-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FTNx7fPyy7LB562RhV8oeztOblz1HIbLy38rQdoYkhYevmVqQGmTJzUsHIwCQ3Np 5nrHjJVevk6MVp4TnMRYCg== 0000003642-99-000011.txt : 19990817 0000003642-99-000011.hdr.sgml : 19990817 ACCESSION NUMBER: 0000003642-99-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLCITY INSURANCE CO /NY/ CENTRAL INDEX KEY: 0000003642 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 132530665 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07411 FILM NUMBER: 99693265 BUSINESS ADDRESS: STREET 1: 335 ADAMS STREET CITY: NEW YORK STATE: NY ZIP: 11201 BUSINESS PHONE: 7184224383 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission File Number 1-7411 ALLCITY INSURANCE COMPANY (Exact name of registrant as specified in its charter) New York 13-2530665 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 335 Adams Street, Brooklyn, N.Y 11201-3731 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (718)422-4000 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 [ ] On August 9, 1999, there were 7,078,625 shares of Common Stock outstanding. ALLCITY INSURANCE COMPANY INDEX PART I Financial Information PAGE Item 1. Interim Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 1 Consolidated Statements of Operations - Six months ended June 30, 1999 and June 30, 1998 2 Consolidated Statements of Operations - Three months ended June 30, 1999 and June 30, 1998 3 Consolidated Statements of Cash Flows - Six months ended June 30, 1999 and June 30, 1998 4 Consolidated Statements of Changes in Shareholders' Equity - Six months ended June 30, 1999 and June 30, 1998 . 5 Notes to Interim Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Interim Results of Operations . 8-12 PART II Other Information Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K.. 13 Signature Page 14 CONSOLIDATED BALANCE SHEETS ALLCITY INSURANCE COMPANY AND SUBSIDIARY (In thousands, except share and par value amounts)
June 30, December 31, 1999 1998 ASSETS (Unaudited) Investments: Available for sale at fair value (amortized cost of $180,779 in 1999 and $181,214 in 1998) $177,957 $181,905 Held to maturity at amortized cost (fair value of $484 in 1999 and $498 in 1998) 494 502 Short-term 21,022 20,186 Other invested assets 32,525 31,446 TOTAL INVESTMENTS 231,998 234,039 Cash 3,035 390 Agents' balances, less allowance for doubtful accounts ($1,870 in 1999 and $1,817 in 1998) 8,793 10,015 Accrued investment income 3,139 3,662 Reinsurance balances receivable 265,497 295,994 Prepaid reinsurance premiums 28,592 37,691 Deferred policy acquisition costs 4,476 5,365 Deferred income taxes 12,574 11,101 Due from affiliates - 3,010 Other assets 4,169 4,437 TOTAL ASSETS $562,273 $605,704 LIABILITIES Unpaid losses $342,298 $382,109 Unpaid loss adjustments expenses 44,606 52,123 Unearned premiums 50,794 63,972 Drafts payable 1,912 3,912 Due to affiliates 22,685 - Unearned service fee income 1,522 2,240 Reserve for servicing carrier claim exp. 1,144 1,730 Reinsurance balances payable 660 885 Other liabilities 5,503 5,233 Surplus note 15,571 15,300 TOTAL LIABILITIES 486,695 527,504 SHAREHOLDERS' EQUITY Common stock, $1.00 par value; 7,368,420 shares authorized; 7,078,625 shares issued and outstanding in 1999 and 1998 7,079 7,079 Additional paid-in-capital 9,331 9,331 Accumulated other comprehensive (loss)/ income, net of deferred taxes of $(988) and $242 in 1999 and 1998, respectively (1,834) 449 Retained earnings 61,002 61,341 TOTAL SHAREHOLDER' EQUITY 75,578 78,200 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $562,273 $605,704
[S] See Notes to Interim Consolidated Financial Statements 1 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) ALLCITY INSURANCE COMPANY AND SUBSIDIARY (In thousands, except share and per share amounts)
Six Months Ended June 30, 1999 1998 REVENUES Net earned premiums $24,978 $36,158 Net investment income 6,179 7,687 Service fee income 1,166 1,721 Net realized securities (losses)/ gains (472) 324 Other income 221 307 32,072 46,197 LOSSES AND EXPENSES Losses 17,686 32,327 Loss adjustment expenses 4,464 3,881 Other underwriting expenses less deferrals of $4,589 in 1999 and $6,857 in 1998 4,694 3,839 Amortization of deferred policy acquisition costs 5,479 6,992 Interest on surplus note 271 298 32,594 47,337 LOSS BEFORE FEDERAL INCOME TAXES (522) (1,140) FEDERAL INCOME TAXES Current tax expense/(benefit) 60 (377) Deferred tax benefit (243) (22) (183) (399) NET LOSS $ (339) $ (741) Per share data, based on 7,078,625 average shares outstanding in 1999 and 1998: BASIC AND FULLY DILUTED LOSS PER SHARE $ (0.05) $ (0.10)
