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, 2001 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 Identification
incorporation or organization) 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
Web site : www.i21.com
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 15, 2001
Common Stock, Without Par Value 85,344,615 shares
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
21ST CENTURY INSURANCE GROUP
CONSOLIDATED BALANCE SHEET
September 30, December 31,
(Amounts in thousands, except share data) 2001 2000
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ASSETS (Unaudited)
Investments, available-for-sale, at fair value and cash:
Fixed maturities $ 862,354 $ 912,655
Equity securities - 433
Cash and cash equivalents 62,030 7,240
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Total investments and cash 924,384 920,328
Accrued investment income 12,172 12,569
Premiums receivable 79,899 78,983
Reinsurance receivables and recoverables 41,578 50,075
Prepaid reinsurance premiums 16,124 20,300
Deferred income taxes 66,034 72,434
Deferred policy acquisition costs 25,144 22,387
Property and equipment, net of accumulated depreciation 175,287 138,062
Other assets 21,649 33,968
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Total assets $ 1,362,271 $ 1,349,106
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LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 291,597 $ 298,436
Unearned premiums 240,219 236,519
Claims checks payable 37,020 35,982
Reinsurance payable 12,397 15,989
Other liabilities 56,246 41,619
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Total liabilities 637,479 628,545
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Common stock, without par value; authorized 110,000,000 shares,
outstanding 85,352,323 in 2001 and 85,145,817 in 2000 416,485 415,064
Retained earnings 296,429 303,714
Accumulated other comprehensive income 11,878 1,783
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Total stockholders' equity 724,792 720,561
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Total liabilities and stockholders' equity $ 1,362,271 $ 1,349,106
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See accompanying notes to financial statements.
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21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
(Amounts in thousands, except per share data) 2001 2000 2001 2000
--------------------------------------------- ----------------- ------------------- --------------- -------------------
REVENUES
Net premiums earned $ 216,631 $ 208,109 $ 648,608 $ 615,442
Net investment income 11,395 12,649 34,761 38,473
Other (437) (346) (725) (693)
Realized investment gains (losses) 962 (299) 2,512 (5,297)
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228,551 220,113 685,156 647,925
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LOSSES AND EXPENSES
Net losses and loss adjustment expenses 195,220 190,547 582,327 553,557
Policy acquisition costs 25,574 22,744 76,786 68,506
Other operating expenses 6,305 6,888 16,774 20,820
Interest and fees expense - 804 - 2,901
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227,099 220,983 675,887 645,784
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Income (loss) before federal income taxes 1,452 (870) 9,269 2,141
Federal income tax benefit 1,227 3,441 4,129 9,044
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NET INCOME $ 2,679 $ 2,571 $ 13,398 $ 11,185
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EARNINGS PER COMMON SHARE
BASIC $ 0.03 $ 0.03 $ 0.16 $ 0.13
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DILUTED $ 0.03 $ 0.03 $ 0.16 $ 0.13
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC 85,353 85,146 85,337 85,200
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DILUTED 85,503 85,344 85,388 85,431
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DIVIDENDS PER SHARE $ 0.08 $ 0.08 $ 0.24 $ 0.40
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See accompanying notes to financial statements.
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21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Other
(Amounts in thousands) Common Retained Comprehensive
Nine Months Ended September 30, 2001 Stock Earnings Income Total
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Balance - January 1, 2001 $415,064 $ 303,714 $ 1,783 $720,561
Comprehensive income 13,398 (1) 10,095 (2) 23,493
Cash dividends declared (20,481) (20,481)
Other 1,421 (202) 1,219
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Balance - September 30, 2001 $416,485 $ 296,429 $ 11,878 $724,792
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(1) Net income for the nine months ended September 30, 2001.
(2) Net change in accumulated other comprehensive income for the nine months
ended September 30, 2001, comprises net unrealized gains on
available-for-sale investments of $11,783 (net of income tax expense of
$6,345) less the reclassification adjustment for gains included in net
income of $1,688 (net of income tax expense of $909).
See accompanying notes to financial statements
4
21ST CENTURY INSURANCE GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine Months Ended September 30, 2001 2000
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OPERATING ACTIVITIES
Net income $ 13,398 $ 11,185
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for depreciation and amortization 16,441 10,519
Amortization of restricted stock grant 500 134
Provision (benefit) for deferred income taxes 1,265 (9,046)
Realized (gains) losses on sale of investments (2,597) 5,085
Federal income taxes 10,129 -
Reinsurance balances 9,081 10,050
Unpaid losses and loss adjustment expenses (6,839) 9,996
Unearned premiums 3,700 14,961
Claims checks payable 1,038 3,235
Other assets (1,322) (15,510)
Other liabilities 14,424 17,935
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Net cash provided by operating activities 59,218 58,544
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INVESTING ACTIVITIES
Investments available-for-sale:
Purchases (315,301) (150,897)
Calls or maturities 2,158 -
Sales 381,687 240,254
Net purchases of property and equipment (53,412) (44,916)
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Net cash provided by investing activities 15,132 44,441
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FINANCING ACTIVITIES
Dividends paid (20,481) (34,153)
Common stock repurchased - (16,598)
Bank loan principal repayment - (67,500)
Proceeds from the exercise of stock options 921 1,686
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Net cash used in financing activities (19,560) (116,565)
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Net increase (decrease) in cash 54,790 (13,580)
Cash and cash equivalents, beginning of period 7,240 45,034
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Cash and cash equivalents, end of period $ 62,030 $ 31,454
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See accompanying notes to financial statements.
