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, 2000 Commission File Number 0-6964
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21ST CENTURY INSURANCE GROUP
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(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
incorporation or organization) Identification Number)
6301 Owensmouth Avenue, 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
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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 31, 2000
Common Stock, Without Par Value 85,145,817 shares
1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2000 1999
-------------- -------------
(Unaudited)
(Amounts in thousands)
<S> <C> <C>
Investments, available-for-sale, at fair value:
Fixed maturities $ 879,691 $ 942,982
Equity securities 396 563
-------------- -------------
Total investments - Note 3 880,087 943,545
Cash and cash equivalents 31,454 45,034
Accrued investment income 13,100 15,403
Premiums receivable 78,074 70,796
Reinsurance receivables and recoverables 67,618 56,616
Prepaid reinsurance premiums 20,636 32,212
Deferred income taxes - Note 4 89,390 91,251
Deferred policy acquisition costs 22,261 22,156
Property and equipment, net of accumulated
depreciation 118,949 84,455
Other assets 28,376 17,864
-------------- -------------
$ 1,349,945 $ 1,379,332
============== =============
</TABLE>
See accompanying notes to financial statements.
2
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<TABLE>
<CAPTION>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2000 1999
--------------- --------------
(Unaudited)
(Amounts in thousands, except share data)
<S> <C> <C>
Unpaid losses and loss adjustment expenses $ 286,244 $ 276,248
Unearned premiums 247,663 232,702
Bank loan payable - 67,500
Claims checks payable 35,147 31,912
Reinsurance payable 31,787 22,311
Other liabilities 45,754 27,822
--------------- --------------
Total liabilities 646,595 658,495
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 414,845 429,623
Accumulated other comprehensive loss (20,262) (40,519)
Retained earnings 308,767 331,733
--------------- --------------
Total stockholders' equity 703,350 720,837
--------------- --------------
$ 1,349,945 $ 1,379,332
=============== ==============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- --------
<S> <C> <C> <C> <C>
(Amounts in thousands, except per share data)
REVENUES:
Net premiums earned $208,109 $191,234 $615,442 $577,879
Net investment income 12,303 14,681 37,780 48,781
Realized investment gains (losses) (299) (7,195) (5,297) 3,343
--------- --------- --------- --------
220,113 198,720 647,925 630,003
LOSSES AND EXPENSES:
Net losses and loss
adjustment expenses 190,547 148,086 553,557 436,465
Policy acquisition costs 22,744 21,270 68,506 60,034
Other operating expenses 6,888 3,786 20,820 13,237
Interest and fees expense 804 1,691 2,901 5,408
--------- --------- --------- --------
220,983 174,833 645,784 515,144
--------- --------- --------- --------
Income (loss) before federal
income taxes (870) 23,887 2,141 114,859
Federal income taxes (benefit) - Note 4 (3,441) 5,515 (9,044) 34,650
--------- --------- --------- --------
NET INCOME $ 2,571 $ 18,372 $ 11,185 $ 80,209
========= ========= ========= ========
EARNINGS PER COMMON SHARE - Note 2
----------------------------------
BASIC $ 0.03 $ 0.21 $ 0.13 $ 0.92
========= ========= ========= ========
DILUTED $ 0.03 $ 0.21 $ 0.13 $ 0.92
========= ========= ========= ========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Nine Months Ended September 30, 2000
------------------------------------
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income (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 11,185 11,185
Change in accumulated other
comprehensive income, net -
Note 3 20,257 20,257
---------
Total comprehensive income 31,442
Cash dividends declared (34,151) (34,151)
Common stock repurchased
and retired (16,598) (16,598)
Other 1,820 1,820
--------- ---------- --------------- ---------
Balance at September 30, 2000. $414,845 $ 308,767 $ (20,262) $703,350
========= ========== =============== =========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
--------------------
2000 1999
-------- ----------
<S> <C> <C>
(Unaudited)
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income $11,185 $ 80,209
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for depreciation and amortization 10,519 9,853
Provision for deferred income taxes (9,046) 17,493
Realized (gains) losses on sale of investments. 5,085 (3,462)
Federal income taxes - 10,932
Reinsurance balances 10,050 6,662
Unpaid losses and loss adjustment expenses 9,996 (105,383)
Unearned premiums 14,961 4,829
Claims checks payable 3,235 (139)
Other 4,245 (1,238)
-------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $60,230 $ 19,756
</TABLE>
6
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<TABLE>
<CAPTION>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Nine Months Ended
September 30,
----------------------
2000 1999
---------- ----------
<S> <C> <C>
(Unaudited)
(Amounts in thousands)
INVESTING ACTIVITIES:
Investments available-for-sale:
Purchases $(150,897) $(718,136)
Calls or maturities - 5,040
Sales 240,254 725,115
Net purchases of property and equipment (44,916) (29,613)
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NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 44,441 (17,594)
FINANCING ACTIVITIES:
Bank loan principal repayments (67,500) (33,750)
Dividends paid (34,153) (41,978)
Common stock repurchased (16,598) (14,381)
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NET CASH USED IN
FINANCING ACTIVITIES (118,251) (90,109)
---------- ----------
Net decrease in cash (13,580) (87,947)
Cash and cash equivalents, beginning of period. 45,034 167,856
---------- ----------
Cash and cash equivalents, end of period $ 31,454 $ 79,909
========== ==========
</TABLE>
See accompanying notes to financial statements.
