SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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.)
45 Main 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 November 11, 2002 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 - September 30, 2002 and
December 31, 2001........................................................................................ 1
Consolidated Statements of Operations - Nine months ended
September 30, 2002 and 2001.............................................................................. 2
Consolidated Statements of Operations - Three months ended
September 30, 2002 and 2001.............................................................................. 3
Consolidated Statements of Cash Flows - Nine months
ended September 30, 2002 and 2001 ....................................................................... 4
Consolidated Statements of Changes in Shareholders' Equity -
Nine months ended September 30, 2002 and 2001............................................................ 5
Notes to Interim Consolidated Financial Statements ...................................................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Interim Results of Operations..................................................... 7
ITEM 4. Controls and Procedures......................................................................... 13
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K................................................................ 14
Signature Page........................................................................................... 15
i
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001 (In thousands, except share and per
share amounts)
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
(Unaudited)
ASSETS
Investments:
Fixed maturities
Available for sale (amortized cost of
$34,713 in 2002 and $23,872 in 2001) $ 35,352 $ 24,175
Held to maturity (fair value
of $489 in 2001) - 480
Equity securities available for sale - 429
Short-term 73,186 98,467
Other invested assets 6,205 6,088
------- -------
TOTAL INVESTMENTS 114,743 129,639
Cash 40 36
Agents' balances, less allowance for
doubtful accounts ($150 in 2002 and
$837 in 2001) 1,267 2,873
Accrued investment income 412 464
Reinsurance balances receivable 126,903 160,713
Prepaid reinsurance premiums 729 3,785
Due from affiliates 3,853 -
Other assets 2,375 4,730
------- -------
TOTAL ASSETS $250,322 $302,240
======= =======
LIABILITIES
Unpaid losses $163,425 $211,254
Unpaid loss adjustment expenses 26,491 32,037
Unearned premiums 1,899 7,215
Due to affiliates - 9,713
Due to investment brokers 24,864 -
Reinsurance balances payable 2,244 949
Other liabilities 3,213 8,054
Surplus note 7,166 7,114
------- -------
TOTAL LIABILITIES 229,302 276,336
------- -------
SHAREHOLDERS' EQUITY
Common stock, $1 par value: 7,368,420
shares authorized; 7,078,625 shares issued
and outstanding in 2002 and 2001 7,079 7,079
Additional paid-in capital 9,331 9,331
Accumulated other comprehensive income 639 732
Retained earnings 3,971 8,762
------- -------
TOTAL SHAREHOLDERS' EQUITY 21,020 25,904
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $250,322 $302,240
======= =======
See Notes to Interim Consolidated Financial Statements.
1
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the nine months ended September 30, 2002 and 2001
(In thousands, except share and per share amounts)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2002 2001
---- ----
REVENUES
Premiums earned $ 3,727 $14,949
Net investment income 2,341 7,135
Net securities gains 1,385 1,463
Other income 38 107
------- --------
7,491 23,654
------- --------
LOSSES AND EXPENSES
Losses 2,465 25,017
Loss adjustment expenses 3,312 7,928
Other underwriting expenses, less
deferrals of $0 in 2002
and $1,783 in 2001 3,885 4,380
Amortization of deferred policy
acquisition costs - 4,818
Interest on surplus note 249 424
------- --------
9,911 42,567
------- --------
LOSS BEFORE FEDERAL INCOME TAXES (2,420) (18,913)
------- --------
FEDERAL INCOME TAXES
Current expense/(benefit) - -
Deferred expense/(benefit) - -
------- --------
- -
------- --------
NET LOSS $(2,420) $(18,913)
======= ========
Per share data, based on 7,078,625
average shares outstanding in 2002
and 2001
BASIC AND DILUTED LOSS PER SHARE $ (0.34) $ (2.67)
======= ========
CASH DIVIDEND PER SHARE $ 0.335 $ -
======= ========
See Notes to Interim Consolidated Financial Statements.
