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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
The Registrant meets the conditions set forth in General Instructions H(1)(a)
and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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: 0-18324
CII Financial, Inc.
(Exact name of registrant as specified in charter)
California 95-4188244
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5627 Gibraltar Drive Pleasanton, California 94588
(Address of principal executive offices) (Zip Code)
(510) 416-8700
(Registrant's telephone number, including area code)
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
As of May 1, 1996 there were 100 shares of common stock outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CII FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31 December 31
1996 1995
-------------- ---------
ASSETS:
Fixed maturities:
Held to maturity, at amortized cost
(fair value $60,453 and $63,254) ............................ $ 60,503 $ 62,380
Available for sale, at fair value
(amortized cost $146,747 and $147,633)....................... 148,121 155,404
Equity securities, at fair value (cost $4,482 and $2,722)...... 4,432 2,381
Short-term investments, at cost which
approximates fair value ..................................... 529 548
Relocation mortgage loans to employees......................... 5,161 5,478
-------- --------
Total investments ........................................... 218,746 226,191
Cash and cash equivalents ........................................ 29,376 18,205
Reinsurance recoverables ......................................... 24,866 25,943
Premiums receivable, less allowance
of $1,381 and $1,381 ........................................ 10,927 11,672
Deferred policy acquisition costs ................................ 2,375 1,928
Deferred income tax .............................................. 4,154 4,154
Property and equipment, less accumulated
depreciation of $3,083 and $2,930 ............................. 3,285 3,376
Other assets ..................................................... 6,710 11,682
-------- --------
TOTAL ASSETS .................................................. $300,439 $303,151
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY:
LIABILITIES:
Reserve for losses and loss adjustment expenses .................. $181,413 $180,518
Unearned premiums ................................................ 12,046 9,282
Convertible subordinated debentures .............................. 56,800 56,800
Other liabilities ................................................ 11,659 14,377
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TOTAL LIABILITIES ............................................. 261,918 260,977
------- -------
SHAREHOLDER'S EQUITY:
Common stock:
No par value; authorized 1,000;
issued and outstanding 100 .................................... 3,604 3,604
Additional paid-in capital........................................ 58,629 58,629
Unrealized gains on securities, net of deferred taxes ............ 2,590 9,142
Accumulated deficit .............................................. (26,302) (29,201)
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TOTAL SHAREHOLDER'S EQUITY .................................... 38,521 42,174
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY .................... $300,439 $303,151
======== ========
See accompanying notes to condensed consolidated financial statements.
2
PART I - FINANCIAL INFORMATION
CII FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Ended
March 31 March 31
1996 1995
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REVENUES:
Net earned premiums .............................................. $27,613 $20,284
Investment income and other revenues ............................. 5,241 4,359
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Total revenues ................................................ 32,854 24,643
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COSTS AND EXPENSES:
Net loss and loss adjustment expenses ............................ 19,508 11,852
Policy acquisition, general and administrative ................... 9,383 9,169
Interest expense ................................................. 1,065 1,230
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Total costs and expenses ...................................... 29,956 22,251
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INCOME BEFORE TAXES AND
DISCONTINUED OPERATIONS ....................................... 2,898 2,392
Federal income tax ............................................... - -
------- -------
INCOME BEFORE DISCONTINUED OPERATIONS ............................ 2,898 2,392
Net operating loss from discontinued operations .................. - 964
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NET INCOME ....................................................... $ 2,898 $ 1,428
======= =======
EARNINGS PER SHARE:
Income before discontinued operations:
Primary ....................................................... $28,980.00 $ .33
========== =====
Fully diluted ................................................. $28,980.00 $ .32
========== =====
Discontinued operations:
Primary ....................................................... - ($ .13)
========== ======
Fully diluted ................................................. - ($ .13)
========== ======
Net income:
Primary ....................................................... $28,980.00 $ .20
========== =====
Fully diluted ................................................. $28,980.00 $ .19
========== =====
See accompanying notes to condensed consolidated financial statements.