[S] See Notes to Interim Consolidated Financial Statements. 2 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) ALLCITY INSURANCE COMPANY AND SUBSIDIARY (In thousands, except share and per share amounts)
Three Months Ended June 30, 199 1998 REVENUES Net earned premiums $11,239 $17,314 Net investment income 3,032 3,825 Service fee income 566 660 Net realized securities (losses)/gains (264) 82 Other income 109 148 14,682 22,029 LOSSES AND EXPENSES Losses 8,345 16,642 Loss adjustment expenses 2,021 1,464 Other underwriting expenses less deferrals of $1,657 in 1999 and $2,868 in 1998 2,427 1,738 Amortization of deferred policy acquisition costs 2,423 3,312 Interest on surplus note 122 182 15,338 23,338 LOSS BEFORE FEDERAL INCOME TAXES (656) (1,309) FEDERAL INCOME TAXES Current tax benefit (15) (275) Deferred tax benefit (215) (183) (230) (458) NET LOSS $ (426) $ (851) Per share data, based on 7,078,625 average shares outstanding in 1999 and 1998: BASIC AND FULLY DILUTED LOSS PER SHARE $ (0.06) $ (0.12)
See Notes to Interim Consolidated Financial Statements. 3 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ALLCITY INSURANCE COMPANY AND SUBSIDIARY (In thousands)
Six Months Ended June 30, 1999 1998 NET CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (339) $ (741) Adjustment to reconcile net loss to net cash provided by/(used for) operations: Benefit from deferred income taxes (243) (22) Amortization of deferred policy acquisition costs 5,479 6,992 Provision for doubtful accounts 53 (55) Net realized securities losses/(gains) 472 (324) Policy acquisition costs incurred and deferred (4,589) (6,857) Net changes in: Agents' balances 1,169 (1,916) Reinsurance balances receivable 30,497 (7,605) Prepaid reinsurance premiums 9,099 5,751 Unpaid losses and loss adjustment expenses (47,328) 4,084 Unearned premiums (13,178) (5,930) Drafts payable (2,000) (883) Due to affiliates 25,695 4,884 Unearned service fees (718) (553) Reserve for servicing carrier claim expense (586) (911) Reinsurance balances payable (225) (1,982) Other 2,149 (836) NET CASH PROVIDED BY/(USED FOR) OPERATING ACTIVITIES 5,407 (6,904) NET CASH FLOWS FROM INVESTING ACTIVITIES Available for sale: Acquisition of fixed maturities (144,191) (85,674) Proceeds from sale of fixed maturities 134,680 (30,553) Proceeds from maturities of fixed maturities 8,664 125,771 Net change in other invested assets (1,079) 9,835 Net change in short-term investments (836) (7,322) NET CASH (USED FOR)/PROVIDED BY INVESTING ACTIVITIES (2,762) 12,057 NET INCREASE IN CASH 2,645 5,153 Cash, at beginning of period 390 2,863 Cash, at the end of period $ 3,035 $ 8,016
See Notes to Interim Consolidated Financial Statements. 4 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) ALLCITY INSURANCE COMPANY AND SUBSIDIARY (In thousands, except par value amounts)
Accumulated Common Other Stock Additional Comprehensive $1 Par Paid-in Income/ Retained Value Capital (Loss) Earnings Total Balance, January 1, 1998 $7,079 $9,331 $ 917 $60,837 $78,164 Comprehensive loss: Net loss (741) (741) Other comprehensive income/(loss): Net change in unrealized gains/(losses) on investments (net of deferred tax of $457) 849 849 Less: reclassification of net securities gains included in net loss (net of tax of $113) (211) (211) Comprehensive loss (103) Balance, June 30, 1998 $7,079 $9,331 $1,555 $60,096 $78,061 Balance, January 1, 1999 $7,079 $9,331 $ 449 $61,341 $78,200 Comprehensive loss: Net loss (339) (339) Other comprehensive income/(loss): Net change in unrealized gains/(losses) on investments(net of deferred tax benefit of $1,363) (2,531) (2,531) Less: reclassification of net securities losses included in net loss (net of tax benefit of $134) 248 248 Comprehensive loss (2,622) Balance, June 30, 1999 $7,079 $9,331 $(1,834) $61,002 $75,578
