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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, 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: 0-18786
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER:
CITATION INSURANCE GROUP
STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION:
California
I.R.S. EMPLOYER IDENTIFICATION NUMBER:
94-2723335
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
One Almaden Boulevard, Suite 300
San Jose, California 95113-2213
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(408) 292-0222
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 6,407,803 shares of common
stock were outstanding as of July 31, 1996, including 313,600 shares held by a
subsidiary of registrant.
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PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
CITATION INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, DECEMBER 31,
1996 1995
----------- ------------
(In thousands) (unaudited)
ASSETS
Investments $ 124,152 $ 135,270
Cash 452 1,338
Investment income receivable 2,463 2,572
Premiums receivable 9,386 12,687
Earned but unbilled premiums 451 936
Reinsurance recoverable 12,167 12,564
Prepaid reinsurance premiums 3,174 2,907
Deferred policy acquisition costs 2,539 2,346
Property and equipment, net 904 1,035
Deferred income taxes 7,970 10,974
Other assets 1,550 1,603
--------- ---------
TOTAL ASSETS $ 165,208 $ 184,232
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loss and loss adjustment expense $ 101,223 $ 105,969
Unearned premiums 20,448 17,032
Reinsurance balances 3,253 9,896
Other liabilities 2,369 5,232
--------- ---------
TOTAL LIABILITIES 127,293 138,129
STOCKHOLDERS' EQUITY
Common stock 622 620
Additional paid-in capital 45,280 45,207
Treasury stock (2,000) (2,000)
Accumulated deficit (6,617) (1,062)
Unrealized appreciation on investments, net 630 3,338
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 37,915 46,103
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 165,208 $ 184,232
========= =========
See notes to condensed consolidated financial statements
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CITATION INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share and per share amounts)
Three Months Ended Six Months Ended
June 30 June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
REVENUES
DIRECT AND ASSUMED PREMIUMS WRITTEN $ 15,108 $ 22,236 $ 28,077 $ 42,502
---------- ---------- ---------- ----------
Net premiums written $ 13,268 $ 12,758 $ 28,895 $ 22,655
Change in unearned premiums (552) 448 (3,279) 6,503
---------- ---------- ---------- ----------
NET PREMIUMS EARNED 12,716 13,206 25,616 29,158
Net investment income 2,305 4,047 4,517 6,489
Commission and fee income 39 146 79 422
---------- ---------- ---------- ----------
15,060 17,399 30,212 36,069
---------- ---------- ---------- ----------
EXPENSES
Loss and loss adjustment expense 10,515 12,253 20,858 26,532
Policy acquisition and other
underwriting expense 5,971 4,002 10,210 8,907
Dividends to policyholders 15 (279) 30 (144)
Other operating costs and expenses 160 429 279 735
---------- ---------- ---------- ----------
16,661 16,405 31,377 36,030
---------- ---------- ---------- ----------
(LOSS) INCOME BEFORE INCOME TAXES (1,601) 994 (1,165) 39
INCOME TAXES 4,390 14 4,390 14
---------- ---------- ---------- ----------
NET (LOSS) INCOME $ (5,991) $ 980 $ (5,555) $ 25
========== ========== ========== ==========
NET (LOSS) INCOME PER SHARE $ (0.98) $ 0.16 $ (0.91) $ --
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING 6,094,203 6,069,203 6,085,274 6,069,203
========== ========== ========== ==========
See notes to condensed consolidated financial statements
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CITATION INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
------------------------
1996 1995
-------- --------
(in thousands)
NET CASH USED IN OPERATING ACTIVITIES $ (7,920) $ (3,088)
-------- --------
INVESTING ACTIVITIES:
Investments purchased (22,648) (15,282)
Investments sold 22,672 22,043
Investments matured 7,000 750
Purchases of property and equipment (65) (143)
-------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 6,959 7,368
FINANCING ACTIVITIES:
Issuance of common stock 75 --
-------- --------
(DECREASE) INCREASE IN CASH (886) 4,280
CASH, BEGINNING OF PERIOD 1,338 889
-------- --------
CASH, END OF PERIOD $ 452 $ 5,169
======== ========
See notes to condensed consolidated financial statements
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CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
1. BASIS OF ACCOUNTING
The accompanying condensed consolidated financial statements as of June 30, 1996
and for the three and six month periods then ended have been prepared in
accordance with the instructions to Form 10-Q and are unaudited; however, in
management's opinion, they include all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of results for such
interim periods. These statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in connection with the financial
statements and notes thereto included in the Company's 1995 Annual Report to
Shareholders. Interim results are not necessarily indicative of results for the
full year.
