<PAGE>
- -------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
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: 001-12099
----------------
The Centris Group, Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0097221
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
650 Town Center Drive, Suite 1600, Costa Mesa, CA 92626
(Address of principal executive offices) (Zip code)
(714) 549-1600
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last
report.)
----------------
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 [_]
Number of shares outstanding of each class of the Registrant's Common Stock
as of August 2, 1999:
<TABLE>
<S> <C>
Common Stock, par value $.01 per share:......................... 11,642,776
Common Stock Purchase Rights:................................... 11,642,776
</TABLE>
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- -------------------------------------------------------------------------------
<PAGE>
INDEX
<TABLE>
<S> <C>
Part I FINANCIAL INFORMATION
Item 1. FINANCIAL INFORMATION
Unaudited Condensed Consolidated Financial Statements:
Balance Sheets as of June 30, 1999 and December 31, 1998............ 3
Income Statements for the Quarters and Six Months Ended June 30,
1999 and 1998....................................................... 4
Statements of Cash Flows for the Six Months Ended June 30, 1999 and
1998................................................................ 5
Notes to Condensed Consolidated Financial Statements................ 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................. 9
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK........ 16
Part II OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 17
Item 6. EXHIBITS and REPORTS ON FORM 8-K................................. 18
SIGNATURES................................................................. 19
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL INFORMATION
Unaudited Condensed Consolidated Financial Statements:
THE CENTRIS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
------
Investments, at market (amortized cost $77,988 at June
30, 1999, $292,181 at December 31,1998)................ $ 77,236 $292,463
Cash and invested cash.................................. 27,529 6,804
Restricted cash and short term investments.............. 31,642 29,799
Accrued investment income............................... 1,349 3,119
Assets held for transfer under pending reinsurance
agreement.............................................. 95,721 99,369
Receivables:
Reinsurance recoverable on losses and reserves........ 102,943 101,644
Premiums.............................................. 68,744 57,558
Prepaid reinsurance premiums............................ 13,264 14,507
Note receivable......................................... 20,750 --
Other assets............................................ 34,369 32,197
-------- --------
Total assets........................................ $473,547 $637,460
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities
Insurance liabilities:
Amounts due insurance companies....................... $107,706 $109,516
Losses and loss adjustment expenses................... 114,903 200,908
Unearned premiums..................................... 15,601 32,274
Pending transferable reinsurance........................ 95,721 99,369
Note payable to bank.................................... 25,000 72,550
Accounts payable and accrued expenses................... 22,173 31,809
-------- --------
Total liabilities................................... 381,104 546,426
Stockholders' Equity.................................... 92,443 91,034
-------- --------
Total liabilities and stockholders' equity.......... $473,547 $637,460
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
THE CENTRIS GROUP, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
--------------- -----------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Premiums earned........................... $21,758 $28,880 $ 43,811 $ 56,348
Managed and withdrawal lines.............. 15,760 -- 29,672 --
Commissions and fees...................... 9,639 8,982 18,154 17,520
Net investment income..................... 2,121 1,391 4,057 2,705
Realized investment gains................. 83 1,955 70 2,596
------- ------- -------- --------
Total revenues.......................... 49,361 41,208 95,764 79,169
------- ------- -------- --------
Operating Expenses:
Losses and loss adjustment expenses
incurred................................. 19,590 21,732 37,826 41,219
Managed and withdrawal lines.............. 15,760 -- 29,672 --
Policy acquisition expenses............... 7,504 9,278 14,209 18,700
General and administrative expenses....... 3,656 4,477 8,142 8,673
Interest.................................. 1,078 547 2,176 1,103
------- ------- -------- --------
Total operating expenses................ 47,588 36,034 92,025 69,695
------- ------- -------- --------
Income from continuing operations before
income taxes............................... 1,773 5,174 3,739 9,474
Income tax expense........................ 606 2,017 1,329 3,694
------- ------- -------- --------
