The Company leases approximately 406,000 rentable square feet of office space for its headquarters facilities, which are located in Woodland Hills, California. The lease term expires November 2014, and the lease may be renewed for two consecutive five-year periods.
The Company also leases office space in 15 other locations of which 13 locations are in California. The Company anticipates no difficulty in extending these leases or obtaining comparable office facilities in suitable locations.
In 1999, 1998 and 1997, the Company's financial statements include the effects of certain non-recurring charges of $9.2 million, $7.7 million and $1.5 million, respectively. These charges represent a non-recurring regulatory settlement with the CDOI in 1999, accelerated amortization of restricted stock grants in 1998 and Year 2000 remediation costs in 1999, 1998 and 1997. Provisions for earthquake losses and expenses were $3.5 million in 2000, $2.4 million in 1999, $40 million in 1998, $24.8 million in 1997 and $40 million in 1996. On an after-tax basis, the foregoing charges reduced basic earnings per share by $0.03, $0.09, $0.46, $0.33 and $0.51 for 2000, 1999, 1998, 1997 and 1996, respectively.
The Company's financial condition remained strong at the end of 2000 despite the decline in operating results. The Company was able to take advantage of market conditions enabling it to economically prepay its bank debt in the third quarter of 2000. Cash flow from operations improved over 1999. At the end of 2000, statutory surplus of the insurance subsidiaries is adequate to support annual premium writings at least 30% greater than current levels. The decrease in statutory surplus since 1998 is primarily due to dividends upstreamed to the holding company and lower operating results in 1999 and 2000.
Net premiums earned were $802.7 million in 2000, $769.2 million in 1999 and $772.3 million in 1998. The increase in 2000 is greater than the proportional increase in the corresponding gross premiums written because of the decrease from 10% to 8% in the quota share reinsurance arrangement with AIG. The decrease in 1999 follows the corresponding decrease in gross premiums written.
Other Personal Lines. Policies in force were 87,112, 68,625 and 15,541 as ---------------------- of December 31, 2000, 1999 and 1998, respectively. The increase in 2000 was caused mainly by having twelve months of new sales of homeowners policies, which resumed in September 1999. The change from 1998 to 1999 was principally due the effects of a 7.5% rate decrease taken in July 1999 and a return to more normal attrition rates following the resumption of new sales. In addition, the ratio of PUP policies to vehicles in force increased slightly from 1998 to 2000.
Gross premiums written were $32.5 million in 2000, $27.5 million in 1999 and $27.3 million in 1998. The increase in 2000 was due to inclusion of new policy sales in the homeowners line for a full year since they resumed in September of 1999. Net premiums earned and underwriting results for 1999 and 1998 are not comparable to 2000 because of the termination effective January 1, 2000, of the 100% quota share reinsurance arrangements that previously had been in place since mid 1996.
As of December 31, 2000, the Company had a pre-tax net unrealized gain on fixed maturity investments of $3.7 million compared to a net unrealized loss of $62.8 million in 1999 and a net unrealized gain of $34.9 million in 1998. Interest rates fell in 2000 and 1998, which increased the fair value of the bond portfolio in those years. Conversely, interest rates rose in 1999, which decreased the fair value of the bond portfolio.
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, 2000.
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, underwriting and claims experience including revived claims under SB1899; (c) the Company's ability to distribute and administer competitive services in a timely, cost-effective manner; (d) the potential negative effect of power shortages in California; (e) the Company's visibility in the marketplace and its financial and claims-paying ratings; (f) the inability to obtain regulatory approval for rate increases and product changes; (g) the effect of changes in laws and regulations affecting the Company's business, including changes in tax laws affecting insurance products; (h) market risks related to interest rates; (i) the Company's ability to develop and deploy information technology and management information systems to support strategic goals while continuing to control costs and expenses; (j) the costs of defending litigation and the risk of unanticipated material adverse outcomes in such litigation; (k) changes in accounting and reporting practices; and (l) 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.
Stockholders' equity - Note 13 Preferred stock, par value $1.00 per share; authorized 500,000 shares, none outstanding - -
Accumulated other comprehensive income (loss) - Note 4 1,783 (40,519) ---------- ----------- Total stockholders' equity 720,561 720,837 ---------- ----------- Total liabilities and stockholder's equity $1,338,075 $1,379,332 ========== ===========
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 --------- --------- -------- (Amounts in thousands, except per share data)
Net losses and loss adjustment expenses - Note 9 749,388 605,064 626,379 Policy acquisition costs - Note 6 91,386 80,514 57,523 Other operating expenses 27,180 18,856 21,100 Interest and fees expense - Note 10 2,901 7,020 10,278 --------- --------- -------- 870,855 711,454 715,280 --------- --------- -------- Income (loss) before federal income taxes (1,093) 121,227 155,370 Federal income taxes (benefit) - Note 5 (14,038) 33,699 54,298 --------- --------- --------
21st Century Insurance Group, through its wholly owned subsidiaries, 21st Century Insurance Company and 21st Century Casualty Company (collectively, the "Company"), is engaged in the sale of private passenger automobile insurance policies in California, Nevada, Oregon and Washington and homeowners and personal umbrella insurance policies in California. At this time, almost all of the Company's business is concentrated in California. The Company also provides private passenger automobile insurance in Arizona through a joint venture with American International Group, Inc. ("AIG"), which owned a majority of the Company's outstanding common stock at December 31, 2000.
