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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
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.)
335 Adams Street, Brooklyn, N.Y 11201-3731
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (718)422-4000
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 [ ]
On August 9, 1999, 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, 1999 and December 31, 1998 1
Consolidated Statements of Operations - Six months ended
June 30, 1999 and June 30, 1998 2
Consolidated Statements of Operations - Three months ended
June 30, 1999 and June 30, 1998 3
Consolidated Statements of Cash Flows - Six months
ended June 30, 1999 and June 30, 1998 4
Consolidated Statements of Changes in Shareholders' Equity -
Six months ended June 30, 1999 and June 30, 1998 . 5
Notes to Interim Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Interim Results of Operations . 8-12
PART II Other Information
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K.. 13
Signature Page 14
<PAGE>
CONSOLIDATED BALANCE SHEETS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and par value amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
<C> <C>
ASSETS (Unaudited)
Investments:
Available for sale at fair value
(amortized cost of $180,779 in 1999
and $181,214 in 1998) $177,957 $181,905
Held to maturity at amortized cost
(fair value of $484 in 1999 and $498
in 1998) 494 502
Short-term 21,022 20,186
Other invested assets 32,525 31,446
TOTAL INVESTMENTS 231,998 234,039
Cash 3,035 390
Agents' balances, less allowance for
doubtful accounts ($1,870 in 1999 and
$1,817 in 1998) 8,793 10,015
Accrued investment income 3,139 3,662
Reinsurance balances receivable 265,497 295,994
Prepaid reinsurance premiums 28,592 37,691
Deferred policy acquisition costs 4,476 5,365
Deferred income taxes 12,574 11,101
Due from affiliates - 3,010
Other assets 4,169 4,437
TOTAL ASSETS $562,273 $605,704
LIABILITIES
Unpaid losses $342,298 $382,109
Unpaid loss adjustments expenses 44,606 52,123
Unearned premiums 50,794 63,972
Drafts payable 1,912 3,912
Due to affiliates 22,685 -
Unearned service fee income 1,522 2,240
Reserve for servicing carrier claim exp. 1,144 1,730
Reinsurance balances payable 660 885
Other liabilities 5,503 5,233
Surplus note 15,571 15,300
TOTAL LIABILITIES 486,695 527,504
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value; 7,368,420
shares authorized; 7,078,625 shares
issued and outstanding in 1999 and 1998 7,079 7,079
Additional paid-in-capital 9,331 9,331
Accumulated other comprehensive (loss)/
income, net of deferred taxes of $(988)
and $242 in 1999 and 1998, respectively (1,834) 449
Retained earnings 61,002 61,341
TOTAL SHAREHOLDER' EQUITY 75,578 78,200
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $562,273 $605,704
</TABLE>
[S]
See Notes to Interim Consolidated Financial Statements
1
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<C> <C>
REVENUES
Net earned premiums $24,978 $36,158
Net investment income 6,179 7,687
Service fee income 1,166 1,721
Net realized securities (losses)/ gains (472) 324
Other income 221 307
32,072 46,197
LOSSES AND EXPENSES
Losses 17,686 32,327
Loss adjustment expenses 4,464 3,881
Other underwriting expenses less
deferrals of $4,589 in 1999 and
$6,857 in 1998 4,694 3,839
Amortization of deferred policy
acquisition costs 5,479 6,992
Interest on surplus note 271 298
32,594 47,337
LOSS BEFORE FEDERAL INCOME TAXES (522) (1,140)
FEDERAL INCOME TAXES
Current tax expense/(benefit) 60 (377)
Deferred tax benefit (243) (22)
(183) (399)
NET LOSS $ (339) $ (741)
Per share data, based on 7,078,625 average
shares outstanding in 1999 and 1998:
BASIC AND FULLY DILUTED
LOSS PER SHARE $ (0.05) $ (0.10)
</TABLE>
[S]
See Notes to Interim Consolidated Financial Statements.
