Delaware
|
95-1935264
|
|||
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|||
6301
Owensmouth Avenue
|
||||
Woodland
Hills, California
|
91367
|
|||
(Address
of principal executive offices)
|
(Zip
Code)
|
|||
(818)
704-3700
|
www.21st.com
|
|||
(Registrant’s
telephone number, including area code)
|
(Registrant’s
web site)
|
|||
Securities
registered pursuant to Section 12(b) of the Act:
|
||||
Title
of each class
|
Name
of each exchange on
which registered
|
|||
Common
Stock, Par Value $0.001
|
New
York Stock Exchange
|
Large
accelerated filer ¨
|
Accelerated
filer x
|
Non-accelerated
filer ¨
|
Description
|
Page
Number
|
|
Part
I
|
||
Item
1.
|
3
|
|
Item
1A.
|
19
|
|
Item
1B.
|
24
|
|
Item
2.
|
25
|
|
Item
3.
|
25
|
|
Item
4.
|
25
|
|
Part
II
|
||
Item
5.
|
25
|
|
Item
6.
|
27
|
|
Item
7.
|
27
|
|
Item
7A.
|
49
|
|
Item
8.
|
51
|
|
Item
9.
|
90
|
|
Item
9A.
|
90
|
|
Item
9B.
|
90
|
|
Part
III
|
||
Item
10.
|
91
|
|
Item
11.
|
91
|
|
Item
12.
|
91
|
|
Item
13.
|
91
|
|
Item
14.
|
91
|
|
Part IV | ||
Item
15.
|
92
|
|
Signatures
|
100
|
Exhibit
Index
|
93
|
|
21
|
Subsidiaries
of Registrant
|
|
23
|
Consent
of Independent Registered Public Accounting Firm
|
|
31.1
|
Certification
of President and Chief Executive Officer Pursuant to Exchange Act
Rule
13a-14(a)
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Exchange Act Rule
13a-14(a)
|
|
32.1
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
ITEM 1. |
BUSINESS
|
·
|
It
increases the number of consumers and total market potential available
to
the Company. While California is the single largest personal auto
insurance market, it represents only 12% of the U.S. total personal
auto
market. In 2006, the Company entered eight new states, increasing
the
total to 17 states and raising the percentage of the U.S. market
in which
it operates from 34% at year-end 2005 to 60% at year-end 2006.
|
·
|
Having
more potential customers makes the Company’s marketing and advertising
programs more cost effective. Buying national television is typically
more
cost effective than buying local
television.
|
·
|
Having
multiple states to operate in reduces the risk from legislative,
regulatory, and judicial changes in any
market.
|
·
|
Having
multiple states to operate in and, over time, diversifying the Company’s
distribution of customers reduces the Company’s risk to catastrophic
events, which typically are local or regional in
nature.
|
·
|
Having
offices in multiple locations and time zones makes the process of
providing unending 24/7 service less difficult, plus allows the Company
to
focus hiring of new staff in states and jurisdictions with favorable
characteristics.
|
·
|
96%
combined ratio
|
·
|
15%
growth in direct premiums written
|
·
|
15%
return on equity
|
·
|
Strong
financial ratings
|
Financial
Ratings by Rating Agency
|
|||||
2006
|
2005
|
2004
|
2003
|
2002
|
|
A.M.
Best
|
A+
|
A+
|
A+
|
A+
|
A+
|
Standard
& Poor’s
|
A+
|
A+
|
A+
|
A+
|
A+
|
Fitch
|
A+
|
A+
|
A
|
—
|
—
|
·
|
Deferred
policy acquisition costs (“DPAC”) -
The unamortized portion of the policy acquisition costs described
below.
|
·
|
Unpaid
losses and loss adjustment expenses - The
estimated liabilities for Losses and Loss Adjustment Expenses (“LAE”)
include the accumulation of estimates of losses for claims reported
on or
prior to the balance sheet dates, estimates (based upon actuarial
analysis
of historical data) of losses for claims incurred but not reported,
the
development of case reserves to ultimate values, and estimates of
expenses
for investigating, adjusting and settling all incurred claims. Amounts
reported are estimates of the ultimate costs of settlement, net of
estimated salvage and subrogation.
|
·
|
Reinsurance
receivables and recoverables - These
amounts are reflected as assets on the consolidated balance sheets
and
consist of two components: the ceded portion of the reserves described
in
unpaid losses and LAE above are classified as recoverables, and the
actual
billings due from our reinsurers on ceded portions of payments of
losses
and LAE paid as receivables.
|
·
|
Unearned
premiums - That
portion of our direct premiums written that has not yet been earned.
