SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 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 July 16, 2001
Common Stock, Without Par Value 85,204,090 shares
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
21ST CENTURY INSURANCE GROUP
CONSOLIDATED BALANCE SHEET
June 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 $ 893,991 $ 912,655
Equity securities - 433
Cash and cash equivalents 3,333 7,240
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Total investments and cash 897,324 920,328
Accrued investment income 12,587 12,569
Premiums receivable 76,435 78,983
Reinsurance receivables and recoverables 60,542 50,075
Prepaid reinsurance premiums 16,189 20,300
Deferred income taxes 71,537 72,434
Deferred policy acquisition costs 25,448 22,387
Property and equipment, net of accumulated depreciation 164,997 138,062
Other assets 35,398 33,968
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Total assets $ 1,360,457 $ 1,349,106
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LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 288,672 $ 298,436
Unearned premiums 243,053 236,519
Claims checks payable 37,548 35,982
Reinsurance payable 22,965 15,989
Other liabilities 51,062 41,619
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Total liabilities 643,300 628,545
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Common stock, without par value; authorized 110,000,000 shares,
outstanding 85,187,340 in 2001 and 85,145,817 in 2000 415,869 415,064
Retained earnings 300,577 303,714
Accumulated other comprehensive income 711 1,783
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Total stockholders' equity 717,157 720,561
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Total liabilities and stockholders' equity $ 1,360,457 $ 1,349,106
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See accompanying notes to financial statements.
2
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
(Amounts in thousands, except per share data) 2001 2000 2001 2000
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REVENUES
Net premiums earned $ 217,366 $ 207,062 $ 431,977 $ 407,334
Net investment income 11,561 12,599 23,366 25,825
Other (209) (172) (288) (348)
Realized investment gains (losses) 434 (1,255) 1,550 (4,998)
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229,152 218,234 456,605 427,813
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LOSSES AND EXPENSES
Net losses and loss adjustment expenses 192,471 184,153 387,107 363,010
Policy acquisition costs 27,086 24,072 51,212 45,762
Other operating expenses 4,981 6,586 10,469 13,932
Interest and fees expense 960 2,097
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224,538 215,771 448,788 424,801
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Income before federal income taxes 4,614 2,463 7,817 3,012
Federal income tax benefit 1,183 2,497 2,902 5,603
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NET INCOME $ 5,797 $ 4,960 $ 10,719 $ 8,615
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EARNINGS PER COMMON SHARE
BASIC $ 0.07 $ 0.06 $ 0.13 $ 0.10
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DILUTED $ 0.07 $ 0.06 $ 0.13 $ 0.10
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC 85,177 85,110 85,183 85,226
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DILUTED 85,372 85,412 85,366 85,492
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DIVIDENDS PER SHARE $ 0.08 $ 0.16 $ 0.16 $ 0.32
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See accompanying notes to financial statements.
3
21ST CENTURY INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Other
(Amounts in thousands) Common Retained Comprehensive
Six Months Ended June 30, 2001 Stock Earnings Income Total
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Balance - January 1, 2001 $415,064 $ 303,714 $ 1,783 $720,561
Comprehensive income 10,719 (1) (1,072) (2) 9,647
Cash dividends declared (13,652) (13,652)
Other 805 (204) 601
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Balance - June 30, 2001 $415,869 $ 300,577 $ 711 $717,157
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(1) Net income for the six months ended June 30, 2001.
(2) Net change in accumulated other comprehensive income for the six months
ended June 30, 2001, comprises net unrealized losses on available-for-sale
investments of ($25) (net of income tax benefit of $13) less the
reclassification adjustment for gains included in net income of $1,047 (net
of income tax expense of $564).
See accompanying notes to financial statements.
