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 June 30, 2003
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
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(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act). Yes [ ] No [X]
On August 11, 2003 there were 7,078,625 shares of Common Stock outstanding.
ALLCITY INSURANCE COMPANY
INDEX
PART I FINANCIAL INFORMATION PAGE
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ITEM 1. Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2003 and December 31, 2002............ 1
Consolidated Statements of Operations - Six months ended June
30, 2003 and 2002............................................................ 2
Consolidated Statements of Operations - Three months ended June
30, 2003 and 2002............................................................ 3
Consolidated Statements of Cash Flows - Six months ended June
30, 2003 and 2002............................................................ 4
Consolidated Statements of Changes in Shareholders' Equity -
six months ended June 30, 2003 and 2002...................................... 5
Notes to Interim Consolidated Financial Statements .......................... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Interim Consolidated Results of Operations............ 8
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk........... 13
ITEM 4. Controls and Procedures............................................. 13
PART II OTHER INFORMATION
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ITEM 6. Exhibits and Reports on Form 8-K.................................... 14
Signature Page............................................................... 15
i
PART 1 - FINANCIAL INFORMATION
------ ---------------------
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 2003 and December 31, 2002
(In thousands, except share and per share amounts)
JUNE 30, DECEMBER 31,
2003 2002
---- ----
(Unaudited)
ASSETS
Investments:
Fixed maturities
Available for sale (amortized cost of
$37,311 in 2003 and $43,125 in 2002) $ 37,662 $ 43,790
Held to maturity (fair value
of $274 in 2003) 272 -
Short-term 24,917 31,474
Other invested assets 6,674 6,429
------- -------
TOTAL INVESTMENTS 69,525 81,693
Cash 51 47
Agents' balances, less allowance for
doubtful accounts ($33 in 2003 and
$182 in 2002) 122 1,002
Accrued investment income 386 405
Reinsurance balances receivable 109,800 118,510
Prepaid reinsurance premiums 272 493
Due from Empire 6,734 5,234
Other assets 573 1,081
------- -------
TOTAL ASSETS $187,463 $208,465
======= =======
LIABILITIES
Unpaid losses $135,103 $151,706
Unpaid loss adjustment expenses 22,421 23,882
Unearned premiums 850 1,393
Reinsurance balances payable 297 780
Other liabilities 3,610 3,737
Surplus note 7,398 7,249
------- -------
TOTAL LIABILITIES 169,679 188,747
------- -------
SHAREHOLDERS' EQUITY
Common stock, $1 par value: 7,368,420
shares authorized; 7,078,625 shares issued
and outstanding in 2003 and 2002 7,079 7,079
Additional paid-in capital 9,331 9,331
Accumulated other comprehensive income 351 665
Retained earnings 1,023 2,643
------- -------
TOTAL SHAREHOLDERS' EQUITY 17,784 19,718
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $187,463 $208,465
======= =======
See Notes to Interim Consolidated Financial Statements.
1
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the six months ended June 30, 2003 and 2002
(In thousands, except share and per share amounts)
SIX MONTHS ENDED
JUNE 30,
--------
2003 2002
---- ----
REVENUES
Premiums earned $ 335 $ 3,054
Net investment income 971 1,736
Net securities gains 200 47
Other income 28 24
------ ------
1,534 4,861
LOSSES AND EXPENSES
(Decrease) increase in provision
for losses (630) 1,761
Loss adjustment expenses 1,965 2,621
Other underwriting expenses, less
deferrals of $0 in 2003 and 2002 1,670 2,292
Interest on surplus note 149 166
------ ------
3,154 6,840
LOSS BEFORE FEDERAL INCOME TAXES (1,620) (1,979)
------ ------
FEDERAL INCOME TAXES
Current expense/(benefit) - -
Deferred expense/(benefit) - -
------ ------
- -
------ ------
NET LOSS $(1,620) $(1,979)
====== ======
Per share data, based on 7,078,625
average shares outstanding in 2003
and 2002
BASIC AND DILUTED LOSS PER SHARE $ (0.23) $ (0.28)
====== ======
See Notes to Interim Consolidated Financial Statements.