It is
the amount of premium we would return to policyholders if all policies
were cancelled as of the balance sheet date. The ceded portion of
this
liability is shown as an asset labeled “Prepaid reinsurance
premiums.”
|
·
|
Statutory
surplus - Represents
equity as of the end of a fiscal period for the Company’s insurance
subsidiaries, determined in accordance with statutory accounting
principles prescribed by insurance regulatory authorities. Stockholders’
equity is the most directly comparable GAAP
measure.
|
·
|
Direct
premiums written -
This statutory measure represents the total policy premiums, net
of
cancellations, associated with policies underwritten and issued.
We use
this non-GAAP measure, which excludes the impact of premiums ceded
to
reinsurers, to assess the underlying growth of our insurance business
from
period to period. We do not currently assume premiums from other
companies.
|
·
|
Net
premiums written -
This statutory measure represents the sum of direct premiums written
less
ceded premiums written. Ceded premiums written is the portion of
our
direct premiums written that we transfer to our reinsurers in accordance
with the terms of our reinsurance contracts, based upon the risks
they
accept. Similar to direct premiums written, we use this non-GAAP
measure
to assess growth. See Note 10 of the Notes
to Consolidated Financial Statements
for a summary of our reinsurance agreements.
|
·
|
Net
premiums earned - Represents
the portion of net premiums written that is recognized as income
in the
consolidated financial statements for the periods presented and earned
on
a pro rata basis over the term of the policies.
|
·
|
Net
losses and loss adjustment expenses incurred -
Includes the payments, as well as the change in estimates for unpaid
liabilities for the indemnity and settlement costs of all insured
events
occurring during the period. These estimates are necessarily subject
to
the outcome of future events, such as changes in medical and repair
costs
as well as economic and social conditions that impact the settlement
of
claims. The methods of making such estimates and for establishing
the
resulting reserves are reviewed and updated as applicable, and any
resulting adjustments are reflected in current
operations.
|
·
|
Policy
acquisition costs -
Consist of premium taxes, advertising, and variable costs incurred
with
writing new and renewal business. These costs are deferred and amortized
over the typical six-month policy period in which the related premiums
are
earned.
|
·
|
Other
underwriting expenses -
Consist of all other costs involved in the support of the insurance
business other than losses, LAE and policy acquisition costs. This
includes servicing policies and all other corporate support
functions.
|
·
|
Underwriting
profit (loss) -
Underwriting profit (loss) is a statutory measure that consists of
net
premiums earned less losses from claims, loss adjustment expenses,
policy
acquisition costs, and underwriting expenses, as determined using
GAAP.
21st believes that underwriting profit (loss) provides investors
with
financial information that is not only meaningful, but important
to
understanding the results of property and casualty insurance operations.
The results of operations of a property and casualty insurance company
include three components: underwriting profit (loss), net investment
income and realized capital gains (losses). Without disclosure of
underwriting profit (loss), it is difficult to determine how successful
an
insurance company is in its core business activity of assessing and
underwriting risk, as including investment income and realized capital
gains (losses) in the results of operations without disclosing
underwriting profit (loss) can mask underwriting losses. Underwriting
profit (loss) is not a GAAP measure. A reconciliation of underwriting
profit (loss) to net income is located in Item
7. Management’s Discussion and Analysis - Results of
Operations.
|
·
|
Loss
and LAE ratio -
The result of dividing net losses and LAE incurred by net premiums
earned.
It is a measure of the percentage of our premium revenue that goes
towards
investigating and settling claims.
|
·
|
Underwriting
expense ratio -
The result of dividing the sum of policy acquisition costs and other
underwriting expenses by net premiums earned. It is a measure of
how
efficiently we attract, acquire, and service the business we
write.
|
·
|
Combined
ratio -
The sum of the loss and LAE ratio and the underwriting expense ratio.