5
21ST CENTURY INSURANCE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
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The accompanying unaudited consolidated financial statements of 21st Century
Insurance Group and subsidiaries (the Company) have been prepared in accordance
with accounting principles generally accepted in the United States ("GAAP") 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 GAAP 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. All material
intercompany accounts and transactions have been eliminated. Operating results
for the nine-month period ended September 30, 2001, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. 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, 2000.
Certain amounts in the 2000 financial statements have been reclassified to
conform to the 2001 presentation.
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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 the investment income from
its investment portfolio to pay claims and operating expenses. Loss and loss
adjustment expense payments and investments in new technology are the most
significant uses of cash for the Company. The Company continually monitors
payments to provide projections of future cash requirements.
In recent periods, the Company has registered underwriting losses. Although the
Company's liquidity and capital needs have been adequately met by cash flow from
operations, corrective actions have been taken to restore underwriting
profitability, including class plan revisions and rate increases in California,
Nevada, Oregon and Washington implemented during the fourth quarter 2000 and the
first nine months of 2001.
Funds required by the Company to pay dividends 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 ordinarily limits the payment of dividends from earned surplus in a
calendar year to the greater of prior year statutory net income or 10% of
surplus without prior approval from the state. Recent industry-wide tax-related
court rulings may subject certain dividends from the insurance subsidiaries to
California state income tax. The Company believes it has sufficient cash at the
holding company to meet its obligations without receiving additional dividends
from its insurance subsidiaries until this tax issue is resolved.
As of September 30, 2001, the Company's insurance subsidiaries had a combined
statutory surplus of $421.9 million compared to a combined statutory surplus of
$475.6 million at December 31, 2000. The decrease of $53.7 million was caused
mainly by expenditures for capitalized software, which the recipient insurance
subsidiary is required to report as a nonadmitted asset for statutory purposes.
The Company's ratio of net written premium for the twelve month period ended
September 30, 2001, to surplus was 2.0 compared to 1.8 at December 31, 2000.
Cash and investments at the holding company were $95.2 million at September 30,
2001, as compared to $97.8 million at December 31, 2000.
Cash and invested assets as of September 30, 2001, had a fair value of $924.4
million (amortized cost of $904.8 million) compared to $920.3 million (amortized
cost of $916.3 million) at December 31, 2000. Investment grade bonds comprised
100% of the fair value of the fixed-maturity portfolio at September 30, 2001.
Of the Company's total investments at September 30, 2001, 80.0% were invested in
tax-exempt, fixed-income securities compared to 90.3% at December 31, 2000. As
of September 30, 2001, the after-tax unrealized gain on investments was $12.7
million compared to an after-tax unrealized gain of $2.6 million as of December
31, 2000.
In September 2000, the Company exercised its option to prepay a $33.8 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.
Interest payments for the first nine months of 2000 totaled approximately $2.1
million.
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UNDERWRITING RESULTS
Gross premiums written in the third quarter of 2001 increased $2.7 million
(1.2%) to $229.0 million from $226.3 million in the same period of 2000
primarily as a result of the November 2000 6.4% and July 2001 3.97 % rate
increases in the California auto program partially offset by the effects of a
decline in the number of vehicles insured. Gross premiums written during the
nine months ended September 30, 2001, increased $8.9 million (1.3%) to $701.8
million from $692.9 million. Net premiums earned increased $8.5 million (4.1%)
and $33.2 million (5.4%) for the quarter and nine months ended September 30,
2001, respectively, because of the scheduled decrease in the cession rate under
a quota share reinsurance treaty from 8% in 2000 to 6% in 2001 and the combined
effects of rate increases and fewer insured vehicles.
Compared to the same periods in 2000, net incurred losses and loss adjustment
expenses increased $4.7 million (2.5%) and $28.8 million (5.2%) during the
quarter and nine months ended September 30, 2001, respectively. The increase is
due to (i) the decrease in ceded amounts discussed above, (ii) the impact of new
claims filed related to the 1994 Northridge Earthquake (see discussion below),
(iii) slightly higher weather-related losses in the homeowners lines and (iv)
the increase in loss severity.
Loss costs began trending upwards in the third quarter 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
reported underwriting results over the near term, because the premium rate
increases taken by the Company require a year to be fully recognized as earned
for financial reporting purposes. During the third quarter 2001, the Company
filed for a 28% increase on it homeowners line. The Company is currently not
accepting new homeowners customers.
The ratio of net underwriting expenses (excluding loan interest and amortization
of deferred loan fees) to net premiums earned was 14.7% and 14.4% for the
quarter and nine months ended September 30, 2001, respectively, and 14.2% and
14.5% for the same prior year periods.