Income from continuing operations........... 1,167 3,157 2,410 5,780
Income from discontinued operations......... -- 1,344 -- 2,955
------- ------- -------- --------
Net income.............................. $ 1,167 $ 4,501 $ 2,410 $ 8,735
======= ======= ======== ========
Basic income per share:
Income from continuing operations......... $ .10 $ .26 $ .21 $ .48
Discontinued operations................... -- .11 -- .24
------- ------- -------- --------
Net income.............................. $ .10 $ .37 $ .21 $ .72
======= ======= ======== ========
Diluted income per share:
Income from continuing operations......... $ .10 $ .25 $ .20 $ .46
Discontinued operations................... -- .11 -- .24
------- ------- -------- --------
Net income.............................. $ .10 $ .36 $ .20 $ .70
======= ======= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
THE CENTRIS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash provided by (used in) operating activities.... $ (7,042) $ 6,645
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities............... (28,128) (23,979)
Net proceeds from divestiture.................... 65,355 --
Proceeds from sales of investment securities..... 41,451 25,884
Net purchases of short term investments.......... (2,291) (10,613)
Purchases of property and equipment.............. (742) (471)
------------ ------------
Cash provided by (used in) investing
activities.................................... 75,645 (9,179)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on note payable.......................... (47,550) (2,650)
Dividends paid................................... (686) (738)
Exercise of stock options........................ 358 337
------------ ------------
Cash (used in) financing activities............ (47,878) (3,051)
------------ ------------
Net increase (decrease) in cash and invested cash.. 20,725 (5,585)
Cash and invested cash at beginning of period...... 6,804 11,122
------------ ------------
Cash and invested cash at end of period............ $ 27,529 $ 5,537
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.................................... $ 2,095 $ 1,096
============ ============
Income taxes paid, net........................... $ 579 $ 4,123
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
THE CENTRIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management all
adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. The results of
operations for the six months ended June 30, 1999 are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto for the year ended December 31, 1998 included in the 1998 Annual
Report to Stockholders of The Centris Group, Inc. (the "Company"). The Company
continues to pursue accretive acquisition and merger opportunities in
complementary business lines. Currently the Company is continuing discussions
with interested parties regarding the potential sale of the Company, but it is
not possible to predict the outcome of these discussions.
2. Changes in Capital Structure
On February 3, 1998, the Company announced that its Board of Directors had
authorized a two-for-one split of its common stock in the form of a 100% stock
dividend to stockholders of record as of February 18, 1998. Certificates
reflecting the stock split were issued February 27, 1998. All references in
the financial statements to number of shares, per share amounts and market
prices of the Company's common stock have been adjusted retroactively for all
periods presented to reflect this change in capital structure.
On September 3, 1998, the Company announced that its Board of Directors had
authorized up to $5,000,000 for the repurchase of shares of the Company's
stock. On October 13, 1998, the Company announced that the Board of Directors
had authorized the repurchase of an additional $5,000,000 of its common stock
under its existing repurchase program. Through June 30, 1999, the Company has
acquired 619,000 common shares at a cost of $6,200,000.
3. Reinsurance Agreement
In connection with the December 31, 1998, acquisition of Seaboard Life
Insurance Company (USA) (now known as Centris Life Insurance Company
("CLIC")), part of the acquisition of The VASA Group Companies, the seller
separately negotiated a reinsurance agreement with Life Reassurance
Corporation of America covering CLIC's Individual Life and Annuity business to
be retroactively effective as of July 1, 1998. The Company has classified the
liabilities relating to this agreement as pending transferable reinsurance and
has classified the related assets as assets held for transfer. CLIC and Life
Re have extended the closure date of the reinsurance transaction in order to
complete the process of securing insurance department approvals in Indiana and
California. Such approvals have been obtained and the transaction is expected
to close in the third quarter of 1999. For the second quarter and six-month
periods of 1999, income of $1,667,000 and $2,838,000 respectively was credited
to the reinsurer and is excluded from the Company's results. Any income earned
or loss incurred from the Individual Life and Annuity business line is
credited or charged to the reinsurer.