See Notes to Interim Consolidated Financial Statements. 5 ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. The unaudited interim consolidated financial statements, which reflect all adjustments (consisting only of normal recurring items) that management believes necessary to fairly present interim results of operations, should be read in conjunction with the Notes to Consolidated Financial Statements (including the Summary of Significant Accounting Policies) included in the Company's audited consolidated financial statements for the year ended December 31, 1998, which are included in the Company's Annual Report filed on Form 10-K for such year (the "1998 10-K"). Results of operations for interim periods are not necessarily indicative of annual results of operations. The consolidated balance sheet at December 31, 1998 was extracted from the audited annual financial statements and does not include all disclosures required by generally accepted accounting principles for annual financial statements. 2. Certain amounts for prior periods have been reclassified to conform with the 1999 presentation. 3. In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", ("SFAS No. 131"). At the time the Company adopted SFAS No. 131, the Company had identified three reportable segments: 1) automobile lines; 2) commercial lines; and 3) miscellaneous and personal lines. Beginning in 1999, the Company's business was reorganized into three segments: 1) Personal Lines and Residual Markets; 2) Mid-Market; and 3) Small Business. Each of these segments has separate management teams responsible for all marketing, sales and underwriting decisions within their units. The reorganization is designed to provide a greater degree of accountability for underwriting results and to create a closer relationship with agents and customers of the Company. The Personal Lines and Residual Market segment will primarily concentrate on personal automobile and homeowners insurance; the Mid-Market segment will focus on commercial auto, commercial package and workers' compensation insurance for larger accounts; and the Small Business segment will primarily focus on commercial package products for small businesses. Further segment information is provided in Note 4 in this Report. 6 In January 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for Insurance-related Assessments" ("SOP 97-3"), which is effective for fiscal years beginning after December 15, 1998, and provides guidance for determining when an insurance company should recognize a liability for guaranty-fund and other insurance related assessments and how to measure that liability. In 1999, the Company adopted SOP 97-3; the financial position and operating results of the Company have not been materially affected. 4. Selected information concerning the Company's segments, as restated (see Note 3 above) for the three and six month periods ended June 30, 1999 and 1998 is as follows (in thousands):
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 Net Earned Premiums Personal Lines & Residual Markets $ 6,078 $10,246 $13,462 $21,380 Mid-Market 3,631 5,239 7,989 11,483 Small Business 1,530 1,829 3,527 3,295 Total Net Earned Premiums $11,239 $17,314 $24,978 $36,158 Losses Personal Lines & Residual Markets $ 4,484 $ 9,420 $ 9,555 $18,115 Mid-Market 3,005 6,145 6,241 11,813 Small Business 856 1,077 1,890 2,399 Total Losses $ 8,345 $16,642 $17,686 $32,327 Loss Adjustment Expenses Personal Lines & Residual Markets $ 1,085 $ 1,150 $ 2,450 $ 2,912 Mid-Market 719 136 1,579 604 Small Business 217 178 435 365 Total Loss Adjustment Expenses $ 2,021 $ 1,464 $ 4,464 $ 3,881
7 Item 2.: Management's Discussion and Analysis of Financial Condition and Interim Results of Operations The following should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 1998 10-K. LIQUIDITY AND CAPITAL RESOURCES During each of the six month periods ended June 30, 1999 and 1998 the Company operated at a net loss. For the six month period ended June 30, 1999, net cash was provided by operations principally due to the timing of payments in connection with the settlement of balances payable to Empire Insurance Company under the terms of the intercompany pooling agreement. For the six month period ended June 30, 1998, net cash was used for operations principally due to decreased premium writings from tighter underwriting standards, reunderwriting, competition, and a decline in the number of assigned risk automobile contracts under which the Company acquires assigned risk business from other insurance companies combined with a depopulation of the related assigned risk pools. For the period ended June 30, 1999, cash provided by operations was principally invested in short-term investments and investments available for sale while cash required to fund operations for the comparable 1998 period was provided from the maturity of investments available for sale and short-term investments as well as the sale of fixed maturity securities. At June 30, 1999 and 1998, the yield on the Company's fixed maturities portfolio was 5.6% and 