FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-7411
ALLCITY INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
New York 13-2530665
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
122 Fifth Avenue, New York, New York 10011
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 387-3000
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 Yes
[X] No [ ]
On August 10, 1998, there were 7,078,625 shares of Common Stock outstanding.
<PAGE>
ALLCITY INSURANCE COMPANY
INDEX
PART I Financial Information PAGE
Item 1. Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 . . 1
Consolidated Statements of Operations - Six months ended
June 30, 1998 and June 30, 1997 and three months ended
June 30, 1998 and June 30, 1997 . . . . . . . . . . . . . . . . . . 2-3
Consolidated Statements of Cash Flows - Six months ended
June 30, 1998 and June 30, 1997 . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Changes in Shareholders' Equity - Six
months ended June 30, 1998 and June 30, 1997 . . . . . . . . . . . . 5
Notes to Interim Consolidated Financial Statements . . . . . . . . 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Interim Results of Operations . . . . . . . . . . . . . . 8-10
PART II Other Information
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 11
Signatures Page . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
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<TABLE>
CONSOLIDATED BALANCE SHEETS (Unaudited)
ALLCITY INSURANCE COMPANY
(In thousands, except share and par value amounts)
<CAPTION> June 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Assets
Investments:
Available for sale at fair value (amortized
cost of $218,249 in 1998 and $268,091 in 1997) $220,194 $269,055
Held to maturity at amortized cost (fair
value of $505 in 1998 and $497 in 1997) 485 485
Short-term (at cost) 9,071 1,749
Equity securities available for sale 447 447
Other invested assets 30,553 -
TOTAL INVESTMENTS 260,750 271,736
Cash 8,016 2,863
Agents' balances, less allowance for doubtful
accounts($1,506 in 1998 and $1,561 in 1997) 15,080 13,109
Accrued investment income 2,959 2,942
Reinsurance balances receivable 280,885 273,280
Prepaid reinsurance premiums 49,323 55,074
Deferred policy acquisition costs 6,944 7,079
Deferred income taxes 11,141 11,462
Other assets 3,508 2,704
TOTAL ASSETS $638,606 $640,249
LIABILITIES
Unpaid losses $ 368,916 $361,341
Unpaid loss adjustments expenses 52,694 56,185
Unearned premiums 84,877 90,807
Drafts payable 4,100 4,983
Due to affiliates 19,311 14,427
Unearned service fee income 3,986 4,539
Reserve for service carrier claim expenses 2,790 3,701
Reinsurance balances payable 2,843 4,825
Other liabilities 6,021 6,567
Surplus note 15,007 14,710
TOTAL LIABILITIES 560,545 562,085
SHAREHOLDERS' EQUITY
Common stock, par value $1.00; 7,368,420
Shares authorized; 7,078,625 shares issued and
outstanding in 1998 and 1997 7,079 7,079
Additional paid-in capital 9,331 9,331
Accumulated other comprehensive income net of
Deferred taxes of $837 and $494 in 1998 and
1997, Respectively 1,555 917
Retained earnings 60,096 60,837
TOTAL SHAREHOLDERS' EQUITY 78,061 78,164
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $638,606 $640,249
<FN>
See Notes to Interim Consolidated Financial Statements.
</TABLE>
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<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
ALLCITY INSURANCE COMPANY
(In thousands, except share and per share amounts)
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
REVENUES
Net earned premiums $36,158 $43,042
Net investment income 7,687 7,726
Service fee income 1,721 3,777
Net securities gains and (losses) 324 (136)
Other income 307 259
46,197 54,668
LOSSES AND EXPENSES
Losses 32,327 35,276
Loss adjustment expenses 3,881 5,205
Other underwriting expenses less deferrals of
$6,857 in 1998 and $7,836 in 1997 3,839 5,230
Amortization of deferred policy acquisition costs 6,992 7,592
Interest on surplus note 298 298
47,337 53,601
(LOSS)/INCOME BEFORE FEDERAL INCOME TAXES (1,140) 1,067
FEDERAL INCOME TAXES
Current tax (benefit)/tax expense (377) 395
Deferred (benefit) (22) (22)
(399) 373
NET (LOSS)/INCOME $ (741) $ 694
Per share data, based on 7,078,625 average
shares outstanding in 1998 and 1997:
BASIC (LOSS)/EARNINGS PER SHARE $ (0.10) $ 0.10
<FN>
See Notes to Interim Consolidated Financial Statements.