As previously reported, the Company concluded that its control over Citation
General Insurance Company ("CGIC"), one of the companies acquired when the
Registrant acquired Madison Capital, Inc. and subsidiaries in October 1993, had
become temporary in late 1994. As a result, the Company has accounted for the
results of CGIC on the equity method since November 1994 which resulted in a
write off of its remaining investment in CGIC at that date. Consequently, the
consolidated results of operations for the three and six month periods ending
June 30, 1996 and 1995 do not include the operations of CGIC. During July 1995,
CGIC was placed into conservation by the State of California, effectively
transferring control of CGIC's assets to the California Department of Insurance.
In August 1995, CGIC was placed into liquidation by the State of California.
2. INCOME TAXES
The Company reported an income tax expense of $14,000 for the second quarter of
1995 and $4,390,000 for the second quarter of 1996. The effective tax rate for
1995 and 1996 differed from the statutory rate primarily due to changes in the
valuation allowance against deferred taxes. The Company increased the valuation
allowance for deferred tax assets by $4.4 million during the second quarter of
1996 which resulted from a reduction in management's estimate of future taxable
income.
Realization of the recorded deferred tax asset is dependent on the Company's
ability to generate sufficient pre-tax and taxable income to offset the
available losses during the reversal period. Based on the expiration of existing
net operating losses, the Company will have to generate an average of
approximately $0.5 million of taxable income in each year from 1997 forward to
fully utilize the available losses, after giving effect to the valuation
allowance. The Company believes that, after giving effect to the valuation
allowance, pre-tax and taxable income in the carryforward period will be
sufficient to utilize the recorded net deferred tax assets, including the
available loss carryforwards. A change effective January 1, 1996 in the
reinsurance structure of the insurance company subsidiaries will result in a
higher percentage of retained loss reserves which will increase tax basis loss
discounts in future tax years. The change in reinsurance will also increase the
net unearned premium reserves which will increase taxable income in future tax
years. In addition, the Company has been re-underwriting the property and
casualty book of
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business to eliminate policies that have a high risk potential not contemplated
in the pricing of the policy. The Company believes that the realization of the
recorded net deferred tax asset is more likely than not. However, no assurance
can be given that the Company's pre-tax and taxable income will be sufficient to
utilize the deferred tax benefit in whole or in part. The Company's belief is
based upon certain assumptions regarding future events which may or may not
occur. If the Company is unable to achieve pre-tax income and the required
levels of taxable income in the future, the Company again may have to increase,
perhaps materially, the valuation allowance. The Company's Federal income tax
returns have not been audited by the Internal Revenue Service and all tax years
remain open to possible audit.
3. PENDING BUSINESS COMBINATION
On March 4, 1996, the Company and Physicians Insurance of Ohio ("PICO")
announced that they had signed a letter of intent for a stock-for-stock merger,
pursuant to which PICO will become a wholly-owned subsidiary of Citation. The
definitive agreement to merge the two companies was signed on May 3, 1996. As a
result of the transaction, the shareholders of PICO will own over 80 percent of
the combined company.
Under the terms of the agreement, each of PICO's outstanding shares will be
converted into Citation common stock based upon a floating exchange rate. The
exchange rate is calculated by dividing the PICO share value by $5.03 per share
of Citation stock. The PICO share value is the average closing price of PICO's
common stock for the 20 trading days prior to the determination date, within a
range of $25.20 to $30.80 per share, inclusive. The determination date will be
set by the occurrence of approvals by regulators and shareholders of both
companies. If the average closing price is less than $25.20, the PICO share
value will be $25.20, but the agreement is subject to termination by Citation if
the PICO average closing price is below $22.50. If the average closing price is
greater than $30.80, the PICO share value will be $30.80, but the agreement is
subject to termination by PICO if the average closing price is above $33.50.
