The selected consolidated financial data presented below for, and as of the end of, each of the years in the five-year period ended December 31, 1995 are derived from the consolidated financial statements of 20th Century Industries and its subsidiaries. The consolidated financial statements as of December 31, 1995 and 1994 and for each of the years in the three-year period ended December 31, 1995 are included elsewhere in this Form 10-K. All dollar amounts set forth in the following tables are in thousands, except per share data.
The Northridge Earthquake significantly affected the financial condition of the Company and its operating results for the entire year of 1994 and, to a lesser extent, 1995.
During 1994, when the magnitude of the Company's losses became evident, the DOI imposed certain requirements on the Company and its insurance sub- sidiaries designed to reduce further exposure to earthquake losses and to strengthen the financial position of the Company. The Company's insurance subsidiaries were ordered to stop writing new homeowners and condominium policies and to non-renew all existing earthquake coverages. The DOI also granted the Company a 17% increase in homeowners premium rates and a 6% increase in automobile premium rates.
In January 1995, the Company reached a settlement of rebate liabilities associated with Proposition 103 with the DOI in the amount of $78 million. The Company was to refund $46 million to customers specified in the agreement as soon as practicable with the remaining $32 million set aside for additional
customer refunds conditioned on the ultimate level of claim costs associated with the 1994 Northridge Earthquake. The settlement required the Company to withdraw its request for a hearing before the United States Supreme Court to appeal the California Supreme Court decision on Proposition 103.
As of December 31, 1995, the Company's insurance subsidiaries had a com- bined statutory surplus of $358,474,000, a ratio of 2.7:1 of net written premium to surplus and was in compliance with DOI requirements and its loan covenants. The 1995 underwriting results for auto business were favorable and demonstrated a return to profitability and stability.
With the statutory surplus of the Company restored to levels within regulatory norms as a result of the capital infusion by AIG in December 1994 and operating profits in 1995, the Company filed for an auto rate decrease of 3.15% in December 1995. These new rates have been approved and are effective March 15, 1996. The Company expects the new rates combined with an aggressive marketing and advertising campaign to restore unit growth in the automobile line. Because the Company is still subject to the order issued by the DOI in June 1994, the homeowners and condominium policies will have to be non-renewed starting July 1996 and the Company will be fully withdrawn from this line in July 1997.
The Company had total unit growth of over 10% on average for the ten years prior to 1994. The Northridge Earthquake significantly reduced statutory surplus and thus required the Company to reduce its insured exposures. As a result, the Company ceased all advertising and marketing for new policies in the first quarter of 1994. In June 1994, the DOI ordered the Company to stop writing all new homeowners and condominium policies and to non-renew all existing earthquake coverages. The DOI also granted the Company a 17% increase in homeowners premium rates effective August 1, 1994 and a 6% increase in automobile premium rates effective October 7, 1994. While improv- ing profitability, the effect of these actions was to cause a decline in units in force which carried into 1995. A further automobile rate increase of 3.65% was effective June 15, 1995, causing the decline in units to continue in 1995. Total units declined from December 31, 1993 to December 31, 1995 9.7% (6.6% for automobile and 25.0% for homeowners and condominium).
Premium revenue and underwriting results for the Company's insurance programs were as follows:
Years Ended DECEMBER 31, ------------------------------------------ 1995 1994 1993 ---- ---- ---- (Amounts in thousands) Gross Premiums Written
Automobile $ 991,969 $ 991,268 $ 932,497 Homeowner and Condominium 69,847 85,088 99,060 Personal Excess Liability 2,146 2,307 2,338 ---------- ---------- ---------- Total $1,063,962 $1,078,663 $1,033,895 ========== ========== ========== Net Premiums Earned Automobile $ 920,560 $ 981,893 $ 908,523 Homeowner and Condominium 42,394 51,166 80,630 Personal Excess Liability 843 944 559 ---------- ---------- ---------- Total $ 963,797 $1,034,003 $ 989,712 ========== ========== ========== Underwriting Profit (Loss) Automobile $ 103,744 $ (45,850) $ 23,800 Homeowner and Condominium (78,976) (879,221) (11,641) Personal Excess Liability 469 997 484 ---------- ---------- ---------- Total $ 25,237 $ (924,074) $ 12,643 ========== ========== ==========
The voluntary automobile insurance business written by the Company is comprised of "Good Drivers", as defined by California statute. While the majority of this business would have been acceptable to the Company before Proposition 103, those who had no prior insurance would have been written at a higher rate level than those who had been insured prior to being written by the Company. The underwriting losses produced by this segment of the market suggests that the former differential was appropriate. These drivers have produced automobile underwriting losses of $26,286,000 in 1995, compared to $31,134,000 in 1994 and $16,877,000 in 1993.