7
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21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of the 21st Century
Insurance Group and subsidiaries (the Company) 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 nine-month period ended September 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 Company's 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
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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 Nine Months Ended
September 30, September 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 $ 2,571 $18,372 $11,185 $80,209
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share:
Weighted-average shares outstanding 85,146 86,995 85,200 87,393
Effect of dilutive securities:
Restricted stock grants 176 50 176 50
Employee stock options 22 56 56 57
------- ------- ------- -------
Dilutive potential common shares 198 106 232 107
Denominator for diluted earnings per share:
Adjusted weighted-average shares outstanding. 85,344 87,101 85,431 87,500
======= ======= ======= =======
Basic earnings per share $ 0.03 $ 0.21 $ 0.13 $ 0.92
======= ======= ======= =======
Diluted earnings per share $ 0.03 $ 0.21 $ 0.13 $ 0.92
======= ======= ======= =======
</TABLE>
9
<PAGE>
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Investments
The amortized cost, gross unrealized gains and losses, and fair values of
investments as of September 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 $ 14,776 $ 4 $ 502 $ 14,278
Obligations of states and political
subdivisions 834,599 2,396 29,172 807,823
Corporate securities 61,843 9 4,262 57,590
---------- ----------- ----------- --------
Total fixed maturities 911,218 2,409 33,936 879,691
Equity securities 41 355 - 396
---------- ----------- ----------- --------
Total investments $ 911,259 $ 2,764 $ 33,936 $880,087
========== =========== =========== ========
</TABLE>
Details follow concerning the change during the nine months ended September 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):
Net unrealized gains on available-for-sale investments, net of
income tax expense of $9,128 $16,951
Plus: reclassification adjustment for losses included in net income,
net of income tax benefit of $1,780 3,306
-------
$20,257
=======
10
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21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2000, the Company had a net operating loss carryforward of approximately
$132.6 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:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
2000 1999
-------- -------
(Amounts in thousands)
<S> <C> <C>
Current tax expense $ 2 $17,157
Deferred tax expense (benefit) (9,046) 17,493
-------- -------
$(9,044) $34,650
======== =======
</TABLE>
11
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21ST CENTURY INSURANCE GROUP AND SUBSIDARIES
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. Loss and loss adjustment 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.
In the third quarter of 2000, the Company registered an underwriting loss for
the fourth consecutive quarter. Although the Company's liquidity and capital
needs have been adequately met by cash flow from operations and investment
activities in this period, its long-term financial health depends on a return to
underwriting profitability. Corrective actions taken in the third quarter
included the following:
- Implementation of a class plan revision for the California auto program
effective September 1, 2000, which rebalances rating factors to create a
more accurately priced book of business.
- A 6.4% rate increase was approved by the California Department of
Insurance, which is being implemented on November 1, 2000.
- Implementation of a 20% overall rate increase in the Company's Arizona
program effective for new business on September 1, 2000 and for renewals
effective October 1, 2000.
- Filing for rate changes for our Oregon and Washington programs.
- Continuation of reduced advertising spending pending implementation of
corrective rate changes.
Funds required by the Company 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 from earned surplus 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, 2000, the Company's insurance subsidiaries had a
combined statutory surplus of $527.2 million compared to a combined statutory
surplus of $660.5 million at September 30, 1999. The Company's ratio of net
written premium to surplus was 1.6:1 at September 30, 2000, compared to 1.2:1 at
September 30, 1999.
12
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21ST CENTURY INSURANCE GROUP AND SUBSIDARIES
ITEM 2. (CONTINUED)
Invested assets as of September 30, 2000, had a fair value of $911.5 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
September 30, 2000, 87.4% were invested in tax-exempt fixed-income securities
compared to 85.6% at December 31, 1999 and 76.5% at September 30, 1999.
The fixed maturity available-for-sale portfolio is subject to decline in fair
value as interest rates rise. As of September 30, 2000, the after-tax
unrealized loss on investments was $20.3 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.
In September 2000, the Company exercised its option to prepay a $33.75 million
variable-rate line of credit resulting in a pre-tax charge of $286,000 from the
write-off of previously unamortized debt issuance costs, which has been included
in the third quarter interest expense for financial reporting purposes.
In August 1996, 21st Century Insurance Company of Arizona, a joint venture owned
51% by AIG and 49% by the Company, 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 $4.2 million at
September 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 ($346,000) and
($693,000) for the three and nine months ended September 30, 2000, respectively,
and ($61,000) and ($333,000) for the same 1999 periods and is included in
investment income in the consolidated statements of income.