</TABLE>
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<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
ALLCITY INSURANCE COMPANY
(In thousands, except share and per share amounts)
<CAPTION>
Three Months Ended
June 30,
1998 1997
<S> <C> <C>
REVENUES
Net earned premiums $17,314 $20,820
Net investment income 3,825 3,863
Service fee income 660 1,882
Net securities gains and (losses) 82 (153)
Other income 148 148
22,029 26,560
LOSSES AND EXPENSES
Losses 16,642 18,152
Loss adjustment expenses 1,464 2,380
Other underwriting expenses less deferrals of
$2,868 in 1998 and $3,524 in 1997 1,738 2,473
Amortization of deferred policy acquisition costs 3,312 3,656
Interest on surplus note 182 149
23,338 26,810
LOSS BEFORE FEDERAL INCOME TAXES (1,309) (250)
FEDERAL INCOME TAXES
Current tax (benefits) (275) (40)
Deferred (benefit) (183) (48)
(458) (88)
NET LOSS $ (851) $ (162)
Per share data, based on 7,078,625 average
shares outstanding in 1998 and 1997:
BASIC (LOSS) PER SHARE $ (0.12) $ (0.02)
<FN>
See Notes to Interim Consolidated Financial Statements.
</TABLE>
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<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
ALLCITY INSURANCE COMPANY
(In thousands)
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ (741) $ 694
Adjustments to reconcile net income to net
cash used for operations:
Provision for deferred tax benefits (22) (22)
Amortization deferred policy acquisition costs 6,992 7,592
Provision for doubtful accounts (55) 135
Net securities (gains)/losses (324) 136
Policy acquisition costs incurred and deferred (6,857) (7,836)
Net change in:
Agents' balances (1,916) (1,592)
Reinsurance balances receivable (7,605) (1,558)
Prepaid reinsurance premiums 5,751 4,326
Unpaid losses and loss adjustment expenses 4,084 (1,050)
Unearned premiums (5,930) (2,996)
Drafts payable (883) (846)
Due to affiliates 4,884 4,479
Unearned services fees (553) 519
Reserve for servicing carrier claim expense (911) (1,298)
Reinsurance balances payable (1,982) (1,789)
Other (836) 170
NET CASH USED FOR OPERATING ACTIVITIE (6,904) (936)
NET CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale:
Acquisition of fixed maturities (85,674) (68,354)
Acquisition of other invested assets (30,553) -
Proceeds from sales of fixed maturities 125,771 52,118
Proceeds from maturities of fixed maturities 9,835 1,732
Net change in short-term investments (7,322) 14,519
NET CASH PROVIDED BY INVESTING ACTIVITIES 12,057 15
NET INCREASE (DECREASE) IN CASH 5,153 (921)
Cash at beginning of period 2,863 2,232
Cash at the end of period $ 8,016 $ 1,311
<FN>
See Notes to Interim Consolidated Financial Statements.
</TABLE>
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<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
ALLCITY INSURANCE COMPANY
(In thousands, except share and par value amounts)
<CAPTION>
Common Accumulated
Shares Additional Other
$1 Par Paid-in Comprehensive Retained
Value Capital Income/(Loss) Earnings Total
<S> <C> <C> <C> <C> <C>
Balance, January 1,1997 $7,079 $9,331 $(1,672) $60,920 $75,658
Comprehensive income:
Net income 694 694
Other Comprehensive
income:
Net change in unrealized 181 181
(loss)on investments(net
of deferred tax of $96)
Less: reclassification
of net Securities
losses included in net
income(net of tax
benefit of $48) 88 88
Balance, June 30, 1997 $7,079 $9,331 $(1,403) $61,614 $76,621
Balance, January 1, 1998 $7,079 $9,331 $ 917 $60,837 $78,164
Comprehensive income:
Net income (741) (741)
Other Comprehensive
income:
Net change in unrealized 849 849
gain on investments
(net of deferred tax of
$457)
Less:reclassification
of net Securities gains
included in net income
(net of tax of $113) (211) (211)
Balance, June 30, 1998 $ 7,079 $9,331 $ 1,555 $60,096 $78,061
<FN>
See Notes to Interim Consolidated Financial Statements.