The transaction is subject to regulatory approvals, approval of the transaction
by shareholders of the Company and PICO and satisfactory completion of other
conditions customary in transactions of this nature.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The statements contained in the Management's Discussion and Analysis of
Financial Condition and Results of Operations include forward-looking
information which are subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in the
forward-looking statements. These risks and uncertainties include those detailed
from time to time in the Company's filings with the Securities and Exchange
Commission and in particular risks and uncertainties regarding frequency and
severity of claims in the Company's property and casualty business, loss reserve
adequacy, rate competition and the effect of the insurance company subsidiaries'
A.M. Best ratings.
Results of Operations
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
As previously reported, the Company concluded that its control over Citation
General Insurance Company ("CGIC"), one of the companies acquired when the
Registrant acquired Madison Capital, Inc. and subsidiaries in October 1993, had
become temporary in late 1994. As a result, the Company has accounted for the
results of CGIC on the equity method since November 1994 which resulted in a
write off of its remaining investment in CGIC at that date. Consequently, the
consolidated results of operations for the three and six month periods ended
June 30, 1995 and 1996 do not include the operations of CGIC.
Direct and assumed premiums written decreased by $7.1 million, or 32.0%, in the
three months ended June 30, 1996 compared to the same period in 1995. This
decrease was the net result of a reduction of approximately $0.1 million in
aggregate workers' compensation premiums, a reduction of approximately $5.6
million in aggregate property and casualty premiums and a decrease of
approximately $1.4 million in aggregate personal automobile premiums.
The 2% decrease in workers' compensation premiums written from $5.2 million in
the second quarter of 1995 to $5.1 million in the second quarter of 1996, was
primarily a result of (a) reductions in minimum rates of 16% effective October
1, 1994, partially offset by a rate increase by the Company of 9.3% effective
January 1, 1996 and (b) a decrease in the average premium per policy to $6,926
at June 30, 1996 from $10,873 at June 30, 1995 which was primarily a result of
rate reductions and the intense competition in the California workers'
compensation market caused by the competitive rate law which went into effect
January 1, 1995. The decrease in average premium per policy was partially offset
by an increase in the number of policies in-force from approximately 1,971 at
June 30, 1995 to 2,799 at June 30, 1996.
The 36% decrease in property and casualty premiums written from $15.5 million in
the second quarter of 1995 to $9.9 million in the second quarter of 1996 was
primarily the result of approximately $4.9 million of non-recurring premium in
the second quarter of 1995 related to the transfer of in force policies of CGIC
to Citation Insurance Company. The $4.9 million of premium related to the
transfer of in force policies of CGIC during the second quarter of 1995 was a
result of the previously reported agreement with the California Department of
Insurance regarding CGIC.
The 93% decrease in personal automobile premiums written from $1.5 million in
the second quarter of 1995 to $0.1 million in the second quarter of 1996
resulted from the Company's decision to withdraw from the personal auto line of
business as further described below. Due to unsatisfactory results, the Company
terminated its agreement in October 1994 with the managing general agency
("MGA"), which had been producing this business since the Company entered this
line and decided to withdraw from this business
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as described in previous filings. Although the Company is attempting to withdraw
from the personal automobile business as quickly as possible, it may be required
to offer existing policyholders the opportunity to renew their policies. While
management believes the volume in this business will continue to decline rapidly
over the next several quarters, the policy renewal offer requirements may result
in some level of premium revenue being reported during the next two calendar
years.
Net premiums written increased $0.5 million, or 4%, in the three months ended
June 30, 1996 compared to the same period in 1995. This increase was the net
result of an increase of approximately $1.9 million attributable to property and
casualty premiums and a decrease of approximately $1.4 million attributable to
personal automobile premiums. Workers' compensation net written premium in the
three months ended June 30, 1996 was approximately equal to the net written
premium during the same period in 1995.