2
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended June 30, 2003 and 2002
(In thousands, except share and per share amounts)
THREE MONTHS ENDED
JUNE 30,
--------
2003 2002
---- ----
REVENUES
Premiums earned $ 323 $ 1,147
Net investment income 380 829
Net securities gains 4 -
Other income 14 10
------ ------
721 1,986
LOSSES AND EXPENSES
Increase in provision for losses 256 275
Loss adjustment expenses 335 1,460
Other underwriting expenses, less
deferrals of $0 in 2003 and 2002 797 876
Interest on surplus note 75 83
------ ------
1,463 2,694
LOSS BEFORE FEDERAL INCOME TAXES (742) (708)
------ ------
FEDERAL INCOME TAXES
Current expense/(benefit) - -
Deferred expense/(benefit) - -
------ ------
- -
------ ------
NET LOSS $ (742) $ (708)
====== ======
Per share data, based on 7,078,625
average shares outstanding in 2003
and 2002
BASIC AND DILUTED LOSS PER SHARE $ (0.11) $ (0.10)
====== ======
See Notes to Interim Consolidated Financial Statements.
3
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended June 30, 2003 and 2002
(In thousands)
SIX MONTHS ENDED
JUNE 30,
--------
2003 2002
---- ----
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,620) $(1,979)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Decrease to allowance for
doubtful accounts (149) -
Net securities gains (200) (47)
Net change in:
Agents' balances 1,029 425
Reinsurance balances receivable 8,710 30,868
Prepaid reinsurance premiums 221 2,999
Unpaid losses and loss adjustment
expenses (18,064) (44,485)
Unearned premiums (543) (5,194)
Due from(to) Empire (1,500) (985)
Reinsurance balances payable (483) 250
Other, net 795 (996)
------ ------
NET CASH USED FOR OPERATING ACTIVITIES (11,804) (19,144)
------ ------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed maturities (5,132) (13,717)
Net change in other invested assets (245) (94)
Proceeds from sale of fixed maturities 8,540 3,135
Proceeds from maturities of fixed
maturities 2,070 2,591
Net change in short-term investments 6,575 27,233
------ ------
NET CASH PROVIDED BY INVESTING ACTIVITIES 11,808 19,148
------ ------
NET INCREASE IN CASH 4 4
Cash at beginning of period 47 36
----- -----
Cash at the end of period $ 51 $ 40
===== =====
See Notes to Interim Consolidated Financial Statements.
4
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
For the six months ended June 30, 2003 and 2002
(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, 2002 $7,079 $9,331 $ 732 $ 8,762 $25,904
Comprehensive loss:
Net loss (1,979) (1,979)
Other comprehensive loss:
Unrealized holding gains
arising during the period
(net of deferred tax of $0) 161 161
Less: reclassification of
net securities gains
included in net loss
(net of deferred tax of $0) (47) (47)
------
Comprehensive loss (1,865)
----- ----- ------ ------ ------
Balance, June 30, 2002 $7,079 $9,331 $ 846 $ 6,783 $24,039
===== ===== ====== ====== ======
Balance, January 1, 2003 $7,079 $9,331 $ 665 $ 2,643 $19,718
Comprehensive loss:
Net loss (1,620) (1,620)
Other comprehensive loss:
Unrealized holding loss
arising during the period
(net of deferred tax of $0) (123) (123)
Less: reclassification of
net securities gains
included in net loss
(net of deferred tax of $0) (191) (191)
------
Comprehensive loss (1,934)
----- ----- ------ ------ ------
Balance, June 30, 2003 $7,079 $9,331 $ 351 $ 1,023 $17,784
===== ===== ====== ====== ======
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
consolidated 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, 2002 which are included in the Company's Annual Report filed on
Form 10-K for such year (the "2002 10-K"). Consolidated results of
operations for interim periods are not necessarily indicative of
annual results of operations. The consolidated balance sheet at
December 31, 2002 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. Pursuant to a tender offer by Leucadia National Corporation
("Leucadia") commenced in April 2003 for all of the outstanding
shares of common stock of the Company not already owned by Leucadia
and its affiliates, in June 2003 Leucadia accepted and purchased
312,611 shares of the Company's common stock at a price of $2.75 per
share. After giving effect to the purchase of the tendered shares,
Leucadia beneficially owns approximately 95.7% of the outstanding
common stock of the Company. Subject to the prior approval of the New
York Insurance Department (the "Department"), Leucadia, directly or
indirectly through one of its subsidiaries, intends to acquire all of
the remaining shares of the Company's common stock pursuant to a plan
for the acquisition of minority interests (the "Plan of Acquisition")
in accordance with Section 7118 of the New York Insurance Law (the
"NYSIL").