2
ALLCITY INSURANCE COMPANY AND SUBSIDIARYCONSOLIDATED STATEMENTS OF
OPERATIONS (UNAUDITED) For the three months ended September 30, 2002 and
2001(In thousands, except share and per share amounts)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------
2002 2001
REVENUES
Premiums earned $ 673 $ 3,062
Net investment income 605 2,093
Net securities gains 1,338 447
Other income 14 23
------- -------
2,630 5,625
------- -------
LOSSES AND EXPENSES
Losses 704 6,254
Loss adjustment expenses 691 1,853
Other underwriting expenses, less
deferrals of $0 in 2002 and 2001 1,593 1,256
Amortization of deferred policy
acquisition costs - -
Interest on surplus note 83 118
------- -------
3,071 9,481
------- -------
LOSS BEFORE FEDERAL INCOME TAXES (441) (3,856)
FEDERAL INCOME TAXES
Current expense/(benefit) - -
Deferred expense/(benefit) - -
- -
NET LOSS $ (441) $(3,856)
========= ========
Per share data, based on 7,078,625
average shares outstanding in 2002
and 2001
BASIC AND DILUTED LOSS PER SHARE $ (0.06) $ (0.54)
========= ========
CASH DIVIDEND PER SHARE $ 0.335 $ _
========= ========
See Notes to Interim Consolidated Financial Statements.
3
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended September 30, 2002 and 2001
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2002 2001
---- ----
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,420) $(18,913)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Amortization of deferred policy
acquisition costs - 4,818
Provision for doubtful accounts (687) (630)
Net securities gains (1,385) (1,463)
Policy acquisition costs incurred
and deferred - (1,783)
Net change in:
Agents' balances 2,293 4,607
Reinsurance balances receivable 33,810 (3,960)
Prepaid reinsurance premiums 3,056 9,972
Unpaid losses and loss adjustment
expenses (53,375) (818)
Unearned premiums (5,316) (18,676)
Due(from)to affiliates (13,566) 7,890
Reinsurance balances payable 1,295 3,666
Other, net (1,775) 1,478
NET CASH USED FOR OPERATING ACTIVITIES (38,070) (13,812)
-------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed maturities (20,831) (62,829)
Net change in other invested assets (117) 7,370
Proceeds from sale of fixed maturities 8,004 88,338
Proceeds from maturities of fixed
maturities 3,441 20,934
Net change in short-term investments,
including amounts due investment brokers 50,145 (40,069)
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 40,642 13,744
-------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders (2,371) -
Interest paid on surplus note (197) -
-------- --------
NET CASH USED FOR FINANCING ACTIVITIES (2,568) -
-------- --------
NET INCREASE (DECREASE) IN CASH 4 (68)
Cash, at beginning of period 36 77
Cash at the end of period $ 40 $ 9
======== ========
See Notes to Interim Consolidated Financial Statements.