2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
199 1998
<C> <C>
REVENUES
Net earned premiums $11,239 $17,314
Net investment income 3,032 3,825
Service fee income 566 660
Net realized securities
(losses)/gains (264) 82
Other income 109 148
14,682 22,029
LOSSES AND EXPENSES
Losses 8,345 16,642
Loss adjustment expenses 2,021 1,464
Other underwriting expenses
less deferrals of $1,657 in
1999 and $2,868 in 1998 2,427 1,738
Amortization of deferred policy
acquisition costs 2,423 3,312
Interest on surplus note 122 182
15,338 23,338
LOSS BEFORE FEDERAL INCOME TAXES (656) (1,309)
FEDERAL INCOME TAXES
Current tax benefit (15) (275)
Deferred tax benefit (215) (183)
(230) (458)
NET LOSS $ (426) $ (851)
Per share data, based on 7,078,625 average
shares outstanding in 1999 and 1998:
BASIC AND FULLY DILUTED
LOSS PER SHARE $ (0.06) $ (0.12)
</TABLE>
See Notes to Interim Consolidated Financial Statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (339) $ (741)
Adjustment to reconcile net loss to net
cash provided by/(used for) operations:
Benefit from deferred income taxes (243) (22)
Amortization of deferred policy
acquisition costs 5,479 6,992
Provision for doubtful accounts 53 (55)
Net realized securities losses/(gains) 472 (324)
Policy acquisition costs incurred and
deferred (4,589) (6,857)
Net changes in:
Agents' balances 1,169 (1,916)
Reinsurance balances receivable 30,497 (7,605)
Prepaid reinsurance premiums 9,099 5,751
Unpaid losses and loss adjustment
expenses (47,328) 4,084
Unearned premiums (13,178) (5,930)
Drafts payable (2,000) (883)
Due to affiliates 25,695 4,884
Unearned service fees (718) (553)
Reserve for servicing carrier claim
expense (586) (911)
Reinsurance balances payable (225) (1,982)
Other 2,149 (836)
NET CASH PROVIDED BY/(USED FOR) OPERATING
ACTIVITIES 5,407 (6,904)
NET CASH FLOWS FROM INVESTING ACTIVITIES
Available for sale:
Acquisition of fixed maturities (144,191) (85,674)
Proceeds from sale of fixed maturities 134,680 (30,553)
Proceeds from maturities of fixed maturities 8,664 125,771
Net change in other invested assets (1,079) 9,835
Net change in short-term investments (836) (7,322)
NET CASH (USED FOR)/PROVIDED BY INVESTING
ACTIVITIES (2,762) 12,057
NET INCREASE IN CASH 2,645 5,153
Cash, at beginning of period 390 2,863
Cash, at the end of period $ 3,035 $ 8,016
</TABLE>
See Notes to Interim Consolidated Financial Statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except par value amounts)
<TABLE>
<CAPTION>
Accumulated
Common Other
Stock Additional Comprehensive
$1 Par Paid-in Income/ Retained
Value Capital (Loss) Earnings Total
<C> <C> <C> <C> <C>
Balance, January 1, 1998 $7,079 $9,331 $ 917 $60,837 $78,164
Comprehensive loss:
Net loss (741) (741)
Other comprehensive
income/(loss):
Net change in
unrealized
gains/(losses) on
investments (net of
deferred tax of $457) 849 849
Less: reclassification of
net securities gains
included in net loss
(net of tax of $113) (211) (211)
Comprehensive loss (103)
Balance, June 30, 1998 $7,079 $9,331 $1,555 $60,096 $78,061
Balance, January 1, 1999 $7,079 $9,331 $ 449 $61,341 $78,200
Comprehensive loss:
Net loss (339) (339)
Other comprehensive
income/(loss):
Net change in unrealized
gains/(losses) on
investments(net of
deferred tax benefit
of $1,363) (2,531) (2,531)
Less: reclassification
of net securities losses
included in net loss
(net of tax benefit
of $134) 248 248
Comprehensive loss (2,622)
Balance, June 30, 1999 $7,079 $9,331 $(1,834) $61,002 $75,578
</TABLE>
See Notes to Interim Consolidated Financial Statements.
5
<PAGE>
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, 1998, which are included in the Company's Annual Report filed
on Form 10-K for such year (the "1998 10-K"). Results of operations for
interim periods are not necessarily indicative of annual results of
operations. The consolidated balance sheet at December 31, 1998 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 1999 presentation.
3. In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information", ("SFAS No. 131"). At the time the Company adopted SFAS
No. 131, the Company had identified three reportable segments: 1) automobile
lines; 2) commercial lines; and 3) miscellaneous and personal lines.
Beginning in 1999, the Company's business was reorganized into three
segments: 1) Personal Lines and Residual Markets; 2) Mid-Market; and
3) Small Business. Each of these segments has separate management teams
responsible for all marketing, sales and underwriting decisions within
their units. The reorganization is designed to provide a greater degree of
accountability for underwriting results and to create a closer relationship
with agents and customers of the Company. The Personal Lines and Residual
Market segment will primarily concentrate on personal automobile and homeowners
insurance; the Mid-Market segment will focus on commercial auto, commercial
package and workers' compensation insurance for larger accounts; and the
Small Business segment will primarily focus on commercial package products
for small businesses. Further segment information is provided in Note 4 in
this Report.
6
<PAGE>
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 15, 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. In 1999,
the Company adopted SOP 97-3; the financial position and operating results
of the Company have not been materially affected.