Overall automobile underwriting results are also affected by assigned risk units in force. Such units have increased steadily since 1993. Underwriting losses for assigned risk business were $3,082,000 in 1995, com- pared to $3,800,000 in 1994 and $3,031,000 in 1993. A 5.2% rate increase for assigned risk business was implemented by the DOI in June 1995.
without earthquake coverage through July 1996. Due to the requirement to exit the homeowners' market, units in force for the homeowner and condominium programs decreased 15.1% in 1995 and 11.7% in 1994. This decline in units resulted in lower gross premiums written and, therefore, net earned premiums in 1995 and 1994. This program will continue to decline until the final policy expires in July 1997.
Underwriting results for these programs are subject to variability caused by weather-related claims and by infrequent disasters. Results in 1995 include storm losses of $14.2 million in the first quarter, $24 million of earthquake-related catastrophe reinsurance premiums, and Northridge Earthquake related losses of $60 million. Results in 1994 include $35 million of catastrophe reinsurance premiums related to the additional reinsurance coverage and $844.1 million of net losses as related to the Northridge Earthquake. Results in 1993 were influenced by $4.6 million in storm losses in the first quarter and by $4.3 million in claims due to the Southern California fires in the fourth quarter plus a $2.6 million California Fair Plan assessment.
The Company maintains a catastrophe reinsurance program to provide coverage through the run-off period of its remaining homeowners policies. The program currently in place provides coverage for the period from July 1, 1995 through June 30, 1996 for a total annual premium of approximately $13 million. Coverage under these treaties is provided by a number of domestic, foreign and London market companies in two layers as follows:
The Company's policy acquisition and general operating expense ratio continues to be one of the lowest in the industry. The ratio of underwriting expenses (excluding loan interest and fees) to earned premiums was 9.0% in 1995, 9.7% in 1994 and 10.7% in 1993. The decline in the ratio from 1993 to 1995 reflects the impact of the ceding commission earned on the quota share agreement with an affiliate of AIG and a reduction in general operating expenses due to the decline in business as well as cost efficiencies. Such efficiency, as reflected in its expense advantage over its competitors, enables the Company to maintain its price leadership and provide for future growth and profitability.
As of December 31, 1995, the Company had a net unrealized gain on fixed maturity investments of $50,527,000 compared to a net unrealized gain (loss) of ($61,425,000) and $145,745,000 in 1994 and 1993, respectively. The primary reasons for the shifts in unrealized gains and losses are twofold. Interest rates rose sharply in 1994 but fell in 1995 reducing the fair value of the bond portfolio in 1994 and increasing it in 1995. In addition, in 1994, the Company sold practically all appreciated fixed maturity investments, realizing $62 million in investment gains.
Prior to 1994, the Company experienced positive cash flow from operating activities. In 1994, the Company paid for the Northridge Earthquake losses with cash flow from operations, investment sales, loan proceeds and equity financing. For 1995, funds needed to pay these claims as well as Proposition 103 rebates came from normal operating cash flows, available cash on deposit, additional loan proceeds of $15 million and preferred stock pro- ceeds of $20 million. As of December 31, 1995, the Company had total cash of $50,609,000 and total investments at fair value of $1,127,112,000.
As of December 31, 1995, there was $224,950,000 of preferred stock out- standing, bearing interest at 9% per year payable quarterly, resulting in a dividend of $5,061,500 per quarter.
The Company also increased in 1995 its revolving credit line to $225 million, with interest obligations varying according to market condi- tions. As of December 31, 1995, the outstanding balance on the loan was $175 million. First quarter 1996 interest payments are estimated to be approximately $2,900,000.
Funds required by 20th Century Industries to pay dividends and meet its debt obligations are provided by the insurance subsidiaries. The ability of the insurance subsidiaries to pay dividends to the holding company is regu- lated by state law. Because of statutory regulations which require dividends to be paid from earned surplus, no dividends were paid by the subsidiaries in 1995. The Company expects to generate positive earned surplus early in 1996 and resume normal dividends from the insurance subsidiaries to service the debt and preferred dividend requirements.
The Company expects to have very small cash outlays for income taxes, specifically alternative minimum tax for the next two to three years. Until the net operating losses caused by the Northridge Earthquake are fully util- ized, the Company expects that cash outlays for income taxes will be less than income tax expense recorded in accordance with generally accepted accounting principles. The net operating loss carryforwards will expire in the year 2009.