5.9%, respectively, with an average maturity of 3.3 years and 3.4 years, respectively. At June 30, 1999, a significant portion of the Company's investment portfolio is invested in U.S. Government and its agencies and other investment grade corporate and industrial issues. The Company maintains cash, short-term and readily marketable securities and anticipates that the cash flow generated from investment income and the maturities and sales of short-term investments and fixed maturities will be sufficient to satisfy its anticipated cash needs. The Company does not presently anticipate paying dividends in the near future and believes it has sufficient capital to meet its currently anticipated level of operations. 8 RESULTS OF OPERATIONS-SIX AND THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX AND THREE MONTHS ENDED JUNE 30, 1998. Net earned premium revenues were $24,978,000 and $36,158,000 for the six month periods ended June 30, 1999 and 1998, respectively, and $11,239,000 and $17,314,000 for the three month periods ended June 30, 1999 and 1998, respectively. The decrease in net earned premiums for these periods principally relates to a decline in the number of assigned risk automobile pool contracts acquired due to competition and the depopulation of the assigned risk automobile pools, as well as a reduction in certain personal and commercial lines of business, principally voluntary private passenger, commercial automobile and commercial package policies, due to tighter underwriting standards, reunderwriting, and increased competition. Net investment income was $6,179,000 and $7,687,000 for the six month periods ended June 30, 1999 and 1998, respectively, and $3,032,000 and $3,825,000 for the three month periods ended June 30, 1999 and 1998, respectively. The decline in both periods was principally the result of a lower overall invested asset base principally due to lower premium volume, and lower current period yields due to current market conditions. Service fee income was $1,166,000 and $1,721,000 for the six month periods ended June 30, 1999 and 1998, respectively, and $566,000 and $660,000 for the three month periods ended June 30, 1999 and 1998, respectively. The decreases in both periods are largely the result of a decline in the number of assigned risk automobile pool contracts acquired by the Company due to competition combined with lower premium volume due to continued depopulation of the assigned risk pools. Losses incurred were $17,686,000 and $32,327,000 for the six month periods ended June 30, 1999 and 1998, respectively, and $8,345,000 and $16,642,000 for the three month periods ended June 30, 1999 and 1998, respectively. The decreases in both periods are primarily a result of reserve strengthening recorded in 1998 for prior accident years and lower current accident year loss ratios resulting from product mix and improved underwriting. 9 Other underwriting expenses and the amortization of deferred policy acquisition costs were $10,173,000 and $10,831,000 for the six month periods ended June 30, 1999 and 1998, respectively, and $4,850,000 and $5,050,000 for the three month periods ended June 30, 1999 and 1998, respectively. The net decreases in both periods primarily relates to the decline in premium revenue. Year 2000 and Information Technology Systems The Company continues to evaluate its information technology systems to determine the potential impact of the year 2000. The year 2000 issue is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. As a result, before the end of 1999, computer hardware and software may need to be upgraded with new hardware and software which can distinguish 21st century dates from 20th century dates. As more fully described in the 1998 10-K, since 1996, the Company has been evaluating its year 2000 readiness. At that time, the Company began to evaluate its information technology systems and their ability to support future business needs. This led to a decision to acquire new policy management and accounting systems. These systems provide enhanced functionality and improved processing for underwriting, claims, billing, collection, reinsurance, reporting and accounting and are designed to be year 2000 compliant. The Company's policy management system has been successfully migrated into production for all new and renewal business. The Company's accounting system was also successfully migrated into production during the first quarter of 1999. As of June 30, 1999, substantially