3
PART I - FINANCIAL INFORMATION
CII FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended
March 31 March 31
1996 1995
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CASH PROVIDED (USED) BY OPERATING ACTIVITIES: .................... $ 6,274 $ (3,421)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held to maturity investments ...................... (22,969) (450)
Purchase of available for sale investments .................... (84,291) (13,723)
Disposal of held to maturity investments
upon maturity or call........................................ 24,669 473
Disposal of available for sale investments .................... 88,597 3,150
Purchase of equity investments ................................ (3,785) -
Decrease (increase) in short-term investments ................. 19 (2,411)
Financed premiums receivable ................................. - 2,463
Mortgage loan receipts ........................................ 317 54
Purchase of property and equipment ............................ (62) (247)
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Net cash provided (used) by investing activities ............ 2,495 (10,691)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock options exercised ..................... - 4
Net transfers from affiliates ................................. 2,402 -
Other ......................................................... - 1
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Net cash provided by financing activities ................... 2,402 5
-------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .............................................. 11,171 (14,107)
Cash and cash equivalents, beginning of period ................ 18,205 20,818
------ ------
Cash and cash equivalents, end of period ...................... $ 29,376 $ 6,711
======== =======
See accompanying notes to condensed consolidated financial statements.
4
PART I - FINANCIAL INFORMATION
CII FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited financial statements include the consolidated
accounts of CII Financial, Inc. ("CII", a holding company, together with its
subsidiaries collectively referred to as the "Company"). All material
intercompany balances and transactions have been eliminated. These statements
have been prepared in conformity with the generally accepted accounting
principles used in preparing the Company's annual audited consolidated
financial statements, but do not contain all of the information and
disclosures that would be required in a complete set of audited financial
statements. They should, therefore, be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the years
ended December 31, 1995 and 1994. In the opinion of management, all
adjustments, consisting only of recurring adjustments necessary for a fair
statement of the results of operations for the three months ended March 31,
1996 have been made.
2. Certain amounts in the accompanying Condensed Consolidated Financial
Statements for prior years have been reclassified to conform to those
classifications used in 1996.
5
PART I - FINANCIAL INFORMATION
CII FINANCIAL, INC. AND SUBSIDIARIES
MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
The following narrative analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated financial condition and results of operations. The discussion
should be read in conjunction with the Condensed Consolidated Financial
Statements and Notes thereto. Any forward looking information contained in this
narrative analysis of the results of operations should be considered in
connection with certain cautionary statements contained in a Current Report on
Form 8-K dated March 28, 1996, of CII Financial, Inc. which is incorporated
herein and made a part hereof. Such cautionary statements are made pursuant to
the "safe harbor" provision of the Private Securities Litigation Reform Act of
1995 and identify important risk factors that could cause the Company's actual
results to differ from those expressed in any projected, estimated or
forward-looking statements relating to the Company.
The profitability of CII Financial, Inc. and its subsidiaries
(collectively, the "Company") is affected by many factors, including, among
others, the severity and frequency of claims, state regulation of premium rates
and benefits payable for injuries and losses, general business conditions, and
competition. The historical information presented may not necessarily be
comparable to, or indicative of, future results of operations of the Company.
Current and prior financial information related to InteLock Technologies, which
was effectively disposed of in June 1996, is now being shown as a discontinued
operation. InteLock Technologies was an 80% owned subsidiary engaged in the
electronic door lock manufacturing business.
Total revenues of the Company for the three months ended March 31, 1996
increased by $8,211,000 or 33.3% to $32,854,000 compared to $24,643,000 for the
three months ended March 31, 1995. The increase in revenues was primarily due to
an increase in net earned premiums of $7,329,000 which was a result of an
increase in business written. Investment income and other revenues increased by
$882,000 due to an increase in the investment yield along with some net
investment gains and were partially offset by a reduction in other non-core
insurance operations.
Net earned premiums increased 36.1% to $27,613,000 for the three months
ended March 31, 1996, compared to $20,284,000 for the corresponding period of
the preceding year. The increase in net earned premiums was all due to an
increase in business written in California as business written in other states
was essentially unchanged. While price competition continues to remain high,
direct written premiums in California for the three months ended March 31, 1996
increased 47.9% to $27,703,000 compared to $18,737,000 for the comparable prior
year period. Direct written premiums in Colorado and other states for the three
months ended March 31, 1996 were $3,852,000 compared to $3,882,000 for the
comparable prior year period.
For the three months ended March 31, 1996, premiums in force have
increased by $13,576,000 compared to an increase of $1,212,000 for the
corresponding period of the preceding year. Premiums in force at March 31, 1996
were $117,347,000 compared to $95,303,000 for the prior preceding period. The
number of policies in force also increased in the three months ended March 31,
1996 by 1,094 or 12.3% compared to an increase of 210 for the comparable prior
year period.