This
ratio measures a company’s overall underwriting profitability. If the
combined ratio is at or above 100, an insurance company cannot be
profitable without investment income (and may not be profitable if
investment income is insufficient). For example, one of our long-term
financial goals as a Company is to maintain a combined ratio of 96%
or
less. This means that for every $1.00 of premium that we earn, we
will
incur $0.96 or less in related costs. The $0.04 margin is referred
to as
our underwriting profit and, when coupled with our investment results,
other income and other expenses, becomes our pre-tax income. As noted
above, underwriting profit (loss) is not a GAAP measure.
|
·
|
The
following coverages are generally made available on our private passenger
auto insurance contract: bodily injury liability; property damage;
medical
payments; personal injury protection, uninsured and underinsured
motorist;
rental reimbursement; uninsured motorist property damage; towing;
comprehensive; and collision. All of these policies are written for
a
six-month term except for Involuntary Market policies assigned to
us,
which are for twelve months.
|
·
|
Minimum
levels of bodily injury and property damage are required by state
law and
typically cover the other party’s claims when our policyholder is at
fault. Uninsured and underinsured motorist typically are optional
coverages and cover our policyholder when the other party is at fault
and
has insufficient liability insurance to cover the insured’s injuries and
loss of income. Comprehensive and collision coverages are also optional
and cover damage to the policyholder’s automobile whether or not the
insured is at fault. Medical payments coverage typically is optional.
In
some states, we are required to offer personal injury protection
coverage.
|
·
|
Various
limits of liability are underwritten with maximum limits of $500,000
per
person and $500,000 per accident. Our most popular bodily injury
liability
limits are $100,000 per person and $300,000 per accident.
|
·
|
Our
personal umbrella policy (“PUP”) is written with a twelve-month policy
term with liability coverage limits of $1 million to $5 million in
excess
of the underlying automobile liability coverage we write. Since May
2002,
we have required minimum underlying automobile limits, written by
us, of
$250,000 per person and $500,000 per accident for PUP policies sold.
We
reinsure 90% of any PUP loss.
|
December
31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
California
vehicles in force1
|
1,290,498
|
1,413,909
|
1,463,469
|
1,369,049
|
1,169,880
|
|||||||||||
Non-California
vehicles in force
|
255,121
|
127,001
|
62,922
|
33,332
|
27,174
|
|||||||||||
Total
vehicles in force
|
1,545,619
|
1,540,910
|
1,526,391
|
1,402,381
|
1,197,054
|
California
vehicles in force1
|
83.5
|
%
|
91.8
|
%
|
95.9
|
%
|
97.6
|
%
|
97.7
|
%
|
||||||
Non-California
vehicles in force
|
16.5
|
8.2
|
4.1
|
2.4
|
2.3
|
|||||||||||
Total
vehicles in force
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
AMOUNTS
IN MILLIONS
|
Direct
Premiums Written
|
|||||||||||||||
Years
Ended December 31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
California2
|
$
|
1,166.0
|
$
|
1,262.3
|
$
|
1,290.9
|
$
|
1,194.6
|
$
|
969.7
|
||||||
Non-California
|
149.1
|
84.1
|
46.3
|
28.9
|
28.5
|
|||||||||||
Total
direct premiums written
|
$
|
1,315.1
|
$
|
1,346.4
|
$
|
1,337.2
|
$
|
1,223.5
|
$
|
998.2
|
California2
|
88.7
|
%
|
93.8
|
%
|
96.5
|
%
|
97.6
|
%
|
97.1
|
%
|
||||||
Non-California
|
11.3
|
6.2
|
3.5
|
2.4
|
2.9
|
|||||||||||
Total
direct premiums written
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
1 |
Includes
motorcycle.
|
2 |
Includes
$0.1 million and $2.4 million of homeowner and earthquake direct
premiums
written in 2003 and 2002, respectively. We no longer have any homeowner
policies
in force. We ceased writing earthquake coverage in 1994, but we had
remaining loss reserves from the 1994 Northridge earthquake. See
further
discussion in
Note 17 to the Notes
to Consolidated Financial Statements.
|
·
|
First
quarter of 2004 - added eight percent of the market when we began
writing
personal auto policies in Illinois, Indiana, and
Ohio.
|
·
|
Third
quarter of 2004 - opened a service center in Dallas, diversifying
our call
center operations.
|
·
|
First
quarter of 2005 - added seven percent of the market when we began
writing
personal auto policies in Texas.
|
·
|
Second
quarter of 2006 - added 15 percent of the market when we began writing
personal auto policies in Florida, Georgia and
Pennsylvania.