</TABLE>
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ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited interim consolidated financial statements, which reflect
all adjustments (consisting only of normal recurring items) that management
believes necessary to fairly present interim results of operations, should be
read in conjunction with the Notes to Consolidated Financial Statements
(including the Summary of Significant Accounting Policies) included in the
Company's audited consolidated financial statements for the year ended December
31, 1997, which are included in the Company's Annual Report filed on Form 10-K
for such year (the "1997 10-K"). Results of operations for interim periods are
not necessarily indicative of annual results of operations. The consolidated
balance sheet at December 31, 1997 was extracted from the audited annual
financial statements and does not include all disclosures required by generally
accepted accounting principles for annual financial statements.
2. Certain amounts for prior periods have been reclassified to conform with
the 1998 presentation.
3. As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Comprehensive Income" ("SFAS No. 130"), which
establishes standards for the reporting and disclosure of comprehensive income
and its components (revenue, expenses, gains and losses). SFAS No. 130
requires that all items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Comprehensive income excludes net investment gains. The new standard requires
additional disclosures in the consolidated financial statements and does not
affect the Company's financial position or results of operations.
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS No. 131"), which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers. In
connection with the adoption of SFAS No. 131, the Company has identified three
reportable segments based on products and services: 1) automobile lines; 2)
commercial lines; and 3) miscellaneous and personal lines. The financial
position and operating results of the Company are not expected to be materially
affected by this statement.
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In January, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" ("SOP 97-3"), which is effective for fiscal years beginning after
December 31, 1998, and provides guidance for determining when an insurance
company should recognize a liability for guaranty-fund and other insurance
related assessments and how to measure that liability. The Company is
currently evaluating the impact to its financial statements for the adoption of
SOP 97-3.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No. 132")
was issued in February, 1998 and revises current disclosure requirements for
employers' pensions and other retiree benefits. SFAS No. 132 will have no
effect on the financial position or results of operations of the Company. SFAS
No. 132 is effective for financial statements as of and for the period ended
December 31, 1998.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") was issued in
June, 1998 and requires that all derivative financial instruments be recognized
as either assets or liabilities in the statement of financial position. SFAS
No. 133 will be effective for fiscal years beginning after June 15, 1999, with
initial application as of the beginning of the first quarter of the fiscal
year. The Company is currently evaluating the impact to its financial
statements.
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Item 2:
Management's Discussion and Analysis of Financial Condition and Interim
Results of Operations
The following should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in the
Company's 1997 10-K.
LIQUIDITY AND CAPITAL RESOURCES
For the six month periods ended June 30, 1998 and 1997, the Company
experienced negative cash flow from operating activities principally due to
decreased premium writings from tighter underwriting standards, re-underwriting
and competition, a decline in the number of contracts under which the Company
acquires assigned risk business from other insurance companies combined with a
depopulation of the related assigned risk pools, and increased loss adjustment
expense payments as a result of a program to reduce pending claims. Cash
required to fund operations was principally provided from the maturity of
investments available for sale and short-term investments.
The Company maintains cash, short-term and readily marketable securities
in an amount sufficient to satisfy its anticipated cash needs. The Company
does not presently anticipate paying dividends in the near future and believes
it has sufficient capital to meet its currently anticipated level of
operations.
At June 30, 1998 and 1997, the yield on the Company's fixed maturities
portfolio was 5.89% and 5.88%, respectively, with an average maturity of 3.4
years and 3.3 years, respectively. At June 30, 1998 and 1997, 92% and 99%,
respectively, of the Company's investment portfolio was invested in U.S.