all of the Company's computer equipment, including required upgrades, is expected to be fully year 2000 compliant. The Company's primary focus during the remainder of 1999 is to complete the migration of the Company's non-compliant historical claims system. The Company anticipates that it will transfer this information to a year 2000 compliant system during the fourth quarter of 1999, while maintaining the existing system until the conversion is successfully completed. If the conversion is not successful, the Company will maintain this information in a simplified database file and in hard copy. 10 Although a significant portion of the Company's current systems are year 2000 compliant, the Company formed a year 2000 readiness team to further increase the Company's state of readiness. The team, which meets regularly, is evaluating a contingency plan to address any actual failures that may occur thereby minimizing any outages in operational functions. The Company expects to finalize this plan during the third quarter of 1999. The Company has made inquiries of third parties with whom it has material relationships as to the year 2000 compliance of such third parties. Many of such parties have reported plans to be fully compliant by the end of 1999 and most had reported substantial progress at the end of 1998. However, at this time the Company cannot predict the effect of the year 2000 issue on its material third parties or the impact any deficiency in the year 2000 readiness of such parties could have on the Company. Through June 30, 1999, expenses incurred by the Company in connection with the year 2000 issue (excluding expenses related to the Company's acquisition of new systems, which was not motivated by year 2000 concerns) did not exceed $100,000. Based upon current information, the Company does not expect that the year 2000 issue will have a material effect on its consolidated financial position or consolidated results of operations. Cautionary Statement for Forward-Looking Information Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Interim Operations may contain forward-looking statements. Such forward-looking statements are made pursuant to the safe- harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may relate, but are not limited , to projections of revenues, income or loss, capital expenditures, fluctuations in insurance reserves, plans for growth and future operations (including year 2000 compatibility), competition and regulation as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, the words "estimates", "expects", "anticipates", "believes", "plans", "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and 11 uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The factors that could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Company's public filings, including general economic and market conditions, changes in domestic laws, regulations and taxes, changes in competition and pricing environments, regional or general changes in asset valuation, the occurrence of significant natural disasters, the inability to reinsure certain risks economically, the adequacy of loss reserves, prevailing interest rate levels, weather related conditions that may affect the Company's operations, the difficulty in identifying hardware and software that may not be year 2000 compliant, the lack of success of third parties to adequately address the year 2000 issue, vendor delays and technical difficulties affecting the Company's ability to upgrade or replace its hardware and/or software for year 2000 compliance, and changes in composition of the Company's assets and liabilities through acquisitions or divestitures. Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this Management's Discussion and Analysis of Financial Condition and Results of Interim Operations or to reflect the occurrence of unanticipated events. 12 Part II - Other Information Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K a) Exhibits The following exhibit is filed herewith: Exhibit Number Description of Document 27 Financial Data Schedule b) Report on Form 8-K There were no reports on Form 8-K filed for the three and six month periods ended June 30, 1999. 13 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALLCITY INSURANCE COMPANY Registrant Date: August 13, 1999 By: /s/Francis M. Colalucci Francis M. Colalucci Executive Vice President, CFO and Treasurer (Principal Financial and Accounting Officer) 14 -----END PRIVACY-ENHANCED MESSAGE-----