4. Discontinued Operations
The Company announced discontinuance of its property/casualty reinsurance
segment as of December 31, 1998 and recorded a $19,621,000 provision for
anticipated future costs associated with such discontinuance (the
"provision"). On June 29, 1999, the Company completed the sale to Folksamerica
Holding Company, Inc. of its property/casualty reinsurance subsidiary, USF RE
INSURANCE COMPANY ("USF RE"), for $92,500,000. Terms of the sale included a
cash payment of $71,750,000 and a $20,750,000 5-year note which bears interest
at 6.4% annually. The note is subject to downward adjustment based on future
adverse loss development. As
6
<PAGE>
THE CENTRIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
described below, net losses from discontinued operations of $(3,937,000) and
$(5,051,000) for the quarter and six months ended June 30, 1999, respectively,
were charged against the provision. The Company also charged transaction fees
and the excess of subsidiary equity on the date of sale of $94,815,000 over
the sale price of $92,500,000 to the provision. The Company is maintaining the
balance of the provision for discontinued operations as the buyer retains
control over loss development on discontinued business lines for the next five
years.
Results of operations for the discontinued property/casualty reinsurance
operations (in thousands of dollars) are as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months
June 30, Ended June 30,
---------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues.................................. $12,773 $16,985 $27,837 $32,941
======= ======= ======= =======
Income (loss) before income taxes......... $(5,634) $ 1,517 $(7,384) $ 3,400
Provision (benefit) for income taxes...... (1,697) 173 (2,333) 445
------- ------- ------- -------
Net income (loss)......................... $(3,937) $ 1,344 $(5,051) $ 2,955
======= ======= ======= =======
</TABLE>
5. Managed and Withdrawal Lines
In connection with the December 31, 1998 acquisition of the VASA Group
companies, the Company agreed to run off the remaining VASA Group medical
stop-loss, group-term life insurance and other medical lines business in
exchange for a fee that was included within the purchase price. The seller is
providing loss protection for the run-off of this business so that the Company
will have neither an underwriting gain nor incur an underwriting loss on such
business. Such items are reported as "Managed and withdrawal lines" revenues
and expenses in the Company's income statement. During the six-month period
ended June 30,1999, receivables due from the seller of $2,949,000 related to
this loss protection were recorded.
6. Note Payable
An aggregate amount of $47,550,000 of the sale proceeds received by the
Company from the sale of USF RE was used to reduce the principal amount of
Centris' outstanding note payable to Fleet National Bank from $72,550,000 to
$25,000,000. In this connection Centris entered into a Sixth Amendment to its
December 1994 Credit Agreement with Fleet National Bank ("Fleet Bank"),
pursuant to which Amendment certain terms and conditions of the Credit
Agreement were modified. Such modifications include changes in the Company's
capital requirements and interest rates applicable to the outstanding balance
of the note. Amounts outstanding bear interest at LIBOR plus a margin,
currently 1.25%. The Company's Credit Agreement contains certain covenants,
restrictions and dividend payment limitations and call provisions in the event
of non-compliance. The Company has notified Fleet Bank that the sale of USF RE
and the charge of $19,621,000 taken by the Company in connection with
discontinuing the property/casualty reinsurance segment in the fourth quarter
of 1998 will impact those covenants which are based upon the prior four
quarters of financial data. As of June 30,1998, the Company notified Fleet
Bank that it will not meet the minimum fixed charge coverage ratio and minimum
debt service coverage ratio covenants due to the circumstances previously
described. Fleet Bank has indicated that a debt covenant waiver will be issued
to the Company. However, Fleet Bank retains the option to call the note as
prescribed in the Credit Agreement if the waiver is not issued. The Company
has received no indication that Fleet Bank intends to call the debt.