If the Plan of Acquisition is consummated, the Company will cease to
be a public company. Leucadia intends to seek the Department's
approval to merge the Company with Empire Insurance Company
("Empire"), the Company's parent (collectively referred to as the
"Group"), following implementation of the Plan of Acquisition,
whereby Empire would be the surviving insurer. If the Department's
approval for the Plan of Acquisition is not obtained, shares of the
Company not beneficially owned by Leucadia will remain outstanding.
In that event, the Company would continue as a public company unless
it has fewer than 300 registered shareholders, in which case,
Leucadia would cause the Company to deregister the common stock under
the Securities Exchange Act of 1934, as amended, and, accordingly,
there may be no public market for the common stock of the Company.
3. In December 2001, the Company and Empire announced that it had
determined that it was in the best interest of its shareholders and
policyholders to commence an orderly voluntary 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 does
not engage in any other business activities except for its claims
runoff operations. By the end of 2005, the Company expects that its
voluntary liquidation will be substantially complete, premium revenue
will be immaterial, infrastructure and overhead costs will be
substantially reduced, and all that it expects to remain will be the
administration and settlement of claims with long tail settlement
characteristics, principally workers' compensation and certain
liability claims. 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.
6
As of June 30, 2003, the Company's reinsurance recoverable from
Empire was $80,380,000, representing 43% of the Company's total
assets. Empire's stand alone statutory surplus was approximately
$11,472,000 as of June 30, 2003, after giving effect to the
limitations imposed under Section 1408 of the NYSIL on Empire's
ability to record the value of its investment in the Company on
Empire's statutory financial statements. This amount is approximately
$8,172,000 above the minimum required under New York insurance
regulations and an improvement of approximately $7,000,000 when
compared to Empire's stand alone statutory surplus as of March 31,
2003. This improvement resulted from a release that Empire obtained
in May 2003 from the New York City Industrial Development Agency
concerning contingent obligations related to its former headquarters
building. Empire's management continues to investigate transactions
that could increase its stand alone surplus level in order to remain
above minimum requirements. However, no assurance can be given that
Empire will be successful in any other transaction to increase its
stand alone statutory surplus.
If the merger of Empire and the Company is consummated, the effect on
Empire's stand alone surplus of the limitation imposed under Section
1408 of the NYSIL will be eliminated. The exact amount of the
increase in Empire's stand alone statutory surplus cannot be
currently determined, however, if the merger were consummated as of
June 30, 2003, the increase would have been $5,597,000.
The Company currently believes that its reinsurance recoverable from
Empire is fully collectible; however, further reductions in Empire's
statutory surplus, resulting from operating results, the
contingencies discussed in Notes 4 and 5 or other matters, could
impair Empire's ability to pay the full amount due to the Company.
Further, any adverse regulatory action taken against Empire in the
future could also impair the Company's ability to fully collect its
reinsurance recoverable and could result in adverse regulatory action
against the Company. No assurance can be given that adverse
regulatory action will not be taken against Empire 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 to
support its position. 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.
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"). In 2002, 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 their
claim. In May 2003, the Former Claims Administrator acknowledged that
it owed the Group $1,131,000 and reduced its claim against the Group
to $605,000. 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 $605,000
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 $181,500 pursuant to the terms of the
pooling agreement.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
INTERIM CONSOLIDATED 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 2002 10-K.
VOLUNTARY LIQUIDATION (RUN-OFF OF COMPANY'S OPERATIONS)
In December 2001, the Group announced that it had determined that it
was in the best interest of its shareholders and policyholders to commence an
orderly voluntary 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 does 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.
As of June 30, 2003, the Company's reinsurance recoverable from
Empire was $80,380,000, representing 43% of the Company's total assets. Empire's
stand alone statutory surplus was approximately $11,472,000 as of June 30, 2003,
after giving effect to the limitations imposed under Section 1408 of the NYSIL
on Empire's ability to record the value of its investment in the Company on
Empire's statutory financial statements. This amount is approximately $8,172,000
above the minimum required under New York insurance regulations and an
improvement of approximately $7,000,000 when compared to Empire's stand alone
statutory surplus as of March 31, 2003. This improvement resulted from a release
that Empire obtained in May 2003 from the New York City Industrial Development
Agency concerning contingent obligations related to its former headquarters
building. Empire's management continues to investigate transactions that could
increase its stand alone surplus level, in order to remain above minimum
requirements. However, no assurance can be given that Empire will be successful
in any other transaction to increase its stand alone statutory surplus.