|
·
|
Fourth
quarter of 2006 - added eleven percent of the market when we began
writing
personal auto policies in New Jersey, Colorado, Minnesota, Missouri,
and
Wisconsin.
|
Voluntary
Personal Auto Lines
|
Distribution
of California Vehicles in Force
|
|||||||||||||||
December
31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
Los
Angeles County
|
27.8
|
%
|
28.8
|
%
|
30.3
|
%
|
32.3
|
%
|
37.2
|
%
|
||||||
San
Diego County
|
14.5
|
13.8
|
13.6
|
13.5
|
13.4
|
|||||||||||
Southern
California, excluding Los Angeles and San Diego
Counties3
|
|
20.0
|
20.0
|
20.3
|
21.4
|
23.5
|
||||||||||
Central
and Northern California4
|
37.7
|
37.4
|
35.8
|
32.8
|
25.9
|
|||||||||||
Total
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
3 |
Includes
the following counties: Imperial, Kern, Orange, Riverside, Santa
Barbara,
San Bernardino and Ventura.
|
4 |
Includes
all California counties other than Los Angeles County, San Diego
County,
and those specified above in Footnote
3.
|
AMOUNTS
IN MILLIONS,
EXCEPT
POLICY DATA
|
Advertising
Expenditures and New Policies Written
|
|||||||||||||||
Years
Ended December 31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
Total
advertising expenditures
|
$
|
74.9
|
$
|
70.1
|
$
|
66.7
|
$
|
53.9
|
$
|
43.3
|
||||||
New
policies written
|
172,899
|
170,224
|
225,349
|
265,589
|
189,652
|
AMOUNTS
IN THOUSANDS
|
Losses
and LAE Incurred, Net of
Reinsurance,
Attributable to Prior Accident Years
|
|||||||||||||||
Years
Ended December 31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
Personal
auto
|
$
|
(52,648
|
)
|
$
|
(27,473
|
)
|
$
|
(2,936
|
)
|
$
|
11,159
|
$
|
16,200
|
|||
Homeowner
and earthquake5
|
751
|
2,333
|
2,831
|
40,048
|
56,158
|
|||||||||||
Total
|
$
|
(51,897
|
)
|
$
|
(25,140
|
)
|
$
|
(105
|
)
|
$
|
51,207
|
$
|
72,358
|
5 |
We
no longer have any homeowner policies in force. We ceased writing
earthquake coverage in 1994, but we had remaining loss reserves from
the 1994 Northridge earthquake. See further discussion in Item 7
under the
captions Results
of Operations - Homeowner and Earthquake Lines in Runoff
Results, Critical
Accounting Estimates - Losses and Loss Adjustment
Expenses,
and Note 17 to the Notes
to Consolidated Financial Statements.
|
TABLE
1 - Auto Lines as of December 31,
|
||||||||||||||||||||||||||||||||||
(Amounts
in thousands, except claims)
|
1996
|
1997
|
1998
|
1999
|
2000
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
|||||||||||||||||||||||
Reserves
for losses and LAE, direct
|
$
|
468,257
|
$
|
403,263
|
$
|
329,021
|
$
|
261,990
|
$
|
286,057
|
$
|
301,985
|
$
|
333,113
|
$
|
419,913
|
$
|
489,411
|
$
|
521,528
|
$
|
480,731
|
||||||||||||
Paid
(cumulative) as of:
|
||||||||||||||||||||||||||||||||||
One
year later
|
260,287
|
253,528
|
247,317
|
242,579
|
268,515
|
239,099
|
249,815
|
280,534
|
283,068
|
301,703
|
||||||||||||||||||||||||
Two
years later
|
336,538
|
319,064
|
307,797
|
311,659
|
332,979
|
312,909
|
328,951
|
359,719
|
385,135
|
|||||||||||||||||||||||||
Three
years later
|
354,854
|
333,349
|
324,778
|
324,740
|
352,592
|
333,955
|
349,763
|
392,665
|
||||||||||||||||||||||||||
Four
years later
|
357,913
|
340,907
|
326,932
|
327,745
|
358,806
|
339,004