7
<PAGE>
THE CENTRIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Income Per Share
Reconciliation of income and outstanding shares and related per share
amounts adjusted to reflect the February 27, 1998 two-for-one stock split, is
presented below (in thousands of dollars, except per share data):
<TABLE>
<CAPTION>
Six months
Quarter Ended Ended June
June 30, 30,
------------- -------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income(Numerator)
Income applicable to common stock for Basic
and Diluted income per share:
Income from continuing operations.......... $1,167 $3,157 $2,410 $5,780
Discontinued operations.................... -- 1,344 -- 2,955
------ ------ ------ ------
Net income................................. $1,167 $4,501 $2,410 $8,735
====== ====== ====== ======
Weighted Average Shares (Denominator)
Basic Shares................................. 11,615 12,180 11,606 12,174
Effect of dilutive securities
Common Stock Equivalents..................... 174 377 185 318
------ ------ ------ ------
Diluted Shares................................. 11,789 12,557 11,791 12,492
====== ====== ====== ======
Basic Income Per Share
Income from continuing operations............ $ .10 $ .26 $ .21 $ .48
Discontinued operations...................... -- .11 -- .24
------ ------ ------ ------
Net income................................... $ .10 $ .37 $ .21 $ .72
====== ====== ====== ======
Diluted Income Per Share
Income from continuing operations............ $ .10 $ .25 $ .20 $ .46
Discontinued operations...................... -- .11 -- .24
------ ------ ------ ------
Net income................................... $ .10 $ .36 $ .20 $ .70
====== ====== ====== ======
</TABLE>
8. Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" was adopted by the Company
effective January 1, 1998. Comprehensive income represents a measure of all
changes in equity of an enterprise that result from recognized transactions
and other economic events of the period, other than transactions with owners
in their capacity as owners. Comprehensive income for the quarterly periods
ended June 30, 1999 and 1998 was $3,658,000 and $3,872,000, respectively.
Comprehensive income for the six-month periods ended June 30, 1999 and 1998
was $1,738,000 and $8,767,000, respectively. The Company's comprehensive
income is comprised of net income for the period plus the tax effected
increase or decrease in unrealized investment gains occurring during the
period.
9. Certain Reclassifications
The 1998 Consolidated Balance Sheet presentation has been revised to conform
to the 1999 presentation.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Business Operations
General
During the second quarter of 1999 the Company continued its transformation
into a specialty insurance company focused on medical and related niche
markets. In the second quarter of 1999 the Company completed the sale of its
USF RE INSURANCE COMPANY ("USF RE") subsidiary, reduced its outstanding debt
by $47,550,000 to $25,000,000, increased its free cash flow position,
maintained its risk retention level at 25% (down from 50% in prior years) for
its medical lines business and continued the assimilation of the VASA Group
companies, acquired December 31, 1998. These major transactions, which are
more fully described in the Company's Annual Report on Form 10-K for the year
ended December 31,1998 ("1998 Form 10-K"), are reflected in the 1999 periods
and result in reduced premiums in the medical lines segment and significant
changes in the Company's balance sheet.
The Company completed the sale to Folksamerica Holding Company, Inc. of its
property/casualty reinsurance subsidiary USF RE, for $92,500,000 on June 29,
1999. Terms of the sale included a cash payment of $71,750,000 and a
$20,750,000 5-year interest-bearing note. The note, which accrues interest at
the U.S. Treasury Note rate plus 50 basis points, is adjustable downward based
on adverse loss development of USF RE's reserves at December 31, 1998. The
1999 results of operations were unaffected by the results of the
property/casualty reinsurance lines due to the provision for discontinued
operations (the "provision") reflected in the Company's December 31, 1998
results of operations. Net losses from discontinued operations of $(3,937,000)
and $(5,051,000) for the quarter and six months ended June 30, 1999,
respectively, were charged against the provision. The Company also charged
transaction fees and the excess of USF RE equity on the date of sale,
$94,815,000, over the sale price of $92,500,000 to the provision. The Company
is maintaining the balance of the provision for discontinued operations as the
buyer retains control over loss development on discontinued business lines for
the next five years. Completion of this transaction substantially eliminates
the Company's exposure to the risks of property/casualty reinsurance losses
from catastrophic events and exposure to losses from Year 2000 claims.
As more fully discussed in the Company's 1998 Form 10-K, the VASA Group
companies were acquired effective December 31,1998. The Purchase Agreement
provides for adjustment of the purchase price based upon an audit of the
financial results of the insurance company members of the group as of December
31,1998. Presently, the Company is continuing its final purchase price
negotiations with the seller, which are expected to be completed during the
third quarter of 1999. The purchase did not include the Individual Life and
Annuity ("ILA") business which is being sold separately and is expected to
close in the third quarter of 1999. Accordingly, the ILA business has no
effect on the Company's results of operations.