The Company is in the process of establishing a service office in the
State of Texas and anticipates that it will commence writing workers'
compensation there in the second quarter of this year. The Company is also
investigating writing workers' compensation in other states.
6
CII FINANCIAL, INC. AND SUBSIDIARIES
MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS (Continued)
Investment income and other revenues increased 20.2% to $5,241,000 for
the three months ended March 31, 1996 from $4,359,000 for the corresponding
prior year period. The increase was primarily due to an increase in net realized
gains and partially to an increase in net investment income due to higher
interest rates. The average yield in the Company's investment portfolio,
excluding realized and unrealized gains, was 7.0% for the three months ended
March 31, 1996 compared to an average yield of 6.4% for the comparable prior
year period. The increase in the average yield was aided by a partial
restructuring of the investment portfolio in the fourth quarter of 1995. Further
restructuring of the investment portfolio in the first quarter of 1996 resulted
in an increase in net realized gains.
The following table shows a comparison of the insurance subsidiaries'
GAAP operating ratios for the three months ended March 31, 1996 and 1995:
1996 1995 Difference
----- ----- ----------
Loss and Loss Adjustment Expenses............... 70.65% 58.43% 12.22%
Underwriting Expenses........................... 33.68 47.30 (13.62)
------ ------ -----
Total Combined............................. 104.33% 105.73% ( 1.40)%
====== ====== ======
The increase in the loss and loss adjustment expense ratio is primarily
attributable to a higher loss ratio for the current accident year. The higher
loss ratio was impacted by the effects of the reduction in premium rates from
the competitive open rating environment. The incurred losses for the current
accident year were partially offset by favorable loss development on prior
accident years totaling $3,991,000 compared to favorable loss development of
$4,450,000 for the comparable prior year period. The loss and loss adjustment
expense ratio for the three months ended March 31, 1996 reflects the Company's
current projection of the ultimate costs of claims occurring in the current as
well as prior accident years and is within the range of reserves recommended by
the Company's independent consulting actuary.
The decrease in the underwriting expense ratio was principally due to
higher earned premiums. The commission expense ratio (including allowances to
agents) for the three months ended March 31, 1996 decreased 2.9 percentage
points to 12.3% compared to the comparable prior year period. The decrease in
the commission ratio was due to the elimination of higher commission marketing
plans in place prior to the open rating environment.
For the three months ended March 31, 1996 and 1995, there was no net
tax provision because of tax exempt interest income, utilization of loss
carryforwards and other tax credits. The deferred tax assets for the net loss
carryforwards and other temporary differences have been evaluated to determine
its probability of being realized in the future. Such evaluation considered,
among other factors, the probability of future profitability and the
establishment and reversal of permanent and temporary differences. As a result,
a valuation allowance has been established for the majority of the deferred tax
assets.
The Company had net income for the three months ended March 31, 1996 of
$2,898,000 compared to net income of $1,428,000 for the corresponding period in
the prior year.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This item is not applicable to this filing.
PART II - OTHER INFORMATION
CII FINANCIAL, INC. AND SUBSIDIARIES
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
This item is not applicable to this filing
Item 3. Defaults Upon Senior Securities
This item is not applicable to this filing
Item 4. Submission of Matters to a Vote of Security Holders
This item is not applicable to this filing
Item 5. Other Information
None
8
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10.1) Pledge Agreement between CII Financial, Inc., a
California corporation, in favor of Bank of America
National Trust and Savings Association, as agent
(together with any successor(s) thereto in such
capacity)
(10.2) Pledge Agreement between California Indemnity Insurance
Company, a California corporation, in favor of Bank of
America National Trust and Savings Association, as
agent (together with any successor(s) thereto in such
capacity)
(27) Financial Data Schedule
(b) Reports on Form 8-K
On February 14, 1996, the Company filed a Report on
Form 8-K regarding a change in certifying accountants.
On March 5, 1996, the Company filed a Report on Form
8-K regarding a notice sent to registered holders to
delist the 7 1/2% convertible subordinated Debentures.
On March 28, 1996, the Company filed a Report on Form
8-K regarding the disclosure of certain cautionary
statements pursuant to the "safe harbor" provision of
the Private Securities Litigation Reform Act of 1995.
9
SIGNATURES
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.
CII FINANCIAL, INC.
May 14, 1996 /s/ Kathleen M. Marlon
Date Kathleen M. Marlon
Chief Executive Officer
May 14, 1996 /s/ John F. Okita
Date John F. Okita
Chief Financial Officer
10