4
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
For the nine months ended September 30, 2002 and 2001
(In thousands, except par value)
ACCUMULATED
COMMON OTHER
STOCK ADDITIONAL COMPREHENSIVE
$1 PAR PAID-IN INCOME/ RETAINED
VALUE CAPITAL (LOSS) EARNINGS TOTAL
----- ------- ------ -------- -----
Balance, January 1, 2001 $7,079 $9,331 $ 571 $ 26,810 $ 43,791
Comprehensive loss:
Net loss (18,913) (18,913)
Other comprehensive income(loss):
Unrealized holding gains
arising during the period
(net of deferred tax
of $0) 1,795 1,795
Less: reclassification of
net securities gains
included in net loss
(net of deferred tax of $0) (1,220) (1,220)
--------
Comprehensive loss (18,338)
------- ------- -------- --------- --------
Balance, September 30, 2001 $ 7,079 $ 9,331 $ 1,146 $ 7,897 $ 25,453
======= ======= ======== ========= ========
Balance, January 1, 2002 $ 7,079 $ 9,331 $ 732 $ 8,762 $ 25,904
Dividends paid to shareholders (2,371) (2,371)
Comprehensive loss:
Net loss (2,420) (2,420)
Other comprehensive income(loss):
Unrealized holding gains
arising during the period
(net of deferred tax
of $0) 370 370
Less: reclassification of
net securities gains
included in net loss
(net of deferred tax of $0) (463) (463)
--------
Comprehensive loss (2,513)
------- ------- -------- --------- --------
Balance, September 30, 2002 $ 7,079 $ 9,331 $ 639 $ 3,971 $ 21,020
======= ======= ======== ========= ========
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, 2001 which are included in
the Company's Annual Report filed on Form 10-K for such year (the "2001
10-K"). Results of operations for interim periods are not necessarily
indicative of annual results of operations. The consolidated balance
sheet at December 31, 2001 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. During the past several years, the Company and its parent company,
Empire Insurance Company ("Empire"), (collectively referred to as "the
Group"), experienced poor underwriting results and adverse reserve
development in all of its lines of business. During 2001, the Group
explored its options for developing a new business model and strategy.
After evaluating these options, the Group announced in December 2001
that it had determined that it was in the best interest of its
shareholders and policyholders to commence an orderly liquidation of all
of the Group's operations. The Group will only accept business that it
is obligated to accept by contract or New York insurance law; it will
not engage in any other business activities except for its claims runoff
operations. The voluntary liquidation of its operations is expected to
be substantially complete by 2005. Given the Group's and the Company's
current financial condition, the expected costs to be incurred during
the claims runoff period, and the inherent uncertainty over ultimate
claim settlement values, no assurance can be given that the Company's
shareholders will be able to receive any value at the conclusion of the
voluntary liquidation of its operations.
3. In the quarter ended September 30, 2002, the Company paid to its
shareholders a $0.335 per share cash dividend (the "Dividend")
aggregating $2,371,340. The Dividend had the effect of increasing the
stand-alone statutory surplus of Empire by approximately $2,000,000. At
September 30, 2002, Empire's stand-alone statutory surplus exceeded the
minimum statutory surplus requirement of $3,300,000 by approximately
$4,500,000. In the event that Empire's stand-alone statutory surplus
declines below the minimum in the future, no assurance can be given that
material adverse regulatory action will not be taken against Empire
(which could adversely affect the Company's ability to collect its
reinsurance balances receivable from Empire, the outstanding balance of
which was approximately $99,000,000 at September 30, 2002) or the
Company.
4. The New York State Department of Taxation and Finance (the "Department
of Taxation and Finance") is in the process of auditing the Group's New
York Franchise tax returns for the years 1992 through 1996 and has
asserted that the Company and Empire should have filed their returns on
a combined basis, rather than on a separate company basis. If the
Company and Empire were required to file on a combined basis, the Group
would be required to pay an additional franchise tax and related
surcharge tax of approximately $5,700,000, plus interest, for the
periods in question. The Group has informed the Department of Taxation
and Finance that it does not agree with its position on this matter, and
is in the process of submitting additional information. The Company does
not believe it is probable that it will sustain a loss as a result of
this assertion and therefore has not made any loss provision in its
financial statements. If the Group does not prevail in this matter, the
Company's share of this additional tax would be approximately
$1,700,000, plus interest pursuant to the terms of the pooling
agreement.
6
5. Empire and the Company have a financial dispute with a company that
previously acted as a third party claims administrator for the Group
("Former Claims Administrator"). The Group received a $1,736,000 claim
for unpaid services from the Former Claims Administrator that the Group
believes it is not obligated to pay because the services provided by the
Former Claims Administrator were deficient and resulted in damages to
the Group in excess of the $1,736,000 claim. The Group is currently
evaluating its options to resolve this dispute, including possibly
litigating the matter. The Group does not believe it is probable that it
will have to pay the $1,736,000 to the Former Claims Administrator,
however, if the Group does not prevail in this matter, the Company's
share of this payment, which has not been accrued, would be $520,800
pursuant to the terms of the pooling agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF INTERIM 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 2001 10-K.