Government and its agencies and other investment grade corporate and industrial
investment issues.
RESULTS OF OPERATIONS - Six and three month periods ended June 30, 1998
compared to the six and three month periods ended June 30, 1997.
Net earned premium revenues were $36.2 million and $43.0 million for the
six month periods ended June 30, 1998 and 1997, respectively, and $17.3 million
and $20.8 million for the three month periods ended June 30, 1998 and 1997,
respectively. The decreases of $6.8 million (16%) and $3.5 million (17%) in
net earned premiums for the six and three month periods ended June 30, 1998,
respectively, compared to similar periods ended June 30, 1997, principally
relate to the Company's automobile lines which were adversely affected by
competition in the assigned risk market resulting in a decline in the number of
contracts under which the Company acquires such assigned risk
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business from other insurance companies combined with a depopulation of the
related assigned risk pools, and a reduction in voluntary automobile lines due
to tighter underwriting standards, re-underwriting and increased competition.
Additionally, the Company's commercial lines, principally workers'
compensation and commercial package, were also affected by tighter underwriting
standards, re-underwriting and increased competition. Additionally, earned
premium revenues were reduced for the three month period ended June 30, 1998 by
$0.3 million to record premiums due under retrospectively rated reinsurance
contracts written for 1995 and prior accident years. The Company re-
estimated the premium due based upon its current estimate of loss ratios for
1995 and prior accident years.
The net income of the Company decreased $1.4 million for the six months
ended June 30, 1998 compared to the six month period ended June 30, 1997. The
decline is principally due to the 1998 period reflecting higher levels of
reserve strengthening for prior accident years ($1.7 million) and recording
current accident year losses at higher ratios ($0.6 million). Also affecting
the current period net income was lower service fee income due to a decrease in
the number of assigned risk contracts acquired by the Company, pool
depopulation, and lower New York Public Automobile Pool ("NYPAP") net service
fee income due to lower volume and the Company's cessation as a servicing
carrier for the NYPAP. These items were partially offset by lower underwriting
expenses which were driven by lower premium volume and lower taxes due to the
decline in taxable income.
The net loss for the three month period ended June 30, 1998 was $0.7
million higher than the comparable period in 1997 principally due to higher
levels of reserve strengthening for prior accident years ($0.8 million),
recording current accident year losses at higher ratios ($0.3 million), and
lower service fee income due to a decrease in the number of assigned risk
contracts acquired by the Company, pool depopulation, and lower NYPAP net
service fee income due to lower volume and the Company's cessation as a
servicing carrier for the NYPAP. These items were partially offset by lower
underwriting expenses which was driven by lower premium volume and lower taxes
due to the decline in taxable income.
Net investment income was comparable in each of the six and three month
periods ended June 30, 1998 and 1997. Although average invested asset
balances in 1998 were slightly lower than the prior year, net investment
income remained unchanged as a slightly greater portion of the Company's
assets were invested in higher yielding asset classes thereby mitigating the
impact of lower balances. The Company continues to maintain a high
quality investment portfolio comprised primarily of publicly traded fixed
income securities with a relatively short duration.
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<PAGE>
Service fee income for the six months ended June 30, 1998 and 1997 was
$1.7 million and $3.8 million, respectively. This represents a 54% decline
from 1997 and is largely the result of reductions in earned fees due to a 37%
decline in earned premium serviced in the assigned risk pools related to
increased competition and depopulation. Additionally, as more fully described
in the Company's 1997 10-K, beginning in 1997, the Company has received
diminishing amounts of servicing fees for providing administrative and claims
services for NYPAP. Effective February 28, 1998, the Company ceased serving as
a servicing carrier for the NYPAP. 1998 results reflect lower net service fee
income from the NYPAP of $0.3 million which is due to lower volume and the
Company's aforementioned cessation as a servicing carrier.