4. Selected information concerning the Company's segments, as restated (see
Note 3 above) for the three and six month periods ended June 30, 1999 and
1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<C> <C> <C> <C>
Net Earned Premiums
Personal Lines &
Residual Markets $ 6,078 $10,246 $13,462 $21,380
Mid-Market 3,631 5,239 7,989 11,483
Small Business 1,530 1,829 3,527 3,295
Total Net Earned Premiums $11,239 $17,314 $24,978 $36,158
Losses
Personal Lines &
Residual Markets $ 4,484 $ 9,420 $ 9,555 $18,115
Mid-Market 3,005 6,145 6,241 11,813
Small Business 856 1,077 1,890 2,399
Total Losses $ 8,345 $16,642 $17,686 $32,327
Loss Adjustment Expenses
Personal Lines &
Residual Markets $ 1,085 $ 1,150 $ 2,450 $ 2,912
Mid-Market 719 136 1,579 604
Small Business 217 178 435 365
Total Loss Adjustment
Expenses $ 2,021 $ 1,464 $ 4,464 $ 3,881
</TABLE>
7
<PAGE>
Item 2.:
Management's Discussion and Analysis of Financial Condition and Interim
Results of Operations
The following should be read in conjunction with the Management's Discussion
and Analysis of Financial Condition and Results of Operations included in
the 1998 10-K.
LIQUIDITY AND CAPITAL RESOURCES
During each of the six month periods ended June 30, 1999 and 1998 the Company
operated at a net loss. For the six month period ended June 30, 1999, net
cash was provided by operations principally due to the timing of payments in
connection with the settlement of balances payable to Empire Insurance
Company under the terms of the intercompany pooling agreement. For the six
month period ended June 30, 1998, net cash was used for operations
principally due to decreased premium writings from tighter underwriting
standards, reunderwriting, competition, and a decline in the number of
assigned risk automobile contracts under which the Company acquires assigned
risk business from other insurance companies combined with a depopulation of
the related assigned risk pools.
For the period ended June 30, 1999, cash provided by operations was
principally invested in short-term investments and investments available for
sale while cash required to fund operations for the comparable 1998 period
was provided from the maturity of investments available for sale and
short-term investments as well as the sale of fixed maturity securities.
At June 30, 1999 and 1998, the yield on the Company's fixed maturities
portfolio was 5.6% and 5.9%, respectively, with an average maturity of 3.3
years and 3.4 years, respectively. At June 30, 1999, a significant portion
of the Company's investment portfolio is invested in U.S. Government and its
agencies and other investment grade corporate and industrial issues.
The Company maintains cash, short-term and readily marketable securities and
anticipates that the cash flow generated from investment income and the
maturities and sales of short-term investments and fixed maturities will be
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.
8
<PAGE>
RESULTS OF OPERATIONS-SIX AND THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE
SIX AND THREE MONTHS ENDED JUNE 30, 1998.
Net earned premium revenues were $24,978,000 and $36,158,000 for the six month
periods ended June 30, 1999 and 1998, respectively, and $11,239,000 and
$17,314,000 for the three month periods ended June 30, 1999 and 1998,
respectively. The decrease in net earned premiums for these periods
principally relates to a decline in the number of assigned risk automobile
pool contracts acquired due to competition and the depopulation of the
assigned risk automobile pools, as well as a reduction in certain personal
and commercial lines of business, principally voluntary private passenger,
commercial automobile and commercial package policies, due to tighter
underwriting standards, reunderwriting, and increased competition.
Net investment income was $6,179,000 and $7,687,000 for the six month periods
ended June 30, 1999 and 1998, respectively, and $3,032,000 and $3,825,000 for
the three month periods ended June 30, 1999 and 1998, respectively.
The decline in both periods was principally the result of a lower overall
invested asset base principally due to lower premium volume, and lower
current period yields due to current market conditions.
Service fee income was $1,166,000 and $1,721,000 for the six month periods
ended June 30, 1999 and 1998, respectively, and $566,000 and $660,000 for
the three month periods ended June 30, 1999 and 1998, respectively. The
decreases in both periods are largely the result of a decline in the number
of assigned risk automobile pool contracts acquired by the Company due to
competition combined with lower premium volume due to continued depopulation
of the assigned risk pools.
Losses incurred were $17,686,000 and $32,327,000 for the six month periods
ended June 30, 1999 and 1998, respectively, and $8,345,000 and $16,642,000
for the three month periods ended June 30, 1999 and 1998, respectively. The
decreases in both periods are primarily a result of reserve strengthening
recorded in 1998 for prior accident years and lower current accident year
loss ratios resulting from product mix and improved underwriting.
9
<PAGE>
Other underwriting expenses and the amortization of deferred policy
acquisition costs were $10,173,000 and $10,831,000 for the six month periods
ended June 30, 1999 and 1998, respectively, and $4,850,000 and $5,050,000
for the three month periods ended June 30, 1999 and 1998, respectively. The
net decreases in both periods primarily relates to the decline in premium
revenue.