The Company currently believes that its reinsurance recoverable from
Empire is fully collectible; however, further reductions in Empire's statutory
surplus, resulting from operating results, the contingencies discussed in Notes
4 and 5 to these interim financial statements or other matters, could impair
Empire's ability to pay the full amount due to the Company. Further, any adverse
regulatory action taken against Empire in the future could also impair the
Company's ability to fully collect its reinsurance recoverable and could result
in adverse regulatory action against the Company. No assurance can be given that
adverse regulatory action will not be taken against Empire or the Company.
LIQUIDITY AND CAPITAL RESOURCES
For the six month periods ended June 30, 2003 and 2002, 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 voluntary 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.
8
At June 30, 2003 and 2002, the yield of the Company's fixed
maturities portfolio was 1.3% and 2.2%, respectively, with an average maturity
of 0.9 years and 0.4 years, respectively. Additionally, the Company's investment
portfolio is principally comprised of U.S. Treasury securities and obligations
of U.S. government agencies. Approximately 90% of the investment portfolio is
rated "investment grade" by established bond rating agencies or issued or
guaranteed by the U.S. Treasury or by governmental agencies.
During the six months ended June 30, 2003 and 2002, the Company sold
certain securities to meet short-term cash flow needs and realized capital gains
of $200,000 and $47,000 in the 2003 and 2002 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 June 30, 2003, these assets totaled
$179,762,000 (of which $80,380,000 is receivable from Empire) as compared to the
Company's loss and LAE reserves of $157,524,000. The Company has not experienced
any material default in the payment of reinsurance claims due from its
reinsurance providers. A substantial portion of the Company's reserves are for
worker's compensation and other liability reserves with long term settlement
characteristics. Based on its historical settlement patterns for these reserves,
the Company projects that it will still have a significant amount of the
reserves remaining unsettled at the end of this decade.
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 to support its
position. 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.
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"). In 2002, 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
their claim. In May 2003, the Former Claims Administrator acknowledged that it
owed the Group $1,131,000 and reduced its claim against the Group to $605,000.
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 $605,000 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 $181,500 pursuant to the terms of the
pooling agreement.
9
Empire is obligated to pay certain severance and retention benefits
to its employees, and has fully accrued for its obligation as of June 30, 2003.
Pursuant to the pooling agreement, the Company has accrued its 30% share of such
benefits. In January 2003, to enhance its ability to retain employees during its
voluntary liquidation, Empire established a trust for the benefit of certain of
its employees and transferred $3,727,000 of its cash to the trust, representing
the accrued obligation as of December 31, 2002. These funds in the trust may be
used to pay Empire's severance and retention obligations to those employees, if
not paid by Empire when due. Empire retains the residual interest in the trust
after satisfaction or release of the employees' severance and retention benefit
claims, and the establishment of the trust does not in any way eliminate
Empire's obligations. Under the pooling agreement, the Company will pay Empire
its share of the benefits when they are paid by either Empire or the trust.
INTERIM RESULTS OF OPERATIONS-SIX AND THREE MONTHS ENDED JUNE 30, 2003 COMPARED
TO THE SIX AND THREE MONTHS ENDED JUNE 30, 2002.
Net earned premium revenues of the Company were $335,000 and
$3,054,000 for the six month periods ended June 30, 2003 and 2002, respectively
and $323,000 and $1,147,000 for the three month periods ended June 30, 2003 and
2002, respectively. The Company's premium revenues reflect the various actions
taken by the Group since 2000 to exit the insurance business, all of which have
been previously disclosed in the Company's 2002 10-K, and the recognition of
retrospective reinsurance premiums discussed below. The Group will continue to
be responsible for the claims incurred during the remaining term of its existing
policies (consisting of approximately 1,860 private passenger automobile
policies whose in force premium totaled $3,895,000 at June 30, 2003) and all
claims incurred on previously issued policies. These in force policies will
continue to decline as the Group exercises its non-renewal or cancellation
rights under New York insurance law or policyholders choose to cancel or not to
renew their policies.