|
356,198
|
|||||||||||||||||||||||||||
Five
years later
|
363,068
|
341,446
|
327,418
|
328,557
|
360,191
|
340,961
|
||||||||||||||||||||||||||||
Six
years later
|
362,824
|
341,374
|
327,162
|
328,359
|
361,104
|
|||||||||||||||||||||||||||||
Seven
years later
|
362,508
|
341,076
|
326,823
|
328,309
|
||||||||||||||||||||||||||||||
Eight
years later
|
362,216
|
340,772
|
326,638
|
|||||||||||||||||||||||||||||||
Nine
years later
|
361,959
|
340,582
|
||||||||||||||||||||||||||||||||
Ten
years later
|
361,764
|
|||||||||||||||||||||||||||||||||
Reserves
re-estimated as of:
|
||||||||||||||||||||||||||||||||||
One
year later
|
365,566
|
359,262
|
313,192
|
309,953
|
352,709
|
323,791
|
348,865
|
417,225
|
462,682
|
469,132
|
||||||||||||||||||||||||
Two
years later
|
366,858
|
337,258
|
321,711
|
340,914
|
354,720
|
338,338
|
354,784
|
407,344
|
440,974
|
|||||||||||||||||||||||||
Three
years later
|
359,925
|
335,246
|
341,695
|
328,190
|
361,264
|
339,965
|
360,308
|
407,362
|
||||||||||||||||||||||||||
Four
years later
|
357,607
|
355,605
|
326,506
|
329,182
|
361,068
|
342,321
|
360,878
|
|||||||||||||||||||||||||||
Five
years later
|
377,414
|
340,537
|
326,565
|
329,318
|
362,066
|
342,993
|
||||||||||||||||||||||||||||
Six
years later
|
361,980
|
340,552
|
327,626
|
329,042
|
362,142
|
|||||||||||||||||||||||||||||
Seven
years later
|
361,865
|
341,396
|
327,243
|
328,756
|
||||||||||||||||||||||||||||||
Eight
years later
|
362,541
|
340,967
|
326,920
|
|||||||||||||||||||||||||||||||
Nine
years later
|
362,042
|
340,714
|
||||||||||||||||||||||||||||||||
Ten
years later
|
361,839
|
|||||||||||||||||||||||||||||||||
Redundancy
(Deficiency)
|
$
|
106,418
|
$
|
62,549
|
$
|
2,101
|
$
|
(66,766
|
)
|
$
|
(76,085
|
)
|
$
|
(41,008
|
)
|
$
|
(27,765
|
)
|
$
|
12,551
|
$
|
48,437
|
$
|
52,396
|
||||||||||
Supplemental
Auto Claims Data:
|
||||||||||||||||||||||||||||||||||
Claims
reported during the year
|
310,475
|
305,600
|
335,245
|
313,182
|
370,521
|
354,968
|
350,693
|
381,238
|
414,310
|
419,214
|
399,596
|
|||||||||||||||||||||||
Claims
pending at year end
|
58,430
|
56,495
|
57,027
|
59,768
|
58,100
|
55,642
|
58,127
|
65,303
|
67,352
|
63,898
|
59,169
|
TABLE
2 - Homeowner and Earthquake Lines in Runoff as of December
31,
|
||||||||||||||||||||||||||||||||||
(Amounts
in thousands)
|
1996
|
1997
|
1998
|
1999
|
2000
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
|||||||||||||||||||||||
Reserves
for losses and LAE, direct
|
$
|
75,272
|
$
|
34,624
|
$
|
52,982
|
$
|
14,258
|
$
|
12,379
|
$
|
47,305
|
$
|
50,896
|
$
|
18,410
|
$
|
6,131
|
$
|
2,307
|
$
|
1,538
|
||||||||||||
Paid
(cumulative) as of:
|
||||||||||||||||||||||||||||||||||
One
year later
|
75,100
|
30,232
|
48,848
|
13,103
|
30,706
|
58,274
|
71,147
|
16,277
|
6,498
|
1,542
|
||||||||||||||||||||||||
Two
years later
|
100,296
|
74,127
|
58,281
|
37,404
|
78,647
|
125,447
|
87,343
|
22,775
|
8,040
|
|||||||||||||||||||||||||
Three
years later
|
142,850
|
82,974
|
81,887
|
83,985
|
143,564
|
140,742
|
93,828
|
24,317
|
||||||||||||||||||||||||||
Four
years later
|
151,342
|
106,274
|
128,266
|
147,856
|
157,792
|
147,101
|
95,359
|
|||||||||||||||||||||||||||
Five
years later