The changes in net workers' compensation premiums written and net personal
automobile premiums written are generally consistent with the changes in direct
and assumed premium volume for these lines of business. The significant change
in net property and casualty premiums written was primarily due to increased
premiums ceded to reinsurers in 1995 under two reinsurance agreements
aggregating $5.8 million. Of the increase in ceded premiums during the second
quarter of 1995, $5.1 million was a result of the Company entering into a new
excess of loss reinsurance agreement effective March 31, 1995. This agreement
applied to the Company's property and casualty business and generally provided
coverage for losses incurred in excess of $50,000 per occurrence up to $150,000
at which level the Company's previous reinsurance agreements provided coverage.
The remaining $0.7 million increase in ceded premiums in the second quarter of
1995 resulted from the Company amending the existing property excess of loss
reinsurance agreement whereby the reinsurance premium calculation would be based
upon written premiums rather than earned premiums. Both agreements provided for
ceding commissions which resulted in immediate increases in the Company's
statutory surplus. The agreements were cancelled effective January 1, 1996 and
replaced by a new property and casualty reinsurance agreement which generally
provides coverage for losses incurred in excess of $250,000 per occurrence.
Net premiums earned decreased by $0.5 million, or 4%, in the three months ended
June 30, 1996 compared to the same period in 1995. This decrease was primarily
the net result of a reduction of approximately $0.5 million attributable to
workers' compensation premiums, an increase of approximately $1.7 million
attributable to property and casualty premiums and a decrease of $1.7 million
attributable to personal automobile premiums. For the three months ended June
30, 1996, 41%, 57% and 2% of net premiums earned related to workers'
compensation premiums, property and casualty premiums and personal automobile
premiums, respectively, compared to 44%, 41% and 15% in the same period in 1995.
Net investment income decreased by $1.7 million or 43%, in the three months
ended June 30, 1996 compared to the second quarter of 1995. The principal reason
for the decrease was that the Company realized $1.7 million of capital gains in
the second quarter of 1995 and realized $0.1 million during the same period of
1996. In addition, the decrease is partially a result of a reduction in the
average investment portfolio during 1996 compared to 1995.
Total revenues for the second quarter of 1996 were $15.1 million, a 13% decrease
from the second quarter of 1995.
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The Company's underwriting results for the three months ended June 30, 1996 and
1995 (computed on a GAAP basis), are as follows:
Three Months Ended
June 30,
---------------------
1996 1995
---- ----
Loss and Loss Adjustment Expense Ratio 82.7% 92.8%
Underwriting Expense Ratio 47.0 30.3
Policyholder Dividend Ratio 0.1 (2.1)
----- -----
Combined Ratio 129.8% 121.0%
===== =====
Loss and loss adjustment expenses decreased $1.7 million or 14% in the second
quarter of 1996 from the second quarter of 1995. This decrease was primarily due
to the decrease in net earned premium of 4% and a decrease in the loss ratio
described below. The loss and loss adjustment expense ratio decreased to 82.7%
in the second quarter of 1996 from 92.8% in the second quarter of 1995.
The decrease in loss and loss adjustment expense ratio from the prior year
quarter is attributable to a decrease in the personal automobile loss and loss
adjustment expense ratio from 206.0% to (-)93.4% partially offset by an increase
in both the workers' compensation loss and loss adjustment expense ratio from
46.0% to 50.4% and the commercial property and casualty loss and loss adjustment
expense ratio from 101.5% to 113.4% in 1996.
The commercial property and casualty loss and loss adjustment expense ratio
increased from 101.5% in the second quarter of 1995 to 113.4% in the second
quarter of 1996. The increase is a result of unfavorable loss development from
prior year reserves of approximately $0.9 million. This development is partially
attributable to late reported claims for the artisan contractor business which
the Company discontinued writing in late 1994. As the artisan contractor
policies were written on an annual basis and covered occurrences during the
policy period, the Company had exposure to claims emanating from this line of
business throughout 1995 even though such claims may not be reported to the
Company for many years. Although management began re-underwriting the book of
business in the third quarter of 1995, the Company has experienced an increase
in the loss and loss adjustment expenses on its commercial property and casualty
line of business during 1996.