In total, the combined ratios were 104.8% and 104.2% in the quarter and nine
months ended September 30, 2001, respectively, compared to 105.8% and 104.5% in
the respective periods of 2000. Underlying these results is improvement in the
personal auto lines combined ratio to 101% for both the quarter and nine months
ended September 30, 2001, compared to 105.3% and 104.6% in the respective
periods of 2000. Mostly offsetting the improvement in the personal auto lines
were the losses related to the earthquake and homeowners lines referred to
above.
INVESTMENT INCOME
Compared to the same period in 2000, net pre-tax investment income decreased
9.9% for the quarter ended September 30, 2001, primarily because of a decrease
of 7.5% in average invested assets. The decline in invested assets was due to
funds being used for acquisitions of software, property and equipment, and
dividends to stockholders. The average annual pre-tax yields on invested assets
for both the three and nine-month periods ended September 30, 2001, were 5.1%,
compared to 5.2% and 5.1% for the same periods in 2000. On an after-tax basis,
the comparable yields were 4.5% for both the three and nine-month periods ended
September 30, 2001, respectively, compared to 4.7% and 4.6% for the same periods
in 2000.
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21ST CENTURY INSURANCE COMPANY OF ARIZONA
21st Century Insurance Company of Arizona ("21st of Arizona"), a joint venture
which is owned 51% by American International Group, Inc., ("AIG") and 49% by the
Company, writes private passenger automobile policies in Arizona. The total
investment in and advances to this venture, which is accounted for by the equity
method, totaled $4.3 million at September 30, 2001 and $4.6 million at December
31, 2000, and is included in other assets in the consolidated balance sheet.
The Company's share of the net loss of this venture was $437,000 and $725,000
for the three and nine months ended September 30, 2001, respectively, and
$346,000 and $693,000 for the same 2000 periods and is included in other income
in the consolidated statements of income.
1994 NORTHRIDGE EARTHQUAKE
California SB1899 took effect January 1, 2001 potentially reviving certain
insurance claims arising out of the 1994 Northridge Earthquake that previously
were barred by the applicable statute of limitations, the policy contract or
settlement agreements. The Company believes this statute violates federal and
state constitutional provisions prohibiting impairment of contracts. The
Company filed a petition for review with the California Supreme Court in
September following an adverse ruling by a California appellate court in July.
On October 17, 2001, the California Supreme Court denied the Company's petition.
The Company intends to continue to challenge the validity of the law under the
federal constitution by filing a writ of certiori with the U.S. Supreme Court.
However to mitigate the risk of an ultimate adverse legal determination, the
Company has, since the effective date of this legislation, been adjusting and
settling claims made under SB 1899 in a normal manner while reserving its right
to assert the unconstitutionality of the law as a defense to any claim or
action. As of September 30, 2001, approximately 1,200 previously reported 1994
Northridge Earthquake claims have been presented for reconsideration under
SB1899. Approximately 37 percent of claims have been closed. Loss payments and
loss adjustment expenses related to the 1994 Northridge Earthquake totaled $9.3
million and $20.0 million for the quarter and nine months ended September 30,
2001. At this time, the Company cannot predict either how many claims
ultimately may be presented or their ultimate cost. The Company incurred more
than $1.1 billion in earthquake-related losses and expenses arising from the
Northridge Earthquake in 1994, closing 94% of the total 46,000 claims within the
first year and 98.6% without litigation.
FORWARD-LOOKING STATEMENTS
Statements contained herein and within other publicly available documents may
include, and the Company's officers and representatives may from time to time
make, statements which may constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are not historical facts but instead represent only the Company's
belief regarding future events, many of which, by their nature, are inherently
uncertain and outside of the Company's control. These statements may address,
among other things, the Company's strategy for growth, underwriting results,
product development, regulatory approvals, market position, financial results
and reserves. It is possible that the Company's actual results and financial
condition may differ, possibly materially, from the anticipated results and
financial condition indicated in these forward-looking statements. Important
factors that could cause the Company's actual results to differ, possibly
materially, from those in the specific forward-looking statements include the
effects of competition and competitors' pricing actions; unanticipated adverse
underwriting and claims experience, including revived claims under SB 1899;
systems and customer service problems, including potential negative effects of
power shortages in California; adverse developments in financial markets or
9
interest rates; and unanticipated results of legislative, regulatory or legal
actions, including the inability to obtain approval for rate increases and
product changes. The Company is not under any obligation to (and expressly
disclaims any such obligations to) update or alter any forward-looking
statement, whether written or oral, that may be made from time to time, whether
as a result of new information, future events or otherwise.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 19, 2001, the Company was served with a class action lawsuit filed on
behalf of claim adjusters who allege the Company had improperly classified them
as salaried workers not eligible for overtime pay. Subsequently, two additional
suits have been filed with similar allegations. Similar suits have also been
filed against other California insurance companies. The Company believes it was
in compliance with applicable law and will vigorously defend itself in the
litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
None
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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
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(Registrant)
Date: October 25, 2001
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BRUCE W. MARLOW
President and Chief Executive Officer
Date: October 25, 2001
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DOUGLAS K. HOWELL
Senior Vice President and
Chief Financial Officer
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