|
174,513
|
152,592
|
192,121
|
161,560
|
163,988
|
148,744
|
||||||||||||||||||||||||||||
Six
years later
|
220,805
|
216,383
|
205,591
|
167,615
|
165,618
|
|||||||||||||||||||||||||||||
Seven
years later
|
284,455
|
229,808
|
211,431
|
169,117
|
||||||||||||||||||||||||||||||
Eight
years later
|
297,754
|
235,648
|
212,607
|
|||||||||||||||||||||||||||||||
Nine
years later
|
303,591
|
236,818
|
||||||||||||||||||||||||||||||||
Ten
years later
|
304,760
|
|||||||||||||||||||||||||||||||||
Reserves
re-estimated as of:
|
||||||||||||||||||||||||||||||||||
One
year later
|
101,903
|
77,445
|
58,582
|
18,024
|
68,245
|
103,470
|
89,281
|
22,406
|
8,805
|
3,080
|
||||||||||||||||||||||||
Two
years later
|
145,635
|
82,716
|
61,393
|
72,546
|
121,176
|
142,211
|
93,388
|
25,081
|
9,578
|
|||||||||||||||||||||||||
Three
years later
|
150,434
|
85,519
|
116,429
|
125,089
|
159,331
|
146,152
|
96,054
|
25,854
|
||||||||||||||||||||||||||
Four
years later
|
153,521
|
140,532
|
169,157
|
163,045
|
162,998
|
148,850
|
96,814
|
|||||||||||||||||||||||||||
Five
years later
|
208,533
|
193,375
|
207,064
|
166,548
|
165,593
|
149,759
|
||||||||||||||||||||||||||||
Six
years later
|
261,389
|
231,217
|
210,486
|
168,994
|
166,493
|
|||||||||||||||||||||||||||||
Seven
years later
|
299,109
|
234,661
|
212,593
|
169,786
|
||||||||||||||||||||||||||||||
Eight
years later
|
302,550
|
236,776
|
213,224
|
|||||||||||||||||||||||||||||||
Nine
years later
|
304,664
|
237,399
|
||||||||||||||||||||||||||||||||
Ten
years later
|
305,288
|
|||||||||||||||||||||||||||||||||
Redundancy
(Deficiency)
|
$
|
(230,016
|
)
|
$
|
(202,775
|
)
|
$
|
(160,242
|
)
|
$
|
(155,528
|
)
|
$
|
(154,114
|
)
|
$
|
(102,454
|
)
|
$
|
(45,918
|
)
|
$
|
(7,444
|
)
|
$
|
(3,447
|
)
|
$
|
(773
|
)
|
Market
Share in California
Based
on Direct Premiums Written
|
||||||||||||||||
Years
Ended December 31,
|
2005
|
2004
|
2003
|
2002
|
2001
|
|||||||||||
21st
Century Insurance Group
|
6
|
%
|
7
|
%
|
6
|
%
|
6
|
%
|
6
|
%
|
||||||
State
Farm Group
|
13
|
14
|
14
|
14
|
13
|
|||||||||||
Farmers
Group
|
10
|
10
|
10
|
11
|
12
|
|||||||||||
Mercury
General Group
|
9
|
9
|
9
|
9
|
8
|
|||||||||||
Automobile
Club of Southern California Group
|
9
|
9
|
9
|
9
|
9
|
|||||||||||
California
State Auto Group
|
9
|
9
|
9
|
9
|
10
|
|||||||||||
Allstate
Insurance Group
|
9
|
8
|
8
|
9
|
11
|
|||||||||||
Progressive
Insurance Group
|
4
|
3
|
3
|
2
|
2
|
|||||||||||
USAA
Group
|
3
|
3
|
3
|
3
|
3
|
|||||||||||
Government
Employees Group (GEICO)
|
3
|
3
|
3
|
3
|
3
|
·
|
Licensing
of insurance companies, claim adjusters, and agents;
|
·
|
Prior
approval, in California and some other jurisdictions, of premium
rates;
|
·
|
Establishment
of capital and surplus requirements and standards of
solvency;
|
·
|
Nature
of, and limitations on, investments insurers are allowed to
hold;
|
·
|
Periodic
examinations of the affairs of
insurers;
|
·
|
Annual
and other periodic reports of the financial condition and results
of
operations of insurers;
|
·
|
Establishment
of statutory accounting rules;
|
·
|
Issuance
of securities by insurers;
|
·
|
Restrictions
on payment of dividends; and
|
·
|
Restrictions
on transactions with affiliates.