Year 2000 and Information Technology Systems
The Company continues to evaluate its information technology systems to
determine the potential impact of the year 2000. The year 2000 issue is the
result of computer programs being written using two digits (rather than four)
to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000, which could result in miscalculations or system failures. As a
result, before the end of 1999, computer hardware and software may need to
be upgraded with new hardware and software which can distinguish 21st century
dates from 20th century dates.
As more fully described in the 1998 10-K, since 1996, the Company has been
evaluating its year 2000 readiness. At that time, the Company began to
evaluate its information technology systems and their ability to support
future business needs. This led to a decision to acquire new policy
management and accounting systems. These systems provide enhanced
functionality and improved processing for underwriting, claims, billing,
collection, reinsurance, reporting and accounting and are designed to be
year 2000 compliant. The Company's policy management system has been
successfully migrated into production for all new and renewal business. The
Company's accounting system was also successfully migrated into production
during the first quarter of 1999. As of June 30, 1999, substantially all of
the Company's computer equipment, including required upgrades, is expected
to be fully year 2000 compliant.
The Company's primary focus during the remainder of 1999 is to complete the
migration of the Company's non-compliant historical claims system. The
Company anticipates that it will transfer this information to a year 2000
compliant system during the fourth quarter of 1999, while maintaining the
existing system until the conversion is successfully completed. If the
conversion is not successful, the Company will maintain this information in
a simplified database file and in hard copy.
10
<PAGE>
Although a significant portion of the Company's current systems are year 2000
compliant, the Company formed a year 2000 readiness team to further increase
the Company's state of readiness. The team, which meets regularly, is
evaluating a contingency plan to address any actual failures that may occur
thereby minimizing any outages in operational functions. The Company expects
to finalize this plan during the third quarter of 1999.
The Company has made inquiries of third parties with whom it has material
relationships as to the year 2000 compliance of such third parties. Many of
such parties have reported plans to be fully compliant by the end of 1999
and most had reported substantial progress at the end of 1998. However,
at this time the Company cannot predict the effect of the year 2000 issue on
its material third parties or the impact any deficiency in the year 2000
readiness of such parties could have on the Company.
Through June 30, 1999, expenses incurred by the Company in connection with the
year 2000 issue (excluding expenses related to the Company's acquisition of
new systems, which was not motivated by year 2000 concerns) did not exceed
$100,000. Based upon current information, the Company does not expect that
the year 2000 issue will have a material effect on its consolidated financial
position or consolidated results of operations.
Cautionary Statement for Forward-Looking Information
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Interim Operations may contain forward-looking
statements. Such forward-looking statements are made pursuant to the safe-
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such statements may relate, but are not limited , to projections of revenues,
income or loss, capital expenditures, fluctuations in insurance reserves,
plans for growth and future operations (including year 2000 compatibility),
competition and regulation as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties,
many of which cannot be predicted or quantified. When used in this
Management's Discussion and Analysis of Financial Condition and Results of
Interim Operations, the words "estimates", "expects", "anticipates",
"believes", "plans", "intends" and variations of such words and similar
expressions are intended to identify forward-looking statements that involve
risks and
11
<PAGE>
uncertainties. Future events and actual results could differ materially
from those set forth in, contemplated by or underlying the forward-looking
statements. The factors that could cause actual results to differ materially
from those suggested by any such statements include, but are not limited to,
those discussed or identified from time to time in the Company's public
filings, including general economic and market conditions, changes in
domestic laws, regulations and taxes, changes in competition and pricing
environments, regional or general changes in asset valuation, the occurrence
of significant natural disasters, the inability to reinsure certain risks
economically, the adequacy of loss reserves, prevailing interest rate levels,
weather related conditions that may affect the Company's operations, the
difficulty in identifying hardware and software that may not be year 2000
compliant, the lack of success of third parties to adequately address the
year 2000 issue, vendor delays and technical difficulties affecting the
Company's ability to upgrade or replace its hardware and/or software for
year 2000 compliance, and changes in composition of the Company's assets and
liabilities through acquisitions or divestitures. Undue reliance should not
be placed on these forward-looking statements, which are applicable only as
of the date hereof. The Company undertakes no obligation to revise or update
these forward-looking statements to reflect events or circumstances that
arise after the date of this Management's Discussion and Analysis of
Financial Condition and Results of Interim Operations or to reflect the
occurrence of unanticipated events.
12
<PAGE>
Part II - Other Information
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
The following exhibit is filed herewith:
Exhibit Number Description of Document
27 Financial Data Schedule
b) Report on Form 8-K
There were no reports on Form 8-K filed for the three and
six month periods ended June 30, 1999.
13
<PAGE>
SIGNATURE
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: August 13, 1999 By: /s/Francis M. Colalucci
Francis M. Colalucci
Executive Vice President,
CFO and Treasurer
(Principal Financial and
Accounting Officer)
14
<PAGE>