13
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21ST CENTURY INSURANCE GROUP AND SUBSIDARIES
ITEM 2. (CONTINUED)
Underwriting Results
---------------------
Gross premiums written in the third quarter of 2000 increased $7.9 million
(3.6%) to $226.3 million from $218.4 million in the same period of 1999. Gross
premiums written during the nine months ended September 30, 2000, increased
$27.2 million (4.1%) to $692.9 million from $665.7 million. Net earned premiums
increased $16.9 million (8.8%) and $37.6 million (6.5%) for the quarter and nine
months ended September 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 $12.1 million in the third
quarter of 2000 compared to an underwriting gain of $18.1 million in the same
quarter last year. An underwriting loss of $27.4 million was incurred for the
first nine months of the year compared to an underwriting gain of $68.1 million
in the same period for 1999. The combined ratio increased from 90.5% in the
third quarter of 1999 to 105.8% for the third quarter of 2000, and from 88.2% to
104.4% for the nine months ended September 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.
Net paid losses and loss adjustment expenses increased $11.6 million (6.9%) from
$168.9 million for the quarter ended September 30, 1999 to $180.5 million for
the comparable period of 2000. For the nine months ending September 30, 1999
and 2000, net paid losses and loss adjustment expenses were $533.7 million and
$541.4 million, respectively, an increase of $7.7 million (1.4%).
Net incurred losses and loss adjustment expenses (net paid losses plus the net
change in loss reserves) increased $42.4 million (28.6%) from $148.1 million for
the quarter ended September 30, 1999 to $190.5 million for the comparable period
of 2000. For the nine months ending September 30, 1999 and 2000, net
incurred losses and loss adjustment expenses were $436.5 million and $553.6
million, respectively, an increase of $117.1 million (26.8%).
14
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21ST CENTURY INSURANCE GROUP AND SUBSIDARIES
ITEM 2. (CONTINUED)
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. The Company has received approval from
the California Department of Insurance for a 6.4 percent rate increase to our
California auto program that will be implemented beginning November 1, 2000.
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.
Net underwriting expenses, which consist of policy acquisition costs and other
operating expenses, increased by $4.6 million (18.3%) for the third quarter of
2000 compared to the same quarter in 1999. Net underwriting costs for the nine
months ended September 30, 2000, increased by $16.1 million (21.9%) compared to
1999. The ratio of net underwriting expenses (excluding loan interest and fees)
to net premiums earned was 14.2% and 14.5% for the quarter and nine months ended
September 30, 2000, respectively, and 13.1% and 12.7% for the same prior year
periods. The increase of this ratio from 12.9% 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 September 30, 2000,
$796.7 million, or 87.4%, of the Company's total cash and investments at fair
value was invested in tax-exempt bonds compared to $802.9 million, or 76.5%, at
September 30, 1999.
15
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21ST CENTURY INSURANCE GROUP AND SUBSIDARIES
ITEM 2. (CONTINUED)
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 13.8% and 21.1% for the quarter and nine months
ended September 30, 2000, compared to the same periods in 1999. The average
annual pre-tax yield on invested assets for the three and nine-month periods
ended September 30, 2000, was 5.2% and 5.1%, respectively, compared to 5.2% and
5.5% for the same periods in 1999. On an after tax basis, the comparable yields
were 4.7% and 4.6% for the three and nine month periods ended September 30,
2000, respectively, compared to 4.4% and 4.2% for the same periods in 1999.
Average invested assets decreased 14.3% and 14.5% for the three and nine-month
periods ended September 30, 2000, respectively, compared to the same periods in
1999.
Realized losses on sales of investments were $300,000 and $5.3 million for the
third quarter and first nine months of 2000 compared to realized losses of $7.2
million and realized gains of $3.3 million for the same periods in 1999.
RECENT LEGISLATION
In September 30, 2000, California Governor Davis signed into law SB 1899, a
statute that would "revive" certain insurance claims arising out of the 1994
Northridge Earthquake that now are barred by the applicable statute of
limitations, the policy contract or settlement agreements signed by the insured.
The statute is effective January 1, 2001, and would provide certain
policyholders 12 months from that date to file additional earthquake claims or
suits against the Company. The Company believes the statute violates federal and
state constitutions, which prohibit impairment of contracts, and is evaluating
its legal options. The Company has diligently and systematically handled claims
from the Northridge Earthquake and has paid out over $1.1 billion in claim
payments.
16
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21ST CENTURY INSURANCE GROUP AND SUBSIDARIES
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 and competitors' pricing actions;
unanticipated adverse claims experience; systems and service problems; financial
or investment considerations; and unanticipated results of legislative,
regulatory or legal actions, including the inability to obtain approval for rate
increases.
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 September 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 November 12, 2000 /s/ BRUCE W. MARLOW
------------------ -------------------------------------
BRUCE W. MARLOW
President and Chief Executive Officer
Date November 12, 2000 /s/ ROBERT B. TSCHUDY
------------------ -------------------------------------
ROBERT B. TSCHUDY
Senior Vice President and
Chief Financial Officer
18
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