The personal automobile loss and loss adjustment expense ratio decreased from
206.0% in the second quarter of 1995 to (-)93.4% in 1996. The second quarter of
1995 results included an increase in loss reserves of $0.7 million for the 1994
accident year. The decrease in the 1996 loss and loss adjustment expense ratio
was primarily due to a decrease during the quarter in loss reserves of $0.7
million for prior accident years due to less than anticipated loss development
and a rate increase of approximately 70% which was effective in November 1995.
The 1994, 1995 and 1996 accident year loss and loss adjustment expense ratios
for personal auto have exceeded 100% for each year respectively as developed
through June 30, 1996. Primarily due to the poorer than expected operating
results, the Company decided in January 1995 to withdraw from this line of
business and focus on its primary business segments.
The increase in workers' compensation loss and loss expense ratio from 46.0% in
the second quarter of 1995 to 50.4% in the second quarter of 1996 was primarily
a result of the reduction in the favorable loss development from prior year
reserves during 1996 compared to the second quarter of 1995. The favorable loss
development from prior years' reserves in the second quarter of 1995 and 1996
resulted in a decrease in loss and loss adjustment expense of $2.2 million and
$0.7 million, respectively. Notwithstanding the increase in the loss ratio, the
workers' compensation loss and loss adjustment expense ratios in the second
quarter of 1995 and 1996 were affected by a continued favorable trend in loss
development for prior accident years. This favorable trend is a result of fewer
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than expected newly reported claims particularly for the 1993, 1994 and 1995
accident years and claim settlements for amounts lower than originally provided.
These positive factors were partially offset by reductions in policy premium
rates as a result of the open rating environment effective in California since
January 1, 1995.
Policy acquisition costs and other underwriting expenses increased $2.0 million
or 49% from the second quarter of 1995. This increase was primarily due to the
Company writing off $1.9 million in deferred policy acquisition costs associated
with the property and casualty line of business during the second quarter of
1996 due to a premium deficiency. As a percentage of net earned premium the
underwriting expense ratio increased to 47.0% from 30.3% in the second quarter
of 1995. This increase was the net result of an increase in the commercial
property and casualty underwriting expense ratio from 27.3% to 61.0%, an
increase in the personal automobile underwriting expense ratio from 32.4% to
52.5%, and a decrease in the workers' compensation underwriting expense ratio
from 32.5% to 27.3%. The increase in the property and casualty expense ratio was
primarily due to the write off of $1.9 million of deferred policy acquisition
costs and partially a result of fixed overhead expenses being incurred against a
smaller premium base. The increase in the personal automobile underwriting
expense ratio resulted primarily from the Company incurring expenses in
connection with running off the book of business.
Dividends to policyholders were $15,000 in the second quarter of 1996 compared
with (-)$279,000 in the second quarter of 1995.
The Company reported an income tax expense of $14,000 for the second quarter of
1995 and $4,390,000 for the second quarter of 1996. The effective tax rate for
1995 and 1996 differed from the statutory rate primarily due to changes in the
valuation allowance against deferred taxes. The Company increased the valuation
allowance for deferred tax assets by $4.4 million during the second quarter of
1996 which resulted from a reduction in management's estimate of future taxable
income.
Realization of the recorded deferred tax asset is dependent on the Company's
ability to generate sufficient pre-tax and taxable income to offset the
available losses during the reversal period. Based on the expiration of existing
net operating losses, the Company will have to generate an average of
approximately $0.5 million of taxable income in each year from 1997 forward to
fully utilize the available losses, after giving effect to the valuation
allowance. The Company believes that, after giving effect to the valuation
allowance, pre-tax and taxable income in the carryforward period will be
sufficient to utilize the recorded net deferred tax assets, including the
available loss carryforwards. A change effective January 1, 1996 in the
reinsurance structure of the insurance company subsidiaries will result in a
higher percentage of retained loss reserves which will increase tax basis loss
discounts in future tax years. The change in reinsurance will also increase the
net unearned premium reserves which will increase taxable income in future tax
years. In addition, the Company has been re-underwriting the property and
casualty book of business to eliminate policies that have a high risk potential
not contemplated in the pricing of the policy. The Company believes that the
realization of the recorded net deferred tax asset is more likely than not.