4
21ST CENTURY INSURANCE GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Six Months Ended June 30, 2001 2000
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OPERATING ACTIVITIES
Net income $ 10,719 $ 8,615
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for depreciation and amortization 9,572 6,388
Amortization of restricted stock grant 306 89
Provision (benefit) for deferred income taxes 1,475 (5,603)
Realized (gains) losses on sale of investments (1,611) 4,899
Federal income taxes (4,355) 3,490
Reinsurance balances 620 11,179
Unpaid losses and loss adjustment expenses (9,764) 162
Unearned premiums 6,535 16,598
Claims checks payable 1,566 391
Other assets 2,446 (8,184)
Other liabilities 9,238 1,607
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Net cash provided by operating activities 26,747 39,631
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INVESTING ACTIVITIES
Investments available-for-sale:
Purchases (204,203) (94,717)
Calls or maturities 1,808 -
Sales 221,259 137,598
Net purchases of property and equipment (36,366) (25,896)
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Net cash provided by (used in) investing activities (17,502) 16,985
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FINANCING ACTIVITIES
Dividends paid (13,652) (27,326)
Common stock repurchased - (16,598)
Bank loan principal repayment - (33,750)
Proceeds from the exercise of stock options 500 1,684
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Net cash used in financing activities (13,152) (75,990)
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Net decrease in cash (3,907) (19,374)
Cash and cash equivalents, beginning of period 7,240 45,034
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Cash and cash equivalents, end of period $ 3,333 $ 25,660
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See accompanying notes to financial statements.
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21ST CENTURY INSURANCE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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. Operating
results for the six-month period ended June 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 rate increases in California, Nevada, Oregon and
Washington implemented during the fourth quarter of 2000 and the first quarter
of 2001 and the implementation of a class plan revision for California effective
September 1, 2000. Effective July 1, 2001, the Company received approval for an
additional 3.97% rate increase for California auto lines.
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 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.
During 2001, the insurance subsidiaries could pay dividends to the holding
company of $46.7 million without prior approval.
As of June 30, 2001, the Company's insurance subsidiaries had a combined
statutory surplus of $438.9 million compared to a combined statutory surplus of
$475.6 million at December 31, 2000. The decrease of $36.7 million was caused
mainly by the transfer of 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 to surplus was 1.9 at June 30, 2001,
compared to 1.8 at December 31, 2000. Cash and investments at the holding
company were $92.0 million at June 30, 2001 as compared to $97.8 million at
December 31, 2000.
Cash and invested assets as of June 30, 2001, had a fair value of $897.3 million
compared to $920.3 million at December 31, 2000. Investment grade bonds
comprised 99.7% of the fair value of the fixed-maturity portfolio at June 30,
2001. Of the Company's total investments at June 30, 2001, 86.3% were invested
in tax-exempt, fixed-income securities compared to 90.3% at December 31, 2000.
As of June 30, 2001, the after-tax unrealized gain on investments was $1.6
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. Interest payments for the first six months of
2000 totaled approximately $1.9 million.
UNDERWRITING RESULTS
Gross premiums written in the second quarter of 2001 increased $3.2 million
(1.4%) to $236.0 million from $232.8 million in the same period of 2000
primarily as a result of the November 2000 6.4% rate increase in the California
auto program partially offset by the effects of a decline in the number of
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vehicles insured. Gross premiums written during the six months ended June 30,
2001, increased $6.2 million (1.3%) to $472.9 million from $466.7 million. Net
premiums earned increased $10.3 million (5.0%) and $24.6 million (6.1%) for the
quarter and six months ended June 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.
As compared to the same periods in 2000, net incurred losses and loss adjustment
expenses increased $8.3 million (4.5%) and $24.1 million (6.6%) during the
quarter and six months ended June 30, 2001, respectively. The increase is due
to (i) a decrease in amounts ceded under the quota share discussed above, (ii)
the impact of new claims filed related to the 1994 Northridge earthquake (see
discussion in Recent Legislation below), and (iii) slightly higher
weather-related losses on homeowners lines.
In total, the combined ratio was 103.3% and 103.9% in the quarter and six months
ended June 30, 2001, respectively, compared to 103.7% and 103.8% in the
respective periods of 2000. Underlying these results is improvement in the
personal auto lines combined ratio to 100.0% and 101.0% for the quarter and six
months ended June 30, 2001, respectively, compared to 103.9% and 104.2% in the
respective quarters of 2000. Mostly offsetting the improvement in the personal
auto lines were the losses related to the earthquake and homeowners lines
referred to above.
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. Recent changes in the
Company's pricing strategy (as discussed previously in Liquidity and Capital
Resources) will become evident in the Company's reported financial results as
the premium increases are earned over the related policy terms.