LIQUIDITY AND CAPITAL RESOURCES
During the past several years, the Group experienced poor underwriting
results and adverse reserve development in all of its lines of business. During
2001, the Group explored its options for developing a new business model and
strategy. After evaluating these options, the Group announced in December 2001
that it had determined that it was in the best interest of its shareholders and
policyholders to commence an orderly liquidation of all of its operations. The
Group will only accept business that it is obligated to accept by contract or
New York insurance law; it will not engage in any other business activities
except for its claims runoff operations. The voluntary liquidation of its
operations is expected to be substantially complete by 2005. Given the Group's
and the Company's current financial condition, the expected costs to be incurred
during the claims runoff period, and the inherent uncertainty over ultimate
claim settlement values, no assurance can be given that the Company's
shareholders will be able to receive any value at the conclusion of the
voluntary liquidation of its operations.
For the nine month periods ended September 30, 2002 and 2001, net cash
was used for operations principally as a result of a decrease in premiums
written and the payment of claims and operating expenses. As a result of its
decision to conduct an orderly liquidation of all of its operations, the Company
expects to report a net use of cash from operations resulting primarily from the
payment of claims and other expenses in excess of revenues generated for the
foreseeable future. During 2001, the Company replaced a significant portion of
its fixed maturities investment portfolio with shorter-term investments in order
to shorten its duration to match its anticipated cash needs.
At September 30, 2002 and 2001, the yield of the Company's fixed
maturities portfolio was 1.9% and 3.2%, respectively, with an average maturity
of 0.6 years and 0.6 years, respectively. Additionally, the Company has a
diversified investment portfolio of securities, approximately 95% of which is
rated "investment grade" by established bond rating agencies or issued or
guaranteed by the U.S. Treasury or by governmental agencies.
7
During the nine months ended September 30, 2002 and 2001, the Company
sold certain securities to meet short-term cash flow needs and realized capital
gains of $1,385,000 and $1,463,000 in the 2002 and 2001 periods, respectively.
The Company will continue to use the cash flow generated from its investment
portfolio, including investment income and proceeds generated from the maturity
and sale of investments, and from collection of its reinsurance receivables, a
substantial portion of which is due from its parent, Empire, to settle its loss
and loss adjustment expense ("LAE") reserves. At September 30, 2002, these
assets (less balances due to investment brokers for securities acquired in
September 2002 and settled in October 2002) totaled $217,234,000 as compared to
the Company's loss and LAE reserves of $189,916,000. The Company expects to
settle approximately 55% of these liabilities by the end of 2004. Additionally,
the Company has not experienced any material default in the payment of
reinsurance claims due from its reinsurance providers.
In the quarter ended September 30, 2002, the Company paid to its
shareholders a $0.335 per share cash dividend (the "Dividend") aggregating
$2,371,340. The Dividend had the effect of increasing the stand-alone statutory
surplus of Empire by approximately $2,000,000. At September 30, 2002, Empire's
stand-alone statutory surplus exceeded the minimum statutory surplus requirement
of $3,300,000 by approximately $4,500,000. In the event that Empire's
stand-alone statutory surplus declines below the minimum in the future, no
assurance can be given that material adverse regulatory action will not be taken
against Empire (which could adversely affect the Company's ability to collect
its reinsurance balances receivable from Empire, the outstanding balance of
which was approximately $99,000,000 at September 30, 2002) or the Company.