The Company continues to pursue accretive acquisition and merger
opportunities in complementary business lines. Currently the Company is
continuing discussions with interested parties regarding the potential sale of
the Company, but it is not possible to predict the outcome of these
discussions.
Managed And Withdrawal Lines
For the quarterly and year-to-date periods ended June 30, 1999 the Company
reported $15,760,000 and $29,672,000, respectively in both revenue and
expenses from Managed and withdrawal lines. These lines of business were
acquired as part of the VASA Group transaction, and pursuant to the terms of
the purchase agreement, the Company can neither profit nor suffer loss from
running off this business due to loss protections provided by the seller. For
further discussion of the terms and conditions of the purchase of the VASA
Group companies see the Company's 1998 Form 10-K.
9
<PAGE>
Results Of Operations
Effective January 1, 1999, the Company's risk retention level on medical
stop loss and provider excess business produced by its subsidiary, USBenefits,
was reduced to 25% from 50% in prior years. This action substantially reduced
the Company's exposure to underwriting risk. The decrease in the risk
retention level produces the declines in premiums earned in the 1999 periods
as compared to the 1998 periods. Accordingly, consolidated revenues, excluding
Managed and withdrawal lines, decreased 18.5% to $33,601,000 for the second
quarter ended June 30, 1999 from $41,208,000 in the 1998 second quarter, and
decreased 16.5% to $66,092,000 for the first six months of 1999 from
$79,169,000 for the 1998 six month period. Total medical lines business
production during the second quarter and year to date periods of 1999
increased 9.9% and 6.7%, respectively over the 1998 periods. Commissions and
fees increased in the 1999 periods as a result of higher production levels and
the effect of rate increases of between 12% to 15%. The Company's acquisition
and divestiture activities yield a decrease in invested assets from
$292,463,000 at December 31,1998 to $77,236,000 at June 30, 1999 which will
produce lower levels of investment income in future periods.
Insurance and reinsurance companies establish reserves for losses incurred,
but not yet paid or reported, in order to match such losses with the related
premiums earned. The process of establishing loss reserves is subject to
uncertainties that are a normal, recurring aspect of the insurance business
which requires the use of informed judgments and estimates. Loss and loss
adjustment expense ("LAE") reserve development is reviewed on a regular basis,
incorporating analysis of current trends, market changes in the Company's
business segments and historical experience to analyze the Company's actuarial
assumptions. As additional experience and other data becomes available, the
Company's actuarial estimates may be revised. Such revisions may impact
earnings.
Loss and loss adjustment expense decreased by 9.9%, to $19,590,000 for the
1999 second quarter compared to $21,732,000 for the 1998 quarter, and
decreased 8.2% to $37,826,000 in the 1999 year to date period from $41,219,000
in the 1998 period. These results reflect changes in the net risk retention
level in the medical lines segment to 25% on policies effective January 1,
1999 and continuing loss development on policy year 1998 and prior years for
which the Company had a net retention level of 50%. During the second quarter
of 1999, the Company purchased reinsurance coverage in connection with the
sale of USF RE that provides $5,000,000 of protection on further development
of policy year 1998 losses. No benefit was recorded as a result of the
reinsurance agreement in the second quarter of 1999. Specialty lines
experience primarily reflects changes since January 1, 1999 in retrocessional
arrangements and termination of the intercompany pooling agreement with USF
RE.
Policy acquisition expenses decreased to $7,504,000, or 19.1% in the 1999
second quarter, from $9,278,000, and declined 24% to $14,209,000 in the 1999
year to date period from $18,700,000 in the 1998 year to date period due
primarily to reductions in the cost structures associated with 1999 medical
lines policies.
General and administrative expenses of continuing operations for the second
quarter of 1999 declined 18.3% as compared to the 1998 second quarter and
declined 6.1% on a year to date basis. These results are primarily due to
allocation methods used to distribute costs between continuing and
discontinued operations. During the second half of 1999, the Company expects
general and administrative expenses to rise as it completes its major
transactions.
On a year to date basis, interest expense rose to $2,176,000, from
$1,103,000 in the 1999 period as compared to the 1998 period, due to the
December, 1998 increase in borrowing levels to finance the VASA group
acquisition. An aggregate amount of $47,550,000 of the sale proceeds received
by the Company from the June, 1999 sale of USFRE was used to reduce the
principal amount of the Company's outstanding note payable to $25,000,000 from
$72,550,000. Accordingly, interest expense will decline significantly in the
third quarter of 1999.
