayments (33,750) (22,500)
Dividends paid (27,326) (28,034)
Common stock repurchased (16,598) (3,138)
---------- ----------
NET CASH USED IN
FINANCING ACTIVITIES (77,674) (53,672)
---------- ----------
Net decrease in cash (19,374) (50,992)
Cash and cash equivalents, beginning of period 45,034 167,856
---------- ----------
Cash and cash equivalents, end of period $ 25,660 $ 116,864
========== ==========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(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 six-month period ended June 30, 2000,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. For further information, refer to the consolidated
financial statements and notes thereto included in the 21st Century Insurance
Group Annual Report on Form 10-K for the year ended December 31, 1999.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 presentation.
8
<PAGE>
21ST CENTURY INSURANCE GROUP 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 Six Months Ended
June 30, June 30,
---------------- ----------------
2000 1999 2000 1999
------- ------- ------- -------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Income available to common stockholders
after assumed conversions $ 4,960 $32,923 $ 8,615 $61,836
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share:
Weighted-average shares outstanding 85,110 87,545 85,226 87,589
Effect of dilutive securities:
Restricted stock grants 163 49 163 49
Employee stock options 139 42 103 59
------- ------- ------- -------
Dilutive potential common shares 302 91 266 108
Denominator for diluted earnings per share:
Adjusted weighted-average shares outstanding 85,412 87,636 85,492 87,697
======= ======= ======= =======
Basic earnings per share $ 0.06 $ 0.38 $ 0.10 $ 0.71
======= ======= ======= =======
Diluted earnings per share $ 0.06 $ 0.38 $ 0.10 $ 0.71
======= ======= ======= =======
</TABLE>
9
<PAGE>
3. Investments
The amortized cost, gross unrealized gains and losses, and fair values of
investments as of June 30, 2000, 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 $ 15,035 $ 9 $ 782 $ 14,262
Obligations of states and political
subdivisions 873,720 1,026 39,456 835,290
Corporate securities 69,179 437 5,213 64,403
----------- ----------- ----------- --------
Total fixed maturities 957,934 1,472 45,451 913,955
Equity securities 41 267 - 308
----------- ----------- ----------- --------
Total investments $ 957,975 $ 1,739 $ 45,451 $914,263
=========== =========== =========== ========
</TABLE>
Details follow concerning the change during the six months ended June 30, 2000,
in the after-tax net unrealized loss on investments, which is included in the
consolidated balance sheet under the caption "Accumulated Other Comprehensive
Loss" (amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
Net unrealized gains on available-for-sale investments, net of
income tax expense of $4,804 $ 8,922
Plus: reclassification adjustment for losses included in net income,
net of income tax benefit of $1,715 3,184
--------
$12,106
========
</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 June 30, 2000, the Company had a net operating loss
carryforward of approximately $122.8 million for regular tax purposes and
an alternative minimum tax credit carryforward of $33.0 million. The net
operating loss carryforwards will expire in 2009 and 2020. Alternative
minimum tax credits may be carried forward indefinitely to offset future
regular tax liabilities.
Federal income tax expense (benefit) consists of:
Six Months Ended June 30,
-------------------------
2000 1999
------------ -----------
(Amounts in thousands)
Current tax expense $ - $ 13,301
Deferred tax expense (benefit) (5,603) 15,834
------------ -----------
$ (5,603) $ 29,135
============ ===========
11
<PAGE>
21ST CENTURY INSURANCE GROUP 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 and investment activities has continued
to be sufficient to fund the Company's needs.
Funds required by 21st Century Insurance Group 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 June 30, 2000, the Company's insurance
subsidiaries had a combined statutory surplus of $575.2 million compared to a
combined statutory surplus of $670.1 million at June 30, 1999. The Company's
ratio of net written premium to surplus was 1.4:1 at June 30, 2000, compared to
1.2:1 at June 30, 1999.
Invested assets as of June 30, 2000, had a fair value of $939.9 million compared
to $988.6 million at December 31, 1999. All investments in fixed maturities are
investment grade. Of the Company's total investments at June 30, 2000, 88.9%
were invested in tax-exempt fixed-income securities compared to 85.6% at
December 31, 1999 and 58.9% at June 30, 1999.
12
<PAGE>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
ITEM 2. (CONTINUED)
The fixed maturity available-for-sale portfolio is subject to decline in fair
value as interest rates rise. As of June 30, 2000, the after-tax unrealized
loss on investments was $28.4 million compared to $40.5 million as of December
31, 1999. 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.
At July 1, 2000, the Company has a variable rate credit line available of $33.75
million, all of which is outstanding. Presently, interest is paid monthly;
interest payments for the first six months of 2000 totaled approximately $1.9
million. Principal repayments of $11.25 million are due on the first day of
each calendar quarter.