The New York State Department of Taxation and Finance (the "Department
of Taxation and Finance") is in the process of auditing the Group's New York
Franchise tax returns for the years 1992 through 1996 and has asserted that the
Company and Empire should have filed their returns on a combined basis, rather
than on a separate company basis. If the Company and Empire were required to
file on a combined basis, the Group would be required to pay an additional
franchise tax and related surcharge tax of approximately $5,700,000, plus
interest, for the periods in question. The Group has informed the Department of
Taxation and Finance that it does not agree with its position on this matter,
and is in the process of submitting additional information. The Company does not
believe it is probable that it will sustain a loss as a result of this assertion
and therefore has not made any loss provision in its financial statements. If
the Group does not prevail in this matter, the Company's share of this
additional tax would be approximately $1,700,000, plus interest pursuant to the
terms of the pooling agreement.
8
INTERIM RESULTS OF OPERATIONS-NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2002
COMPARED TO THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2001.
Net earned premium revenues of the Company were $3,727,000 and
$14,949,000 for the nine month periods ended September 30, 2002 and 2001,
respectively, and $673,000 and $3,062,000 for the three month periods ended
September 30, 2002 and 2001, respectively. The Company's earned premiums
declined in all lines of business during the nine and three month periods ended
September 30, 2002 as a result of actions announced during late 2000 and the
first quarter of 2001. During the fourth quarter of 2000, the Group announced
that it would no longer accept any new private passenger automobile policies.
Existing policies of private passenger automobile insurance will be either sold,
non-renewed or cancelled in accordance with New York insurance law. If the
private passenger automobile book of business is not sold, it is expected that
the Group will continue to issue renewal policies over the next several years as
required by applicable insurance law. In March 2001, the Group announced that it
would no longer issue any new (as compared to renewal) insurance policies in all
other lines of business and that it had filed plans of orderly withdrawal with
the NYID as required. Commercial lines policies were non-renewed or canceled in
accordance with New York insurance law or replaced by Tower Insurance Company of
New York or Tower Risk Management (collectively "Tower") under the agreement for
the sale of the Group's renewal rights. Excluding the remaining terms of
existing policies that the Group intends to either non-renew or cancel, as of
September 30, 2002, the Group's in force premium volume totaled approximately
$6,800,000. As indicated above, these policies are primarily personal lines
policies whose volume will continue to decline as the Group exercises its
non-renewal rights under New York insurance law or policyholders choose to
non-renew their policies.
Pre-tax losses for the Company were $2,420,000 and $18,913,000 for the
nine month periods ended September 30, 2002 and 2001, respectively, and $441,000
and $3,856,000 for the three month periods ended September 30, 2002 and 2001,
respectively. The pre-tax losses include increases for loss and LAE for prior
accident years of $1,100,000 and $17,700,000 for the nine month periods ended
September 30, 2002 and 2001, respectively, and $400,000 and $3,900,000 for the
three month periods ended September 30, 2002 and 2001, respectively. In
addition, during the nine month period ended September 30, 2001, the Company
wrote-off approximately $2,600,000 of deferred policy acquisition costs as their
recoverability from premiums and related investment income was no longer
anticipated.
During the nine month period ended September 30, 2002, the Company
increased its reserve estimates by a net amount of $1,100,000. This increase was
comprised of $2,000,000 of a net increase in expected losses, an increase in LAE
reserves of $1,600,000 and a reduction of $2,500,000 of an accrual for workers'
compensation fund assessments. The increase for expected loss development
consisted of an increase to the Company's reserve estimates in the workers'
compensation line by $3,400,000, primarily for accident years 1999 and prior
which reflects the Company's current analysis of its and the industry's recent
experience. Partially offsetting this was a decrease in the Company's reserve
estimates in the automobile lines of business for the 1998 through 2001 accident
years by $2,300,000, primarily relating to personal injury protection coverage
("PIP"). This decrease was principally due to favorable reported loss
development during the period which the Company believes is primarily due to
improved claims handling, which resulted in improved severity. The Company also
increased its loss reserve estimate for older accident years by approximately
$900,000 principally in the general liability and commercial package policies
lines of businesses which reflects the Company's recent claim experience.