Net income from continuing operations decreased by 63% to $1,167,000 for the
second quarter of 1999 from $3,157,000 in the second quarter of 1998, and
decreased 58.3% to $2,410,000 for the first six months of 1999 as compared to
$5,780,000 in the 1998 six month period. These outcomes reflect completion of
the Company's major transactions begun in 1998 as well as loss development on
policy year 1998 and prior years in the medical lines segment.
10
<PAGE>
Income taxes as a percentage of pre-tax income fluctuate depending on the
proportion of tax exempt investment income to total pre-tax income and the
proportion of total income subject to state income taxes.
The statutory combined ratio is the traditional indicator of the potential
underwriting profitability of an insurance company's business. The Company's
statutory combined ratios were 111.0 and 100.4 for the six-month periods ended
June 30, 1999 and 1998, respectively.
Business Segments
The Company conducts business in two segments:
MEDICAL LINES includes (i) medical stop-loss and provider excess
coverages marketed and underwritten by USBenefits Insurance Services, Inc.
("USBenefits") on behalf of The Continental Insurance Company
("Continental"), one of the CNA Insurance Companies; (ii) catastrophic
accident and health risks underwritten and managed nationally and
internationally by INTERRA, Inc. ("INTERRA"); and (iii) reinsurance of 50%
of such business by USF RE through December 31, 1998, at which time USF RE
terminated its reinsurance of the medical lines business on a run-off
basis. Effective January 1, 1999 Centris Life Insurance Company ("CLIC")
(formerly known as Seaboard Life Insurance Company (USA)) and Centris
Insurance Company ("CIC") (formerly known as VASA North Atlantic Insurance
Company) became reinsurers of the medical lines business with net retained
liability under all medical stop-loss and provider excess contracts limited
to 25%. CLIC and CIC are rated "A-" (Excellent) by A. M. Best Company.
Medical stop-loss coverage is a form of excess insurance that protects
employers that self-fund their employee healthcare plans by limiting their
exposure from the risk of loss. Provider excess coverage limits the
financial risks healthcare providers face from medical plans that prepay
the providers fixed sums per plan participant (capitated fees) or provide
specified rates for services. Medical lines products are marketed through a
network of unaffiliated third party administrators, insurance agents,
brokers and consultants.
SPECIALTY LINES insurance underwriting is conducted by the Company's USF
Insurance Company ("USFIC") subsidiary, which is presently rated "A"
(Excellent) by A.M. Best Company, a rating that it previously shared with
USF RE, under an intercompany pooling agreement that has been terminated
effective as of January 1, 1999. A.M. Best Company has placed USFIC's
rating under review pending a visit by management to discuss historical
results and future operations. There can be no assurance that USFIC will
continue to be rated by A.M. Best Company following the disposition of USF
RE or that if USFIC continues to be rated, that it will retain its current
rating of "A". USFIC writes both standard and surplus lines insurance on
commercial and personal property/casualty risks which are marketed
exclusively through managing general agents, general agents and program
administrators.
11
<PAGE>
The tables set forth below present pre-tax operating information by business
segment and holding company operations (including realized gains) for the
quarters and six month periods ended June 30, 1999 and 1998, respectively.