|
ITEM 1A. |
RISK
FACTORS
|
·
|
Establish
solvency requirements, including minimum reserves and capital and
surplus
requirements;
|
·
|
Limit
the amount of dividends, intercompany loans and other intercompany
payments our insurance company subsidiaries can make without prior
regulatory approval;
|
·
|
Impose
restrictions on the amounts and types of investments we may
hold;
|
·
|
Control
the amount and exposure of losses in Involuntary Markets that companies
must bear;
|
·
|
Require
assessments to pay claims of insolvent insurance companies;
and
|
·
|
Require
that we submit to periodic financial and operational examinations
by the
state of domicile of our respective insurance company
subsidiaries.
|
·
|
The
availability of sufficient reliable data;
|
·
|
Uncertainties
inherent in estimates and assumptions, generally;
|
·
|
Our
ability to conduct a complete and accurate analysis of available
data;
|
·
|
Our
ability to timely recognize changes in trends and to project both
the
severity and frequency of losses with reasonable accuracy;
|
·
|
Our
ability to project changes in certain operating expenses with reasonable
certainty;
|
·
|
The
development, selection and application of appropriate rating formulae
or
other pricing methodologies;
|
·
|
Our
ability to innovate with new pricing strategies, and the success
of those
innovations;
|
·
|
Our
ability to predict policyholder retention
accurately;
|
·
|
Unanticipated
court decisions, legislation or regulatory
action;
|
·
|
Ongoing
changes in our claim settlement
practices;
|
·
|
Unexpected
changes in the medical sector of the
economy;
|
·
|
Unanticipated
changes in auto repair costs, auto parts prices and used car prices;
and
|
·
|
Changing
driving patterns.
|
·
|
The
availability of sufficient reliable
data;
|
·
|
The
difficulty in predicting the rate and direction of changes in frequency
and severity trends in multiple
markets;
|
·
|
Unexpected
changes in medical and repair
costs;
|
·
|
Unanticipated
changes in governing statutes and
regulations;
|
·
|
New
or changing interpretations of insurance policy provisions by
courts;
|
·
|
Inconsistent
decisions in lawsuits regarding coverage and changing theories of
liability;
|
·
|
Ongoing
changes in claims settlement
practices;
|
·
|
The
accuracy of our estimates of the number or severity of claims that
have
been incurred but not reported as of the date of the financial
statement;
|
·
|
The
accuracy and adequacy of actuarial techniques and databases used
in
estimating loss reserves; and
|
·
|
The
accuracy of estimates of total loss and loss adjustment expenses
as
determined by our employees for different categories of claims.
|
·
|
Interest
rate risk
-
The Company’s investment portfolio contains interest rate sensitive
investments, such as municipal and corporate bonds. Increases in
market
interest rates may have an adverse impact on the value of the investment
portfolio by decreasing unrealized capital gains on fixed income
securities. Declining market interest rates could have an adverse
impact
on the Company’s investment income as it invests positive cash flows from
operations and as it reinvests proceeds from maturing and called
investments into new investments that could yield lower rates than
the
Company’s investments have historically generated. Interest rates are
highly sensitive to many factors, including governmental monetary
policies, domestic and international economic and political conditions
and
other factors beyond the Company’s control. Although the Company takes
measures to manage the risks of investing in a changing interest
rate
environment, it may not be able to mitigate interest rate sensitivity
effectively. The Company’s mitigation efforts include maintaining a high
quality portfolio with a relatively short duration to reduce the
effect of
interest rate changes on book value. Despite its mitigation efforts,
a
significant increase in interest rates could have a material adverse
effect on the Company’s book value.
|
·
|
Credit
risk -
The risk that issuers of bonds that we hold will not pay principal
or
interest when due. Credit defaults and impairments may result in
a charge
to income as we are forced to write-down the value of bonds we hold.