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. In addition, the Company
entered into certain retrospectively rated reinsurance contracts covering
workers' compensation for certain periods prior to 1991. Under these contracts,
the Company paid the reinsurers 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. Based on the Company's
current evaluation and estimation of losses covered under these contracts, the
Company reduced premiums and pre-tax profits by $415,000 and $228,000 for the
six month periods ended June 30, 2003 and 2002, respectively, and $0 and $0 for
the three month periods ended June 30, 2003 and 2002, respectively, to recognize
reinsurance premiums due under retrospectively rated reinsurance contracts.
Pre-tax losses for the Company were $1,620,000 and $1,979,000 for the
six month periods ended June 30, 2003 and 2002, respectively, and $742,000 and
$708,000 for the three month periods ended June 30, 2003 and 2002, respectively.
The pre-tax losses include increases for loss and LAE for prior accident years
of $616,000 and $700,000 for the six month periods ended June 30, 2003 and 2002,
respectively, and $242,000 and $250,000 for the three month periods ended June
30, 2003 and 2002, respectively.
10
During the six month period ended June 30, 2003, the increase in
estimated losses and LAE for claims occurring in prior years was comprised of an
increase in estimated LAE of $1,766,000 and a net decrease in estimated losses
of $1,150,000. The increase in LAE was primarily based on the Company's
re-estimation of the internal overhead costs allocated to claims expected to be
paid during the voluntary run-off of the Company's operations and an increase in
the average LAE cost per claim. The net decrease in estimated losses was
primarily due to favorable reported loss experience during the first quarter of
2003 in the automobile lines for accident years 1996 through 2002. The Company
believes the favorable loss development is due to improved claims handling,
which resulted in reduced severity.
During the six month period ended June 30, 2002, the increase in
estimated losses and LAE for claims occurring in prior years was comprised of a
net increase in estimated losses of $1,800,000, an increase in estimated LAE of
$1,400,000 and a reduction of $2,500,000 of an accrual for workers' compensation
fund assessments. The increase in estimated losses consisted of an increase to
the Company's loss estimates in the workers' compensation line of $3,500,000,
primarily for accident years 1999 and prior which reflected the Company's then
current analysis of its and the industry's experience. Partially offsetting this
was a decrease in the Company's loss estimates in the automobile lines of
business for the 1998 through 2001 accident years of $2,600,000, primarily
relating to personal injury protection coverage. The Company also increased its
loss estimates for older accident years by approximately $900,000 principally in
the general liability and property lines of businesses which reflected the
Company's then current claim experience. The increase in estimated LAE of
$1,400,000 referred to above was 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.
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 six and three month period ended June
30, 2003 was lower than the comparable 2002 periods due to a reduction in
invested assets 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.
Other underwriting expenses for the six and three month period ended
June 30, 2003 were lower than the comparable periods in 2002 primarily due to a
reduction in operating expenses resulting from reduced business.
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The Company had no current federal tax expense or benefit for the six
and three month periods ended June 30, 2003 and 2002. In addition, due to the
Company's uncertainty of 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.
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 adequacy of loss and LAE reserves;
o prevailing interest rate levels;
o weather related conditions that may affect the Company's operations;
o the ability to attract and retain key personnel;
o adverse selection through renewals or cancellations of the Group's
policies;
o adverse regulatory action against the Company and/or Empire;
o Empire's surplus falling below the minimum statutory surplus
requirement;
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 Regulatory restrictions on rate increases for the Group's policies;
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;
12
o An adverse resolution of the financial dispute with a former third
party claims administrator; and
o Consummation of the Plan of Acquisition for the Company's common
shares and of the potential merger of the Company and Empire.
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required under this Item is contained in Item 7A of the
Company's Annual Report on Form 10-K for the year ended December 31, 2002, and
is incorporated by reference herein.
ITEM 4. CONTROLS AND PROCEDURES
(a) The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officers, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), as of June 30, 2003. Based on their evaluation, the Company's principal
executive and principal financial officers concluded that the Company's
disclosure controls and procedures were effective as of June 30, 2003.
(b) There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the Company's fiscal quarter ended June 30, 2003, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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PART II - OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
b) Report on Form 8-K
The Company filed a current report on Form 8-K dated April 9, 2003,
which sets forth information under Item 5. Other Events and Item 7.
Financial Statements and Exhibits.
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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 14, 2003 By: /s/ Douglas M. Whitenack
--------------- -----------------------------
Douglas M. Whitenack,
Chief Financial Officer
15
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.