The selected consolidated financial data presented below as of the end of and for each of the years in the five-year period ended December 31, 1999, are derived from the Company's consolidated financial statements. The consolidated financial statements as of December 31, 1999 and 1998, and for each of the years in the three-year period ended December 31, 1999, are included elsewhere in this Form 10-K. The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share. For further discussion of earnings per share, see Note 3 of the Notes to Consolidated Financial Statements.
All dollar amounts set forth in the following tables are in thousands, except per share data.
These counts exclude 21,312, 15,541 and 10,853 in 1999, 1998 and 1997, respectively, of vehicles insured by 21st Century Insurance Company of Arizona.
Premium revenue and underwriting results for the Company's insurance programs follow, presented in conformity with generally accepted accounting principles ("GAAP"). To facilitate comparability, the effects of the earthquake, non-recurring costs and the Proposition 103 settlement have been isolated from the core business in the tables below.
Automobile insurance is the primary line of business written by the Company and has been consistently profitable, although the Company experienced a combined ratio of 100.3% in this line in the fourth quarter of 1999 as a result of the factors discussed previously under Units in Force that have contributed to lower margins. The majority of the Company's insured autos are located in Southern California. The Company continues to expand its coverage throughout the West by marketing its business in Northern California, San Diego County, Nevada, Oregon and Washington which, combined, accounted for approximately 59% of all new business written in 1999.
The auto line experienced an $80.7 million underwriting profit in 1999 compared to $120.4 million and $135.6 million in 1998 and 1997, respectively, as adjusted for the effects of non-recurring costs. The decrease in underwriting results in 1999 and 1998 is primarily due to increases in losses and loss expenses coupled with rate decreases of 6.8% and 3.2% effective February 15, 1999 and January 1, 1998, respectively.
These rate reductions caused gross written premiums to decrease two years in a row, despite increases in insured units of 4.9% and 4.2% for 1999 and 1998, respectively.
Underwriting results for this program are subject to variability caused by weather-related claims and by infrequent disasters. No significant losses were incurred in this line in 1997, 1998 or 1999.
Although the Company has not written new or renewal earthquake premiums since 1994, the Company assumes a small amount of earthquake premium from the California FAIR Plan, a state-administered pool of difficult-to-insure risks. Insurers are required to participate in the pool in proportion to their share of direct written homeowners coverage in the state.
The Y2K issue arose because some computer programs and hardware were designed to use two digits rather than four to define the applicable year. The Company took what it believed to be a comprehensive approach to remediating its Y2K issues, including the preparation of risk assessments, system upgrades, system replacements, system testing and contingency planning. The Company passed the critical Year 2000 dates January 1, 2000, and February 29, 2000, with no problems and, as such believes it has no further exposure to Year 2000 computer issues.
The total Year 2000 project cost was approximately $9.6 million, which was expensed as incurred. Approximately one third of that amount represented the direct cost of certain personnel in the Company's Information Services department who were dedicated to this project, with most of the remainder representing external consultants. Costs incurred during 1999, 1998 and 1997 were $2.4 million, $5.7 million and $1.5 million, respectively.
During the second quarter of 1999, the Company's Board of Directors authorized the expenditure of $50 million to purchase shares of the Company's common stock. As of February 29, 2000, 2,,321,084 shares had been repurchased at a cost of approximately $44.0 million.
The National Association of Insurance Commissioners requires property and casualty insurance companies to calculate and report information under a Risk-Based Capital ("RBC") formula in their Annual Statements. The RBC requirements are intended to assist regulators in identifying inadequately capitalized companies. The RBC calculation is based on the type and mix of risks inherent in the Company's business and includes components for underwriting, asset, interest rate and other risks. To the extent that a subsidiary's surplus fell below prescribed levels, it would be the parent company's intention to infuse necessary capital to support that entity. The Company's insurance subsidiaries exceeded their RBC statutory surplus standards by a considerable margin as of December 31, 1999.
The Company leases approximately 500,000 square feet for its Home Office facilities in Woodland Hills, California. The Company expanded its headquarters to nearly double the size of its former facility in
The Company's management has made in this report, and from time to time may make in its public filings, press releases, and oral presentations and discussions, forward-looking statements concerning the Company's operations, economic performance and financial condition. Forward-looking statements include, among other things, discussions concerning the Company's potential, expectations, beliefs, estimates, forecasts, projections and assumptions. Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those anticipated by forward-looking statements due to a number of important factors including, but not limited to, those discussed elsewhere in this report and in the Company's other public communications, as well as the following: (a) the intensity of competition from other companies in the insurance industry; (b) the Company's experience with respect to persistency and claims experience; (c) the Company's ability to distribute and administer competitive services in a timely, cost-effective manner; (d) the Company's visibility in the marketplace and its financial and claims-paying ratings; (e) the effect of changes in laws and regulations affecting the Company's business, including changes in tax laws affecting insurance products; (f) market risks related to interest rates; (g) the Company's ability to develop information technology and management information systems to support strategic goals while continuing to control costs and expenses; (h) the costs of defending litigation and the risk of unanticipated material adverse outcomes in such litigation; (i) changes in accounting and reporting practices; and (j) the Company's access to adequate financing to support its future business. 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.
We have audited the accompanying consolidated balance sheets of 21st Century Insurance Group (formerly 20th Century Industries) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
The accompanying consolidated financial statements include the accounts and operations of 21st Century Insurance Group and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") which differ from statutory accounting practices ("SAP") prescribed or permitted by insurance regulatory authorities. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from these estimates.