Credit rating agencies have downgraded, and may downgrade in the
future,
certain issuers of fixed maturity securities. At December 31, 2006,
our
bond portfolio consisted of investment grade securities. Widespread
deterioration in the credit quality of issuers could materially impact
the
value of our invested assets, as well as our earnings, liquidity,
and
capital.
|
|
·
|
Concentration
risk -
The risk that the portfolio may be too heavily concentrated in the
securities of one or more issuers, sectors or industries, which could
result in a significant decrease in the value of the portfolio in
the
event of a deterioration of the financial condition of those issuers
or
the market value of their
securities.
|
·
|
Prepayment
or extension risk (applicable to certain securities in the portfolio,
such
as residential mortgage-backed securities) -
The risk that, as interest rates change, the principal of such securities
may be repaid earlier than anticipated, adversely affecting the value
of,
or income from, such securities and the
portfolio.
|
·
|
Reinvestment
risk - The
risk that an investor will not be able to reinvest funds at as favorable
a
yield as the original investment yields.
|
·
|
State
insurance regulatory authorities require insurance companies to maintain
specified minimum levels of statutory capital and surplus.
|
·
|
Competitive
pressures require our insurance subsidiaries to maintain financial
strength ratings.
|
·
|
In
certain situations, prior approval must be obtained from state regulatory
authorities for the insurance subsidiaries to pay dividends or make
other
distributions to affiliated entities, including the holding company.
|
ITEM
1B.
|
UNRESOLVED
STAFF
COMMENTS
|
ITEM
2.
|
PROPERTIES
|
Purpose
|
Location
|
Approximate
Square
Footage
|
Owned
or
Leased
|
Headquarters
|
Woodland
Hills, California
|
406,000
|
Leased
|
Claims
offices
|
Other
California
|
159,000
|
Leased
|
Claims
offices
|
Arizona
|
13,000
|
Leased
|
Legal
offices
|
Other
California
|
21,100
|
Leased
|
Service
Center
|
Lewisville,
Texas
|
136,000
|
Owned
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
ITEM 5. |
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
(a)
|
Price
Range of Common Stock
|
Quarter
|
High
|
Low
|
Close
|
Dividends
per
Share
|
|||||||||
2006
|
|||||||||||||
1
|
$
|
17.02
|
$
|
15.28
|
$
|
15.80
|
$
|
0.08
|
|||||
2
|
16.49
|
|
13.58
|
14.40
|
0.08
|
||||||||
3
|
15.98
|
14.04
|
14.95
|
0.08
|
|||||||||
4
|
18.02
|
14.63
|
17.65
|
0.08
|
|||||||||
2005
|
|||||||||||||
1
|
$
|
14.35
|
$
|
13.00
|
$
|
13.95
|
$
|
0.04
|
|||||
2
|
15.07
|
12.90
|
14.84
|
0.04
|
|||||||||
3
|
16.30
|
14.40
|
15.95
|
0.04
|
|||||||||
4
|
17.92
|
14.83
|
16.18
|
0.04
|
(b)
|
Holders
of Common Stock
|
(c)
|
Dividends
|
(e)
|
Shareholder
Return Performance Graph
|
ITEM
6.
|
SELECTED
FINANCIAL
DATA
|
Years
Ended December 31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
Total
revenues
|
$
|
1,375,287
|
$
|
1,419,128
|
$
|
1,383,332
|
$
|
1,246,464
|
$
|
981,295
|
||||||
Net
income (loss)
|
97,228
|
87,426
|
88,225
|
53,575
|
(12,256
|
)
|
||||||||||
Basic
earnings (loss) per share
|
1.13
|
1.02
|
1.03
|
0.63
|
(0.14
|
)
|
||||||||||
Diluted earnings (loss) per share | 1.12 | 1.02 | 1.03 | 0.63 | (0.14 | ) | ||||||||||
Dividends
declared per share
|
0.32
|
0.16
|
0.08
|
0.08
|
0.26
|
|||||||||||
Total
assets
|
1,951,697
|
1,920,229
|
1,864,314
|
1,738,132
|
1,470,037
|
|||||||||||
Debt
|
115,895
|
127,972
|
138,290
|
149,686
|
60,000
|
|||||||||||
Total
liabilities
|
1,053,148
|
1,090,257
|
1,089,913
|
1,037,442
|
814,429
|
|||||||||||
Stockholders’
equity
|
898,549
|
829,972
|
774,401
|
700,690
|
655,608
|
|||||||||||
Book
value per common share
|
10.39
|
9.66
|
9.06
|
8.20
|
7.67
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
·
|
Overview
|
·
|
Results
of Operations
|
·
|
Financial
Condition
|