Property and equipment is recorded at cost and depreciated on a straight-line basis. The estimated useful lives used for depreciation purposes are: furniture and fixtures - 7 years; equipment - 3 to 5 years; automobiles - 5 years; leasehold improvements - 7 years; software - 3 to 7 years.
The Company sponsors a non-contributory defined benefit pension plan which covers essentially all employees who have completed at least one year of service. The benefits are based on employees' compensation during all years of service. The Company's funding policy is to make annual contributions as required by applicable regulations. At December 31, 2000, the pension plan's assets were comprised of 33.5% fixed income securities and 66.5% stock index mutual funds.
The net periodic pension cost for these plans was $4,086,000, $4,357,000 and $4,117,000 in 2000, 1999 and 1998, respectively. Accrued pension costs included in the consolidated balance sheets at December 31, 2000 and 1999 are $3,424,000 and $2,499,000, respectively.
The deficiency that emerged in 2000 related to insured events of prior years primarily resulted from the Company's estimate in 1999 of the beneficial effect on loss costs of laws passed in prior years which limited the rights of uninsured motorists and drunk drivers to collect non-economic damages. The Northridge Earthquake, which occurred on January 17, 1994, significantly affected the operating results and the financial position of the Company. Provisions charged to income for this event amounted to $3.5 million, $2.4 million and $40.0 million in 2000, 1999 and 1998, respectively.
The Company had a variable-rate revolving credit facility with an outstanding balance of $67.5 million at December 31, 1999.
YEARS ENDED DECEMBER 31, -------------------------------------------------------------------- 2000 1999 1998 -------------------- ---------------------- ---------------------- Written Earned Written Earned Written Earned --------- --------- ---------- ---------- ---------- ----------
Losses and loss adjustment expenses incurred have been reduced by reinsurance ceded as follows:
Ceded losses and loss adjustment expenses incurred (75,326) (77,455) (79,937) --------- --------- --------- Net losses and loss adjustment expenses incurred $749,388 $605,064 $626,379 ========= ========= =========
In connection with an investment agreement executed in 1994 with AIG, each of the Company's insurance subsidiaries entered into a five-year 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 ceded 10% of their premiums earned and losses and loss adjustment expenses 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 subsequent years at declining coverage percentages of 8%, 6%, 4% and 2%, respectively, and elected to do so in 2000 and 2001 at 8% and 6%, respectively. Ceding commissions of 13.57%, 10.42% and 9.40% were earned by the insurance subsidiaries for 2000, 1999 and 1998, respectively.
The Company leases office space in Woodland Hills, California. The lease expires in November 2014 and may be renewed for two consecutive five-year periods. The Company also leases office space in several other locations throughout California, primarily for claims services.
Rental expense charged to operations for the years ended December 31, 2000, 1999 and 1998, was $15,448,000, $14,415,000 and $12,879,000, respectively.
The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its stock-based compensation. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. SFAS No. 123, Accounting for Stock-Based Compensation, requires disclosure of the pro forma net income and earnings per share as if the Company had accounted for its employee stock options under the fair value method. The fair value of stock grants made under the Restricted Shares Plan is amortized to expense under APB 25 over the vesting period of the grants. This accounting treatment results in compensation expense being recorded in a manner consistent with that required under SFAS No. 123, and, therefore, pro forma net income and earnings per share amounts for the Restricted Share Plan would be unchanged from those reported in the financial statements.
A summary of grants under the plan from 1998 through 2000 follows:
Currently included in this class of litigation are certain actions that arose out of the Northridge Earthquake. Most of these actions seek to resolve claims involving disputed damages or to contest the applicability of the statute of limitations, or to pursue claims revived by SB 1899. The resolution of such litigation has an element of uncertainty and although the impact on future results of operations cannot be estimated, the Company does not believe that the ultimate outcome of any pending action will have a material effect on its consolidated financial condition or results of operations.
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 continues to believe this statute violates federal and state constitutional provisions prohibiting impairment of contracts and supports a legal challenge to the law being undertaken by another insurer and two industry trade groups. However, to mitigate the risk of an adverse determination, the Company has begun adjusting and settling claims made under SB 1899 while reserving its right to assert the unconstitutionality of the law as a defense to any claim or action. As of February 28, 2001, approximately one percent of previously reported Northridge earthquake claims have been presented for reconsideration under SB 1899. At this time, the Company cannot predict how many claims ultimately may require adjustment under the statute. The Company incurred over $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.
Personal Auto. Underwriting profit in the auto line decreased by $118.3 -------------- million in 2000 compared to 1999. The decrease was caused principally by the estimate in 1999 of the beneficial effect on loss costs of laws passed in prior years which limited the rights of uninsured motorists and drunk drivers to collect non-economic damages. Underwriting profit declined $34.4 million in 1999 from 1998 as a result of increasing losses and a 6.85% rate decrease that was effective in February 1999.
Earthquake. See Note 9 of Notes to Consolidated Financial Statements. ----------