9
The 2002 increase in LAE reserves of $1,600,000 referred to above is primarily
the result of a higher than expected level of payment activity during the
period, principally related to outside attorneys handling third party liability
claims and the payment of internal overhead costs allocated to claims handling.
During the three months ended June 30, 2002, the Company reduced its accrual for
certain New York workers' compensation fund assessments. As a result of a
legislative change, these workers' compensation fund assessments are currently
determined based on workers' compensation premiums writings, rather than on the
basis of loss payments as had previously been the case. Due to a reduction in
workers' compensation premium volume, the Company was able to reduce its accrual
for these fund assessments by approximately $3,000,000 of which $2,500,000 was
recorded as a reduction in loss reserves and $500,000 was recorded as a
reduction in other liabilities during the nine months ended September 30, 2002.
During the nine month period ended September 30, 2001, the Company
increased its reserve estimates for its commercial package policies lines of
business, primarily due to increases in severity of liability claims for
accident years 1998 and prior. The Company has exposure for third party
liability claims in many of its lines of insurance. During 2001, there were
several settlements and court decisions on third party liability cases for
amounts that were greater than the industry's or the Company's historical
experience for similar claims, which had formed the basis for the Company's
estimated loss reserves. These results signaled a change in the judicial
environment in the Company's marketplace. Accordingly, in 2001, the Company
increased its loss reserve estimate by approximately $6,900,000 due to an
estimated increase in severity for these exposures. Reserve increases in the
nine month period ended September 30, 2001 also resulted from unfavorable
development principally in automobile lines of business for the 1998 through
2000 accident years, primarily relating to PIP, and in its workers' compensation
lines of insurance. The Company believed that the increased loss estimates for
PIP were consistent with industry trends during 2001, and increased loss
reserves for all automobile lines by $3,300,000. In addition, the Company also
increased its reserves for LAE by $5,500,000 as a result of increases to its
loss reserves and an increase in future overhead costs which will be allocated
to settle claims currently incurred.
As a result of the terrorist attacks on September 11, 2001 at the World
Trade Center, the Company recorded estimated incurred losses and LAE of $800,000
for the nine months ended September 30, 2001, primarily relating to business
interruption coverage.
During the period between 1984 and 1995, the Company entered into
certain retrospectively rated reinsurance contracts covering substantially all
lines of business, except workers' compensation. Under these contracts, the
Company paid the reinsurer provisional premiums that are subject to adjustment
based on subsequent loss development. Ceded premiums accrued under these
contracts reduce both net written and earned premiums during the period the
retrospective reinsurance premiums are accrued. If additional unfavorable loss
development emerges in future periods, the Company may be required to accrue
additional retrospective reinsurance premiums. As a consequence of its reserve
increases, the Company reduced premiums and pre-tax profits by $314,000 and
$2,435,000 for the nine month periods ended September 30, 2002 and 2001,
respectively, and $86,000 and $1,400,000 for the three month periods ended
September 30, 2002 and 2001, respectively, to recognize reinsurance premiums due
for 1995 and prior years under retrospectively rated reinsurance contracts.
10
In management's judgment, information currently available has been
appropriately considered in estimating the Company's loss reserves. However, the
reserving process relies on the basic assumption that past experience is an
appropriate basis for predicting future events. The Company will continue to
evaluate the adequacy of its loss reserves on a quarterly basis, incorporating
any future changes in trends and actual loss experience, and record adjustments
to its loss reserves as appropriate.
Net investment income for the nine and three month periods ended
September 30, 2002 were lower than the comparable 2001 periods due to a
reduction in investments held as a result of a decrease in premiums written and
the payment of claims and operating expenses, as well as a reduction in
investment yields resulting from lower interest rates and the Company's decision
to shorten the duration of its investment portfolio.
During the three month period ended September 30, 2002, the Company
recorded a net increase in other underwriting expenses of approximately $392,000
primarily due to the write off of uncollectible premium receivables.