However, no assurance can be given that the Company's pre-tax and taxable income
will be sufficient to utilize the deferred tax benefit in whole or in part. The
Company's belief is based upon certain assumptions regarding future events which
may or may not occur. If the Company is unable to achieve pre-tax income and the
required levels of taxable income in the future, the Company may have to
increase, perhaps materially, the valuation allowance. The Company's Federal
income tax returns have not been audited by the Internal Revenue Service and all
tax years remain open to possible audit.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Direct and assumed premiums written decreased by $14.4 million, or 34.0%, in the
six months ended June 30, 1996 compared to the same period in 1995. This
decrease was the net result of a reduction of approximately $1.3 million in
aggregate workers' compensation premiums, a reduction of approximately $10.1
million in aggregate
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property and casualty premiums and a decrease of approximately $3.0 million in
aggregate personal automobile premiums.
The 11% decrease in workers' compensation premiums written from $11.6 million in
the first six months of 1995 to $10.3 million in the same period of 1996, was
primarily a result of (a) reductions in minimum rates of 16% effective October
1, 1994, partially offset by a rate increase by the Company of 9.3% effective
January 1, 1996 and (b) a decrease in the average premium per policy to $6,926
at June 30, 1996 from $10,873 at June 30, 1995 which was primarily a result of
rate reductions and the intense competition in the California workers'
compensation market caused by the competitive rate law which went into effect
January 1, 1995.
The 37% decrease in property and casualty premiums written from $27.6 million in
the first six months of 1995 to $17.5 million in the same period of 1996 was
primarily the result of approximately $9.2 million of non-recurring premium in
the first six months of 1995 related to the transfer of in force policies of
CGIC to Citation Insurance Company. The $9.2 million of premium related to the
transfer of in force policies of CGIC during the first six months of 1995 was a
result of the previously reported agreement with the California Department of
Insurance regarding CGIC.
The 91% decrease in personal automobile premiums written from $3.3 million in
the first six months of 1995 to $0.3 million in the same period of 1996 resulted
from the Company's decision to withdraw from the personal auto line of business
as previously discussed.
Net premiums written increased $6.2 million, or 28%, in the six months ended
June 30, 1996 compared to the same period in 1995. This increase was the net
result of a reduction of approximately $1.4 million attributable to workers'
compensation premiums, an increase of approximately $10.6 million attributable
to property and casualty premiums and a decrease of approximately $3.0 million
attributable to personal automobile premiums.
The decreases in net workers' compensation premiums written and net personal
automobile premiums written are generally consistent with the changes in direct
and assumed premium volume for these lines of business. The significant change
in net property and casualty premiums written was primarily due to increased
premiums ceded to reinsurers in 1995 under two reinsurance agreements
aggregating $13.1 million and the cancellation of these two treaties on January
1, 1996 which resulted in a reduction of ceded written premiums of $7.6 million
during the first quarter of 1996. This was partially offset by $2.8 million of
premiums ceded to a new reinsurance contract effective January 1, 1996. Of the
increase in ceded premiums during the first quarter of 1995, $11.0 million was a
result of the Company entering into a new excess of loss reinsurance agreement
effective March 31, 1995. This agreement applied to the Company's property and
casualty business and generally provided coverage for losses incurred in excess
of $50,000 per occurrence up to $150,000 at which level the Company's previous
reinsurance agreements provided coverage. The remaining $2.1 million increase in
ceded premiums in 1995 resulted from the Company amending the existing property
excess of loss reinsurance agreement whereby the reinsurance premium calculation
would be based upon written premiums rather than earned premiums. Both
agreements provided for ceding commissions which resulted in immediate increases
in the Company's statutory surplus.