The ratio of net underwriting expenses (excluding loan interest and amortization
of deferred loan fees) to net premiums earned was 14.8% for both the quarters
ended June 30, 2001 and 2000. The net underwriting ratios for the six months
ended June 30, 2001 and 2000, were 14.3% and 14.7%, respectively.
INVESTMENT INCOME
Compared to the same period in 2000, net pre-tax investment income decreased
8.2% for the quarter ended June 30, 2001, primarily because of a decrease of
10.5% in average invested assets. The decline in invested assets was due to
funds being used for acquisitions of software, property and equipment, repayment
of bank debt, and dividends to stockholders. The average annual pre-tax yield on
invested assets for both the three and six-month periods ended June 30, 2001,
was 5.1%, compared to 5.0% and 5.2% for the same periods in 2000. On an
after-tax basis, the comparable yields were 4.5% and 4.6% for the three and
six-month periods ended June 30, 2001, respectively, compared to 4.5% and 4.7%
for the same periods in 2000.
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
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investment in and advances to this venture, which is accounted for by the equity
method, totaled $4.7 million at June 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 $209,000 and $288,000 for
the three and six months ended June 30, 2001, respectively, and $172,000 and
$347,000 for the same 2000 periods and is included in other income in the
consolidated statements of income.
OTHER MATTERS
California SB 1899 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
is evaluating its options for further legal review following an adverse ruling
by the California appellate court on July 24, 2001. However, to mitigate the
risk of an ultimate adverse 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 June 30, 2001,
approximately 850 previously reported Northridge earthquake claims have been
presented for reconsideration under SB 1899. Approximately 30 percent of claims
have been closed. Loss and loss adjustment expenses related to the 1994
earthquake totaled $6.1 million and $10.7 million in the quarter and six months
ended June 30, 2001, respectively. At this time, the Company cannot predict
either how many claims ultimately may require further adjustment or their
ultimate cost. The Company incurred more than $1.1 billion in earthquake-related
losses and expenses, closing 94% of the total 46,000 claims within the first
year and 98.6% without litigation.
FORWARD-LOOKING STATEMENTS
Statements contained herein 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 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 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 does not undertake any obligation to update or
revise any forward-looking statements, 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 that the Company had improperly classified
them as salaried workers not eligible for overtime pay. Similar suits have 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders occurred on June 6, 2001, in which the
following individuals were re-elected as directors: John B. De Nault, III,
William N. Dooley, R. Scott Foster, M.D., Roxani M. Gillespie, Bruce W. Marlow,
James P. Miscoll, Robert M. Sandler, Gregory M. Shepard and Howard I. Smith.
The shareholders also ratified the appointment of PricewaterhouseCoopers LLP
("PwC") as the Company's independent accountants for 2001 and approved
amendments to the Company's 1995 Stock Option Plan ("Plan"), including
increasing the number of common stock authorized pursuant to the Plan from
4,000,000 to 10,000,000 with the number of common stock authorized for employee
incentive stock options increasing from 3,600,000 to 9,600,000 and changing the
Plan's name to be consistent with the Company's current name.
The shareholders voted as follows:
ELECTION OF WITHHOLD
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DIRECTORS FOR AGAINST OR ABSTAIN
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J. De Nault III 76,288,872 4,204,426
W. Dooley 70,601,736 9,891,562
R. Foster, M.D. 71,704,672 8,788,626
R. Gillespie 71,680,572 8,812,726
B. Marlow 71,481,039 9,012,259
J. Miscoll 71,252,594 9,240,704
R. Sandler 70,601,736 9,891,562
G. Shepard 75,466,672 5,026,626
H. Smith 71,456,839 9,036,459
PROPOSALS
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Appointment of PwC 76,090,490 4,396,135 6,673
Amendments to the Plan 70,564,233 7,085,041 173,035
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
A report on Form 8-K was filed on April 13, 2001, regarding the appointment
of Douglas K. Howell as senior vice president and chief financial officer
effective April 9, 2001.
A report on Form 8-K was filed on April 23, 2001, regarding the dismissal
of Ernst & Young LLP and the engagement of PricewaterhouseCoopers LLP as
the Company's independent auditor effective April 26, 2001.
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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: July 27, 2001
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BRUCE W. MARLOW
President and Chief Executive Officer
Date: July 27, 2001
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DOUGLAS K. HOWELL
Senior Vice President and
Chief Financial Officer
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