The Company had no current federal tax expense or benefit for the nine
and three month periods ended September 30, 2002 and 2001. In addition, due to
the Company's uncertainty as to having future taxable income necessary for
realization of the deferred tax assets, a valuation allowance has been provided
for all periods shown for the total amount of the deferred tax asset.
Empire and the Company have a financial dispute with a company that
previously acted as a third party claims administrator for the Group ("Former
Claims Administrator"). The Group received a $1,736,000 claim for unpaid
services from the Former Claims Administrator that the Group believes it is not
obligated to pay because the services provided by the Former Claims
Administrator were deficient and resulted in damages to the Group in excess of
the $1,736,000 claim. The Group is currently evaluating its options to resolve
this dispute, including possibly litigating the matter. The Group does not
believe it is probable that it will have to pay the $1,736,000 to the Former
Claims Administrator, however, if the Group does not prevail in this matter, the
Company's share of this payment, which has not been accrued, would be $520,800
pursuant to the terms of the pooling agreement.
11
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 pursuant to the safe-harbor provisions of the Private
Securities Litigation Reform Act of 1995. Such forward-looking 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, 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
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:
o general economic and market conditions or prevailing interest
rate levels,
o changes in domestic laws, regulations and taxes,
o changes in competition and pricing environments,
o regional or general changes in asset valuation,
o the occurrence of significant natural disasters,
o the inability to reinsure certain risks economically,
o the adequacy of loss and LAE reserves,
o prevailing interest rate levels,
o weather related conditions that may affect the Company's
operations,
o effectiveness of the Tower agreement,
o the ability to attract and retain key personnel,
o adverse selection through renewals of the Group's policies,
o regulatory approval of the Group's proposed actions in response
to the findings of the Department,
o adverse regulatory action against the Group,
o Empire's surplus falling below the minimum statutory surplus
requirement,
12
o developments in claims handling, including adverse litigation
developments with respect to environmental claims, including
lead poisoning, and other liability claims that could adversely
affect the voluntary liquidation plan of the Group,
o the Group's ability to manage the claims runoff,
o increased loss adjustment expenses resulting from an extended
claims run-off period,
o changes in composition of the Company's assets and liabilities
through acquisitions or divestitures,
o an adverse determination by the New York State Department of
Taxation and Finance on its audit of the Group's New York State
franchise tax returns for the years 1992 through 1996, and
o An adverse resolution of the financial dispute with a former
third party claims administrator.
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.
ITEM 4. CONTROLS AND PROCEDURES
(a) The Company maintains disclosure controls and procedures
that are designed to ensure that information required to be disclosed in
the Company's filings under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the periods
specified in the rules and forms of the Securities and Exchange
Commission. Such information is accumulated and communicated to the
Company's management, including its principal executive officer and
principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure. The Company's management, including the
principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives.
Within 90 days prior to the filing date of this quarterly report
on Form 10-Q, the Company has carried out an evaluation, under the
supervision and with the participation of the Company's management,
including the Company's principal executive officer and the Company's
principal financial officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on
such evaluation, the Company's principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective.
(b) There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of their evaluation in
connection with the preparation of this quarterly report on Form 10-Q.
13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
99.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
b) Report on Form 8-K
None.
14
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: November 14, 2002 By: /s/ Rocco J. Nittoli
------------------------------
Rocco J. Nittoli
Chief Operating Officer
(Principal Financial Officer)
15
CERTIFICATIONS
I, H.E. Scruggs, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Allcity Insurance
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a- 14 and 15d- 14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By: /s/ H.E. Scruggs
--------------------------------
H.E. Scruggs
Chief Executive Officer
CERTIFICATIONS
I, Rocco J. Nittoli, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Allcity Insurance
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a- 14 and 15d- 14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By: /s/ Rocco J. Nittoli
-----------------------------
Rocco J. Nittoli
Principal Financial Officer
EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
99.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.