The new property and casualty reinsurance agreement effective January 1, 1996
generally provides coverage for losses incurred in excess of $250,000 per
occurrence and required an initial cession of unearned premiums of $2.8 million.
This was more than offset by the cancellation of the above described reinsurance
agreements on January 1, 1996 in which the ceded unearned premiums were returned
to the Company in the amount of $7.6 million, effectively reversing the March
31, 1995 transactions described above.
The net effect of the changes described above which were effective January 1,
1996 was to decrease ceded written premiums and increase unearned premiums by
approximately $4.8 million, increase deferred acquisition costs by $2.3 million
and decrease reinsurance balances by $2.5 million.
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Net premiums earned decreased by $3.5 million, or 12%, in the six months ended
June 30, 1996 compared to the same period in 1995. This decrease was primarily
the net result of a reduction of approximately $2.2 million attributable to
workers' compensation premiums, an increase of approximately $2.4 million
attributable to property and casualty premiums and a decrease of $3.7 million
attributable to personal automobile premiums. For the six months ended June 30,
1996, 41%, 55% and 4% of net premiums earned related to workers' compensation
premiums, property and casualty premiums and personal automobile premiums,
respectively, compared to 44%, 40% and 16% in the same period in 1995.
Net investment income decreased by $2.0 million or 30%, in the six months ended
June 30, 1996 compared to the same period of 1995. The principal reason for the
decrease was that the Company realized $1.7 million of capital gains in the
first six months of 1995 compared to $0.1 million during the same period of
1996. In addition, the decrease is partially a result of a reduction in the
average investment portfolio during the 1996 period.
Total revenues for the first six months of 1996 were $30.2 million, a 16%
decrease from the first six months of 1995.
The Company's underwriting results for the six months ended June 30, 1996 and
1995 (computed on a GAAP basis), are as follows:
Six Months Ended
June 30, ,
---------------------------
1996 1995
---- ----
Loss and Loss Adjustment Expense Ratio 81.4% 91.0%
Underwriting Expense Ratio 39.9 30.5
Policyholder Dividend Ratio 0.1 (0.5)
----- -----
Combined Ratio 121.4% 121.0%
===== =====
Loss and loss adjustment expenses decreased $5.7 million or 21% in the six
months of 1996 from the same period of 1995. This decrease was primarily due to
the decrease in net earned premium of 12% and a decrease in the loss ratio
described below. The loss and loss adjustment expense ratio decreased to 81.4%
in the six months of 1996 from 91.0% in the first six months of 1995.
The decrease in loss and loss adjustment expense ratio from the prior year
period is attributable to a decrease in the personal automobile loss and loss
adjustment expense ratio from 174.6% to 40.2% partially offset by an increase in
both the workers' compensation loss and loss adjustment expense ratio from 55.5%
to 60.8% in 1996 and the commercial property and casualty loss and loss
adjustment expense ratio from 95.5% to 99.9%.
The commercial property and casualty loss and loss adjustment expense ratio
increased from 95.5% in the six months of 1995 to 99.9% in the same period of
1996. The increase is primarily a result of unfavorable loss development during
the first six months of 1996 from prior year reserves of approximately $0.9
million. This development is partially attributable to late reported claims for
the artisan contractor business which the Company discontinued writing in late
1994. As the artisan contractor policies were written on an annual basis and
covered occurrences during the policy period, the Company had exposure to claims
emanating from this line of business throughout 1995 even though such claims may
not be reported to the Company for many years.
The personal automobile loss and loss adjustment expense ratio decreased from
174.6% in the first six months of 1995 to 40.2% in 1996. The first six months
results of 1995 included an increase in loss reserves of $1.7 million for the
1994 accident year. The same period in 1996 includes a reduction in loss
reserves of $0.8 million for prior
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accident years due to less than anticipated loss development. The decrease in
the 1996 loss and loss adjustment expense ratio was further a result of the rate
increase of approximately 70% which was effective in November 1995.