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. The Company's insurance subsidiaries have sufficient capital to meet all RBC requirements.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of 20th Century Industries and subsidiaries at December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with gen- erally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic finan- cial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As described in Note 1, 20th Century Industries and subsidiaries adopted in 1994 the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As described in Note 4, 20th Century Industries and subsidiaries adopted in 1993 the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
DECEMBER 31, ------------------------------ 1995 1994 ---- ---- (Amounts in thousands) Investments: Fixed maturities - available-for- sale, at fair value $1,125,548 941,406 Equity securities, at fair value 1,564 768 ---------- ---------- Total investments - Note 2 1,127,112 942,174 Cash and cash equivalents 50,609 249,834 Accrued investment income 19,862 19,631 Premiums receivable 90,835 90,236 Reinsurance receivables and recoverables 48,314 2,737 Prepaid reinsurance premiums 28,823 1,237 Income taxes receivable - 74,064 Deferred income taxes - Note 4 206,230 276,570 Deferred policy acquisition costs - Note 3 10,481 14,776 Other assets 26,620 31,551 ---------- ----------
20TH CENTURY INDUSTRIES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER 31, ----------------------------- 1995 1994 ---- ---- (Amounts in thousands, except share data)
The accompanying financial statements include the accounts of 20th Century Industries and its wholly-owned subsidiaries, 20th Century Insurance Company and 21st Century Casualty Company (collectively, the Company). The Company is engaged in the sale of private passenger automobile insurance and personal excess liability policies in the State of California. The Company also has homeowner and condominium insurance, although this line is being run- off with all policies expiring in July 1997. All material intercompany accounts and transactions have been eliminated. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles which differ in some respects from those followed in reports to insurance regulatory authorities. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes. Actual results could differ from these estimates.
Fair values for fixed maturity and equity securities are based on quoted market prices. Unrealized investment gains and losses are credited or charged directly to stockholders' equity, net of any tax effect. When investment
Cash and cash equivalents include cash and short-term investments in demand deposits.
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 estimates of the ultimate net costs of settlement which are necessarily subject to the impact of future changes in economic and social conditions. Management believes that, given the inherent variability in any such estimate, the aggregate reserves are within a reasonable and acceptable range of adequacy. The methods of making such estimates and for establishing the resulting reserves are continually reviewed and updated and any adjustments resulting therefrom are reflected in earnings.
Policy acquisition costs, principally direct and indirect costs related to production of business, are deferred and amortized against the premiums earned.
The accompanying 1993 and 1994 financial statements have been reclassified to conform with the 1995 presentation.
The changes in unrealized gains (losses) for 1995 and 1994 total $73,285,000 and ($39,777,000), net of deferred income taxes of $39,461,000 and ($21,419,000), respectively.
The amortized cost, gross unrealized gains and losses, and fair values of fixed maturities as of December 31, 1995 and 1994, respectively, are as follows:
1996 $ 5,138 $ 5,201 1997 - 2000 120,561 126,126 2001 - 2005 492,272 515,480 2006 - 2015 455,860 477,496 2016 and after 1,190 1,245 ---------- ---------- Total $1,075,021 $1,125,548 ========== ==========
The following reflects the policy acquisition costs deferred for amortization against future income and the related amortization charged to income from operations, excluding certain amounts deferred and amortized in the same period:
1) The Company, as of December 31, 1995, has approximately 83% of its $1.1 billion investment portfolio invested in taxable securities compared to 76% at December 31, 1994. By converting the remainder of its investment portfolio from tax-exempt securities and investing new cash flow into taxable securities, the Company could increase its future taxable income.
2) The Company could reinsure outstanding loss reserves and thus eliminate the temporary difference related to the discounting of loss reserves for tax purposes.
The Company has a strong record of profitable operations. Except for the losses arising from the Northridge Earthquake, the Company has been profitable for each of the past 10 years. Over the last five years, the Company's combined ratio has been approximately 99% excluding the Northridge Earthquake, and investment earnings have averaged approximately $101 million a year over the same five year period. Historically, the Company has generated almost all of its profits from its automobile line of business. In accordance with the order by the California Department of Insurance, the Company is withdrawing from the homeowner, condominium and earthquake lines of business. As of July 23, 1995, the Company was out of the earthquake line of business and will be out of the homeowner and condominium line of business by July 23, 1997. This withdrawal will substantially reduce the Company's exposure to future earthquake catastrophes.
The Company believes that because of its historically strong earnings performance, return to profitability in 1995, and the tax planning strategies available, it is more likely than not that the Company will realize the benefit of the deferred tax asset, and therefore, no valuation allowance has been established.
The Company sponsors a non-contributory defined benefit pension plan (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. The Pension Plan's assets consist of high-grade fixed income securities and cash equivalents.
The Company also sponsors unfunded Supplemental Executive Retirement Plans (Supplemental Plan) which cover certain key employees, designated by the Board of Directors. The Supplemental Plan benefits are based on years of service and compensation during the last three years of employment, and are reduced by the benefit payable from the Pension Plan.
The net periodic pension cost for these plans reflected in the 1995, 1994 and 1993 Consolidated Statements of Operations is $3,147,000, $3,722,000, and $2,998,000, respectively. Accrued pension costs reflected in the Consolidated Balance Sheets at December 31, 1995 and 1994 are $5,637,000 and $4,713,000, respectively.
