DECEMBER 31, ------------------------------------------ 1994 1993 1992 ---- ---- ---- Policies in Force Automobile 1,132,605 1,130,446 1,018,656 Homeowners and Other 217,239 244,786 228,709 -------------- ----------- ----------- Total 1,349,844 1,375,232 1,247,365 ============== =========== ===========
Property insurance results are subject to the variability introduced by the chance occurrences of natural or man-made disasters such as earthquakes, fires, windstorms, floods and riots. The Company minimizes its exposure to riot-related damage by not writing commercial risks, and its exposure to conflagration is reduced because it does not accept business in close proximity to designated brush hazard areas. The Company reported claims totaling approximately $4.3 million, after reinsurance, as a result of the Southern California fires in the fourth quarter of 1993; however, it was assessed an additional $2.6 million as its share of California Fair Plan losses. Hurricanes and similar wind-related catastrophes are not generally considered to be a significant exposure in California. The Company does not have a significant exposure to floods as flood damage is not covered under the homeowners policy.
On September 8, 1994, the Company revised upward its estimated gross losses and allocated loss adjustment expenses from the Northridge Earthquake expected to be sustained by the Insurance Subsidiaries to approximately $815 million. The Company became in violation of the net worth maintenance and other financial covenants under the Bank Credit Agreement. The statutory surplus of the Insurance Subsidiaries was reduced from approximately $252 million on June 30, 1994 to approximately $71 million on September 30, 1994, the ratio of the Insurance Subsidiaries' total net written premiums to statutory surplus increased to 14:1 and the Company's stockholders' equity declined to approximately $163 million. These adverse developments put a severe financial strain on the Company.
In addition, in the event the Company's total gross losses and allocated loss adjustment expenses with respect to the Northridge Earthquake exceed $945 million, the exercise price shall be reduced by $0.08 per share for each million dollars of gross losses and allocated loss adjustment expenses in excess of $945 million (provided that the exercise price shall never be reduced to less than $1.00 per share as a result of Northridge Earthquake losses); provided, however, that no adjustment to the Exercise Price shall be made with respect to increases in gross losses and allocated loss adjustment expenses reflected in financial statements following the 1995 year-end audited financial statements of the Company.
In the latter part of March, 1995, the Company issued an additional $20 million in Preferred Stock to AIG and borrowed an additional $10 million against its existing bank credit facility.
Stockholders' equity decreased $337.3 million between 1993 and 1994 from $655.2 million to $317.9 million, respectively, while book value per common share decreased $10.45 from $12.74 to $2.29 for the same time period.
Income taxes for 1993 and 1994 have been provided using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes". Under that method, deferred tax assets and liabilities are determined based on the differences between their financial reporting and their tax bases and are measured using the enacted tax rates. Income taxes for 1992 have been provided for using the deferred method.
On December 16, 1994, the Company received $216 million of equity capital from American International Group, Inc. ("AIG") and in exchange, issued (i) 200,000 shares of Series A 9% Convertible Preferred Stock, par value $1.00 per share, at a price and liquidation value of $1,000 per share and convertible into common shares at a conversion price of $11.33 per share, and (ii) 16,000,000 Series A Warrants to purchase an aggregate 16,000,000 shares of the Company's Common Stock at $13.50 per share. The Company received aggregate consideration of $200,000,000 for the shares of the Preferred Stock and $16,000,000 for the Warrants. The Series A Preferred Stock ranks senior to the Common Stock in respect to dividend and liquidation rights. The Common Stock Warrants are generally exercisable from February 1998 to February 2007. See Note 14 of the Notes to Consolidated Financial Statements for further discussion regarding the agreement between the Company and AIG.
The insurance subsidiaries have restrictions affecting the amount of stockholder dividends which may be paid within any one year without the approval of the California Department of Insurance. The California Insurance Code provides that amounts may be paid as dividends from earned surplus on an annual noncumulative basis of the greater of (1) net income for the preceding year, or (2) 10 percent of statutory surplus as regards policyholders as of the preceding December 31, without prior approval by the California Department of Insurance. As both Insurance Subsidiaries had negative earned surplus at December 31, 1994, no dividends may be paid to the Company during 1995 without prior approval.
On January 27, 1995, the Company announced a settlement of rebate liabilities associated with Proposition 103, which was passed by California voters on November 8, 1988. The agreement applies to both Insurance Subsidiaries, 20th Century Insurance Company and 21st Century Casualty Company, and applies to those customers insured between November 8, 1988 and November 7, 1989. At December 31, 1994, $78 million is recorded as a liability.
ber 31, 1995. Available to the Company were are an additional $15 million un- der the existing bank credit facility and up to $70 million in preferred stock which could be issued to AIG. See Note 17 for further discussion.
The net income for all four quarters of 1994 reflect the impact of the January 17 Northridge Earthquake, which were as follows: first quarter, $551.3 million; second quarter, $76.5 million; third quarter, $129.8 million; and fourth quarter, $126.2 million. The second quarter 1994 net income reflects approximately $50 million in realized capital gains from the sale of investments. The third quarter 1994 net income reflects additional deferred revenue of $43.6 million and interest expense of $28 million related to the Proposition 103 order directing the Company to issue refunds totaling approximately $78.3 million, plus interest at 10% per annum from May 8, 1989 to September 30, 1994. The fourth quarter 1994 net income reflects the reversal of all Proposition 103 interest accrued of approximately $44 million in accordance with a settlement with the California Department of Insurance.