In August 1996, 21st Century Insurance Company of Arizona, a joint venture owned
51% by AIG and 49% by 21st Century Insurance Group, began writing private
passenger automobile policies in that state. The Company's investment in and
advances to this venture, which is accounted for by the equity method, totaled
$4,016,000 at June 30, 2000, and are included in other assets in the
consolidated balance sheet. The Company's share of the net loss of this venture
was ($172,000) and ($347,000) for the three and six months ended June 30, 2000,
respectively, and ($147,000) and ($272,000) for the same 1999 periods and is
included in investment income in the consolidated statements of income.
13
<PAGE>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Underwriting Results
---------------------
Gross premiums written in the second quarter of 2000 increased $9.4 million
(4.2%) to $232.8 million from $223.4 million in the same period of 1999. Gross
premiums written during the six months ended June 30, 2000, increased $19.4
million (4.3%) to $466.7 million from $447.3 million. Net earned premiums
increased $14.8 million (7.7%) and $20.7 million (5.4%) for the quarter and six
months ended June 30, 2000, respectively, mainly due to the termination
effective January 1, 2000, of the former 100% quota share reinsurance program
relating to the homeowners line.
The Company experienced an underwriting loss of $7.8 million in the second
quarter of 2000 compared to an underwriting gain of $30.1 million in the same
quarter last year. An underwriting loss of $15.4 million was incurred for the
first six months of the year compared to an underwriting gain of $50.1 million
in the same period for 1999. The combined ratio increased from 84.3% in the
second quarter of 1999 to 103.7% for the second quarter of 2000, and from 87.1%
to 103.8% for the six months ended June 30, 1999 and 2000, respectively.
Contributing to the change in combined ratio were the earning-in of a February
1999 rate decrease, an upturn in loss frequency and severity trends, and the
impact of reserve savings in 1999.
Loss costs began trending upwards in the third quarter of 1999 after several
years in which the Company's underwriting results had benefited from declining
trends. The higher loss costs can be expected to negatively impact the
Company's underwriting results over the near term. A reevaluation of the
Company's pricing strategy was completed in the second quarter and a 6.9% rate
increase has been requested. However, because premiums are earned over policy
terms for financial operating purposes, the effects of any rate increases would
not be evident in the Company's reported financial results for several months
following regulatory approval.
14
<PAGE>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
ITEM 2. (CONTINUED)
Net underwriting expenses, which consist of policy acquisition costs and other
operating expenses, increased by $2.2 million (7.6%) for the second quarter of
2000 compared to the same quarter in 1999. Net underwriting costs for the six
months ended June 30, 2000, increased by $11.5 million (23.8%) compared to 1999.
The ratio of net underwriting expenses (excluding loan interest and fees) to net
premiums earned was 14.8% for both the quarter ended June 30, 2000, and the same
prior year period. This increase of this ratio from 12.5% in December 1999 to
its current level reflects the Company's continuing investments in new
technology, customer-focused business practices and the impact of a 6.8% rate
decrease that went into effect in February 1999.
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 June 30, 2000,
$835.7 million, or 88.9%, of the Company's total cash and investments at fair
value was invested in tax-exempt bonds compared to $655.0 million, or 58.9%, at
June 30, 1999.
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 22.2% and 15.5% for the quarter and six months ended
June 30, 2000, compared to the same periods in 1999. The average annual pre-tax
yield on invested assets for the three and six-month periods ended June 30,
2000, was 5.0% and 5.2%, respectively, compared to 5.5% and 5.7% for the same
periods in 1999. On an after tax basis, the comparable yields were 4.5% and
4.7% for the three and six month periods ended June 30, 2000, respectively,
compared to 4.2% for the same periods in 1999. Average invested assets
decreased 15.5% and 16.7% for the three and six-month periods ended June 30,
2000, respectively, compared to the same periods in 1999.
Realized losses on sales of investments were $1.3 million and $5.0 million for
the second quarter and first six months of 2000 compared to realized gains of
$3.3 million and $10.5 million for the same periods in 1999.
15
<PAGE>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
ITEM 2. (CONTINUED)
FORWARD LOOKING-STATEMENTS
Statements contained in this quarterly which are not historical facts may be
considered forward-looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995 relating to, among other things, the
Company's future performance and operations, management's future plans and
goals, and business environment changes. Such forward-looking statements are
subject to risks and uncertainties, which could cause actual results to differ
materially from those projected. Such risks and uncertainties include, but are
not limited to: the effects of competition; claims experience; systems and
service issues; financial or investment considerations; and unanticipated
results of legislative, regulatory or legal actions, including the inability to
obtain approval for rate increases.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended
June 30, 2000.
17
<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.
21ST CENTURY INSURANCE GROUP
---------------------------------
(Registrant)
Date August 11, 2000
------------------------- ---------------------------------
BRUCE W MARLOW
President and Chief Executive Officer
Date August 11, 2000
------------------------- ---------------------------------
ROBERT B. TSCHUDY
Senior Vice President and
Chief Financial Officer
<PAGE>