Service fee income for the three months ended June 30, 1998 and 1997 was
$ 0.7 million and $1.9 million, respectively. The lower service fee income for
the second quarter 1998 period relates to a 36% decline in earned premium
serviced by the Company related to increased competition and depopulation, and
the impact of ceasing to serve as a servicing carrier for NYPAP ($0.2 million).
Losses incurred for the six months ended June 30, 1998 and 1997 were
$32.3 million and $35.3 million, respectively, and $16.6 million and $18.2
million for the three months ended June 30, 1998 and 1997, respectively. The
decline in losses incurred is generally the result of the reduced volume of
business written. Losses incurred reflect $1.7 million and $0.8 million,
respectively, for the six and three month periods ended June 30, 1998 compared
to the same periods in 1997 for additional reserve strengthening for prior
accident years in the private passenger automobile, commercial assigned risk,
commercial package, and workers' compensation lines of business, which
resulted from continued unfavorable claims development. Additionally, higher
estimated loss ratios have been used for the current accident year, primarily
in the private passenger automobile line, due to increased claim frequency.
These higher ratios increased the losses $0.6 million and $0.3 million,
respectively, for the six and three month periods ended June 30, 1998.
Loss adjustment expenses incurred for the six months ended June 30, 1998
and 1997 were $3.9 million and $5.2 million, respectively, and $1.5 million
and $2.4 million for the three months ended June 30, 1998 and 1997,
respectively. The decreases were mainly attributable to the decrease in
premium revenues.
The combination of other underwriting expenses and the amortization of
deferred policy acquisition costs for the six and three month periods ended
June 30, 1998 were lower than the comparable periods ended June 30, 1997. The
decreases in current year expenses of $2.0 million and $1.1 million for the
six and three month periods ended June 30, 1998, respectively, compared to the
same periods ended June 30, 1997, was largely the result of lower operating
costs related to reduced premium revenues. In addition, the second quarter of
1998, included a reduction of underwriting expenses for a previously recorded
liability for lease abandonment costs of $0.3 million.
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Part II - Other Information
Item 5. Other Information
During the first quarter, 1998 Mr. Richard G. Petitt, a Director,
Chairman of the Board, President and Chief Executive Officer of the Company,
announced his retirement. Mr. Petitt will resign his positions as Chairman of
the Board, President and Chief Executive Officer of the Company on August 17,
1998. The Company has also appointed Mr. Robert V. Toppi as President and
Chief Executive Officer of the Company effective August 17, 1998. Mr. Toppi
has over 30 years experience in the property and casualty insurance business,
including New York City, primarily with the Aetna Casualty and Surety Company
("Aetna"). His most recent position with Aetna was as a Resident Vice
President of the Greater New York district which included the five boroughs.
Mr. Toppi was also a member of the Board for the New York Property Insurance
Underwriting Association and the New York Fire Underwriter's Association.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
The following exhibit is filed herewith:
Exhibit Number Description of Document
27-27* Financial Data Schedule
b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended June 30,
1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLCITY INSURANCE COMPANY
Registrant
Date: By: FRANCIS M. COLALUCCI
Francis M. Colalucci
Senior Vice President, CFO and Treasurer
(Principal Financial and Accounting Officer)
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<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 229,265
<DEBT-CARRYING-VALUE> 485
<DEBT-MARKET-VALUE> 505
<EQUITIES> 447
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 260,750
<CASH> 8,016
<RECOVER-REINSURE> 280,885
<DEFERRED-ACQUISITION> 6,944
<TOTAL-ASSETS> 638,606
<POLICY-LOSSES> 421,610
<UNEARNED-PREMIUMS> 84,877
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 7,079
<OTHER-SE> 70,982
<TOTAL-LIABILITY-AND-EQUITY> 638,606
36,158
<INVESTMENT-INCOME> 7,687
<INVESTMENT-GAINS> 324
<OTHER-INCOME> 2,028
<BENEFITS> 32,327
<UNDERWRITING-AMORTIZATION> 6,992
<UNDERWRITING-OTHER> 3,839
<INCOME-PRETAX> (1,140)
<INCOME-TAX> (399)
<INCOME-CONTINUING> (741)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (741)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