The Company's 49% interest in 21st Century Insurance Company of Arizona, which is a joint venture between the Company and AIG and which began operations in August 1996, has a carrying value of $3,548,000 at December 31, 1999, and is included in other assets in the consolidated balance sheet. The Company's equity in the net loss of this venture amounted to $451,000, $373,000 and $656,000 in 1999, 1998 and 1997, respectively, and is included in investment income in the consolidated statements of income.
Cash and cash equivalents include cash and short-term investments in demand deposits having a maturity of three months or less at the date of purchase.
Insurance premiums are recognized as revenue pro rata over the terms of the policies. The unearned portion is included in the balance sheet as a liability for unearned premiums.
The estimated liabilities for losses and loss adjustment expenses include the accumulation of estimates of losses for claims reported prior to the balance sheet dates, estimates (based upon actuarial analysis of historical data) of losses for claims incurred but not reported and estimates of expenses for investigating and adjusting all incurred and unadjusted claims. Amounts reported are
Policy acquisition costs, principally direct and indirect costs related to production of business, are deferred and amortized to expense as the related premiums are earned.
The amortized cost, gross unrealized gains and losses, and fair values of investments as of December 31, 1999 and 1998, are as follows:
The amortized cost and fair value of the Company's fixed maturity investments at December 31, 1999, are summarized by contractual maturity, as follows:
Details follow concerning the change in the after-tax net unrealized gain (loss) on investments for 1999, 1998, and 1997, which is included in the equity section of the consolidated balance sheets under the caption "accumulated other comprehensive income."
A reconciliation of income tax computed at the federal statutory tax rate, which was 35% for 1997 through 1999, to total income tax expense follows:
The Company sponsors a contributory savings and security plan for eligible employees. The Company provides matching contributions equal to 75% of the lesser of 6% of an employee's compensation or the amount contributed by the employee. Contributions charged against operations were $2,963,000, $2,728,000 and $2,697,000 in 1999, 1998 and 1997, respectively.
The 1998 increase in the provision for insured events of prior years included $40 million related to the Northridge Earthquake. The 1997 decrease in the provision for insured events of prior years was partially offset by an increase in earthquake losses of $24.75 million.
As of December 31, 1999, the Company's outstanding advances against the Facility totaled $67.5 million, which approximated its fair value. Interest is charged at a variable rate based, at the option of the Company, on either (1) the contractually defined Alternate Base Rate ("ABR") plus a margin of 0.25% or (2) the Eurodollar Rate plus a margin of .75%. Margins are adjusted in relation to certain financial and operational levels of the Company. The ABR is defined as a daily rate which is the higher of (a) the prime rate for such day or (b) the Federal Funds Effective Rate for such day plus .5% per annum. Interest is payable at the end of each interest period. The stock of the Company's insurance subsidiaries is pledged as collateral under the Facility. At December 31, 1999, the annual interest rate for the specified interest period was approximately 7.25%. Interest paid was $5,306,000 in 1999, $8,660,000 in 1998, and $12,758,000 in 1997.
In connection with an investment agreement executed in 1994 with AIG, each of the Company's insurance subsidiaries entered into a five-year (1995 to 1999) quota share reinsurance agreement with an AIG affiliate to provide coverage for all ongoing lines of business. Under this contract, which attaches to the Company's retained risks net of all other reinsurance, the subsidiaries cede 10% of their premiums earned and losses incurred in connection with policies incepted during the period January 1, 1995, through December 31, 1999. The majority of the Company's reinsurance receivables are due from the AIG affiliate. The AIG affiliate has the option to renew the agreement for each of the four years at declining coverage percentages of 8%, 6%, 4% and 2%, respectively, and has elected to do so in 2000. Ceding commissions of 10.42%, 9.40% and 9.36% were earned by the insurance subsidiaries for 1999, 1998 and 1997, respectively. The ceding commission is adjusted annually to equal the prior year's gross SAP underwriting expense ratio.
Homeowners policies renewed February 15, 1997, and through December 31,1999, are covered in full by quota share reinsurance agreements with three reinsurers, as follows: National Union Fire Insurance Co. of Pittsburgh, PA (50%), a subsidiary of AIG, F&G Re (25%) and Risk Capital Re (25%). The Company's insurance subsidiaries earn a commission on ceded premiums based on a sliding scale dependent on the incurred loss ratio.
Losses on homeowner policies inforce or incepting between July 1, 1996, and September 30, 1996, are ceded 100% under a separate quota share agreement which is now in run-off.
Rental expense charged to operations for the years ended December 31, 1999, 1998 and 1997, was $14,415,000, $12,879,000 and $11,969,000, respectively.
The aggregate number of common shares issued and issuable under the Plan currently is limited to 4,000,000. At December 31, 1999, 1,912,353 common shares remain available for future grants. All options granted have ten-year terms. As a consequence of AIG's acquiring a controlling interest in the Company, vesting was accelerated for all options previously granted through July 27, 1998. Options granted after July 27, 1998, vest over various future periods.
A summary of grants under the plan from 1997 through 1999 follows:
Auto. Underwriting profit in the auto line decreased by $34.4 million in 1999 - - ---- compared to 1998. The decrease was caused mainly by a 6.85% rate decrease that became effective in February 1999 and a reversal of previously favorable loss trends that became particularly evident in the third quarter of