As a result of changes in estimates of insured events in prior years, the provision for losses and loss adjustment expenses decreased by $39,464,000, $84,453,000 and $62,986,000 in 1995, 1994 and 1993, respectively, due to a combination of improvements in the claims handling process, unanticipated decreases in frequency and random fluctuations in severity. The 1995 decrease in provision for insured events of prior years is affected by a $28 million net increase in losses related to the Northridge Earthquake.
Effective December 1995, the Company increased its reducing-revolver credit facility (the Facility) to an aggregate commitment of $225 million.
first $ 10,000,000 $7,750,000 $ 2,250,000 next $ 90,000,000 $4,500,000 $ 85,500,000
The Company has a homeowners' excess-of-loss reinsurance treaty with General Reinsurance Corporation. In this excess treaty, the reinsurer's limit is $650,000 in excess of the Company's retention of $300,000 per risk, subject to a maximum reinsurer's limit of $1,300,000 per occurrence. The Company has a quota share treaty for its Personal Excess Liability Policy business whereby it cedes 60% of its business.
Minimum rental commitments under the Company's lease obligations are as follows: 1996 $10,744,000 1997 10,477,000 1998 8,865,000 1999 7,963,000 2000 1,890,000 Thereafter 1,085,000
Rental expense charges to operations for the years ended December 31, 1995, 1994 and 1993 were $12,062,000, $11,694,000, and $11,259,000, respec- tively.
Stockholder's equity of the insurance subsidiaries on a statutory accounting basis at December 31, 1995 and 1994 was $358,474,000 and $207,018,000, respectively. Statutory net income (loss) for the insurance subsidiaries was $118,562,000, $(657,331,000) and $96,218,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
The plan provides for grants of common shares not to exceed 921,920 shares to be made to key employees as determined by the Key Employee Incentive Committee of the Board of Directors. At December 31, 1995, 313,474 common shares remain available for future grants. Upon issuance of grants of common shares under the plan, unearned compensation equivalent to the market value on the date of grant is charged to common stock and subsequently amortized in equal monthly installments over the five-year period of the grant.Amortization of unearned compensation was $550,000, $431,000 and $320,000 in 1995, 1994 and 1993, respectively. At December 31, 1995 and 1994, unearned compensation, net of amortization, was $605,000 and $1,153,000, respectively. The common shares are restricted for 5 years retroactive to the first day of the year of grant. Restrictions are removed on 20% of the shares of each employee on January 1 of each of the 5 years following the year of grant. A summary of grants outstanding under the plan from 1993 through 1995 is as follows:
On May 25, 1995, the shareholders of the Company approved the 1995 Stock Option Plan (the "Plan"), which provides for the grant of stock options to key employees and non-employee directors of the Company. The aggregate number of common shares issued and issuable under the Plan shall not exceed 1,000,000. At December 31, 1995, options to purchase 180,000 common shares have been granted with an average exercise price of $12.56 per share.
By the second quarter of 1995, the Company had refunded $46 million to customers specified in the settlement, representing an average payment per household of $80.00, approximately 7.5 percent of premiums paid between November 8, 1988 and November 7, 1989. In accordance with the settlement, the Company offset the increase in earthquake losses associated with the 1994 Northridge Earthquake with $32 million in funds previously set aside for potential Proposition 103 rebates. In addition as part of the settlement, the Company obtained an additional $15 million from the existing bank credit facility and $20 million from the issuance of 20,000 additional shares of preferred stock to AIG ( see Notes 7 and 14, respectively ) and contributed $30 million to the surplus of the insurance subsidiaries.
The Northridge, California Earthquake, which occurred on January 17, 1994, significantly affected the operating results and the financial position of the Company. Since the event occurred, the Company and other members of the property and casualty insurance industry have revised their estimates of claim costs and related expenses several times.
As part of the Investment Agreement, a 10% quota share reinsurance agreement with an AIG affiliate applicable to each of the Company's insurance subsidiaries' entire book of business was implemented on January 1, 1995 (see Note 8).
The first quarter 1995 net loss was impacted by $14.2 million in pre-tax losses resulting from a series of severe storms as well as $6.0 million of catastrophe reinsurance premiums related to the additional reinsurance coverage purchased in order to provide reinsurance coverage for the declining earthquake exposure. The second and fourth quarters of 1995 were adversely affected by increases in the net loss for the Northridge Earthquake of $11.7 million and $6.5 million, respectively.
The following table presents premium revenue and underwriting profit (loss) for the Company's insurance lines on a GAAP basis:
In 1994, both the Auto and Homeowner and Condominium lines experienced an underwriting loss due to the high level of claims incurred as a result of the January 17 Northridge Earthquake and the cost of the Proposition 103 rollback order.