The increase in workers' compensation loss and loss expense ratio from 55.5% in
the first six months of 1995 to 60.8% in the same period of 1996 was primarily a
result of the reduction in the favorable loss development from prior year
reserves during 1996 compared to the first six months of 1995. The favorable
loss development from prior years' reserves in the first six months of 1995 and
1996 resulted in a decrease in loss and loss adjustment expense of $4.1 million
and $2.1 million, respectively. Notwithstanding the increase in the loss ratio,
the workers' compensation loss and loss adjustment expense ratios in the six
months of 1995 and 1996 were affected by a continued favorable trend in loss
development for prior accident years. This favorable trend is a result of fewer
than expected newly reported claims particularly for the 1993, 1994 and 1995
accident years and claim settlements for amounts lower than originally provided.
These positive factors were partially offset by reductions in policy premium
rates as a result of the open rating environment effective in California since
January 1, 1995.
Policy acquisition costs and other underwriting expenses increased $1.3 million
or 15% from the first six months of 1995. This increase was primarily due the
Company writing off $1.9 million in policy acquisition costs associated with the
property and casualty line of business due to a premium deficiency, partially
offset by the decline in net earned premiums during the same comparative periods
of 12%. As a percentage of net earned premium the underwriting expense ratio
increased to 39.9% from 30.5% in the first six months of 1995. This increase was
the net result of an increase in the commercial property and casualty
underwriting expense ratio from 31.9% to 49.3%, a decrease in the personal
automobile underwriting expense ratio from 37.7% to 25.2%, and an increase in
the workers' compensation underwriting expense ratio from 26.5% to 28.7%. The
increase in the property and casualty expense ratio was primarily due to the
write off of $1.9 million in policy acquisition costs and partially a result of
fixed overhead expenses being incurred against a smaller premium base. The
decrease in the personal automobile underwriting expense ratio resulted
primarily from the Company writing off the deferred policy acquisition costs
associated with this business aggregating $485,000 at March 31, 1995.
Dividends to policyholders were $30,000 in the first six months of 1996 compared
with (-)$144,000 in the same period of 1995, reflecting management's
expectations that the Company's future policyholder dividends obligations will
be minimized.
The Company reported an income tax expense of $14,000 for the first six months
of 1995 and $4,390,000 for the same period of 1996. The effective tax rate for
1995 and 1996 differed from the statutory rate primarily due to changes in the
valuation allowance against deferred taxes. As previously discussed the Company
increased the valuation allowance for deferred tax assets by $4.4 million during
the second quarter of 1996.
Liquidity and Capital Resources
The Company's major sources of funds from operations are premiums collected and
investment income. The major uses of operating funds include the payment of
claims and underwriting and administrative expenses. The Company's current
investment strategy is to structure the portfolio to match anticipated claims
obligations as well as other operating needs. The Company used $7.9 million of
funds in operations in the first six months of 1996 and used $3.1 million during
the first six months of 1995. Funds used in the first six months of 1996 were
primarily provided from the Company's investment portfolio.
The Company believes that its current capital structure together with internally
generated funds, will be sufficient to support its operations for the
foreseeable future. The Company currently has no material commitments for
capital expenditures.
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CITATION INSURANCE GROUP
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None, except in the ordinary course of business in
connection with the insurance subsidiaries' operations.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of the
common stockholders of record as of March 29,1996 at the
Company's regularly scheduled Annual Meeting of
Shareholders on May 29, 1996.
1. To elect three directors. Messrs. James R.
Bancroft, Paul M. Bancroft and Donald Henderson
were each elected to serve a term of three years.
2. To ratify the appointment of Deloitte and Touche
LLP as independent auditors for the 1996 year.
The appointment was ratified as proposed.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Financial Data Schedule included in electronic
filing
b. No reports on Form 8-K were filed in the quarter
ended June 30, 1996.
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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.
CITATION INSURANCE GROUP
------------------------
(Registrant)
Date: August 14, 1996 Donald Henderson
-----------------------------
President & Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1996 Robert M. Erickson
-----------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
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