MEDICAL LINES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended June
Quarter Ended June 30, 30,
---------------------- ------------------------
% %
1999 1998 Change 1999 1998 Change
------- ------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Premium Production............ $59,932 $54,558 9.9 % $113,366 $106,238 6.7 %
======= ======= ======== ========
Revenues:
Premiums earned............. $20,875 $27,279 (23)% $ 41,839 $ 53,119 (21)%
Commissions and fees........ 9,578 8,982 7 % 18,066 17,520 3 %
Investment income........... 1,871 1,063 76 % 3,432 2,060 67 %
------- ------- -------- --------
Total revenues.............. 32,324 37,324 (13)% 63,337 72,699 (13)%
------- ------- -------- --------
Expenses:
Losses and loss adjustment.. 18,733 20,770 (10)% 36,116 38,994 (7)%
Policy acquisition.......... 7,251 9,081 (20)% 13,730 18,173 (24)%
General and administrative.. 2,858 3,404 (16)% 6,435 6,679 (4)%
------- ------- -------- --------
Total expenses.............. 28,842 33,255 (13)% 56,281 63,846 (12)%
------- ------- -------- --------
Income before income taxes.... $ 3,482 $ 4,069 (14)% $ 7,056 $ 8,853 (20)%
======= ======= ======== ========
</TABLE>
The decline in premiums earned in the 1999 periods as compared to 1998 is
the result of the Company reducing its exposure to underwriting risk by
limiting its risk retention level on business written by USBenefits to 25% on
policies effective January 1, 1999 from 50% in prior periods. Total business
production for the segment increased 9.9% and 6.7% in the 1999 periods,
incorporating rate increases of 12% to 15%. Commission and fee income on this
production increased moderately in the 1999 period due to expansion of INTERRA
brokerage operations and higher production levels. Loss and loss adjustment
expenses declined 10% and 7% in the 1999 quarterly and year to date periods.
These results reflect a reduction in the net risk retention level in the
medical lines segment to 25% on policies effective January 1, 1999 as well as
loss development on policy year 1998 and prior years for which the Company had
a net retention level of 50%. During the second quarter of 1999, the Company
purchased reinsurance coverage in connection with the sale of USF RE that
provides $5,000,000 of protection on further development of policy year 1998
losses.
12
<PAGE>
SPECIALTY LINES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
% %
1999 1998 Change 1999 1998 Change
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Premiums earned.................. $ 883 $1,601 (45)% $1,972 $3,229 (39)%
Investment income................ 249 292 (15)% 624 585 7 %
------ ------ ------ ------
Total revenues................... 1,132 1,893 (40)% 2,596 3,814 (32)%
------ ------ ------ ------
Expenses:
Losses and loss adjustment....... 857 962 (11)% 1,710 2,225 (23)%
Policy acquisition............... 253 197 28 % 479 527 (9)%
General and administrative....... (181) 336 (154)% 94 488 (81)%
------ ------ ------ ------
Total expenses................... 929 1,495 (38)% 2,283 3,240 (30)%
------ ------ ------ ------
Income before income taxes......... $ 203 $ 398 (49)% $ 313 $ 574 (45)%
====== ====== ====== ======
</TABLE>
Specialty lines operating results reflect changes in reinsurance programs
and termination of the inter-company pooling agreement with the Company's USF
RE subsidiary effective January 1, 1999. These operating changes are the
principal factors impacting premiums earned, loss and loss adjustment expenses
and policy acquisition costs in the 1999 periods.
Holding Company
(Dollars in Thousands)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended June
June 30, 30,
---------------------- ----------------------
% %
1999 1998 Change 1999 1998 Change
------- ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Commission and fee income...... $ 61 $ -- $ 88 $ --
Investment income.............. 1 36 1 60 (98)%
Realized gains................. 83 1,955 (96)% 70 2,596 (97)%
------- ------ ------- ------
Total revenues................. 145 1,991 (93)% 159 2,656 (94)%
------- ------ ------- ------
Expenses:
General and administrative..... 979 737 33 % 1,613 1,506 7 %
Interest....................... 1,078 547 97 % 2,176 1,103 97 %
------- ------ ------- ------
Total expenses................. 2,057 1,284 60 % 3,789 2,609 45 %
------- ------ ------- ------
Loss before income taxes......... $(1,912) $ 707 $(3,630) $ 47
======= ====== ======= ======
</TABLE>
Changes in realized gains in the 1999 period as compared to the 1998 period
arise from the continuous evaluation of the investment portfolio in accordance
with the Company's investment guidelines. General and administrative expenses
in the 1999 periods fluctuate based upon the timing of purchased services and
the allocation of services provided to the operating subsidiaries.
Interest expense for the 1999 periods rose due to higher borrowing levels to
finance the VASA Group acquisition. Interest expense will decline in the 1999
third quarter following the reduction of outstanding debt by $47,550,000 to
$25,000,000 as a result of the completion of the sale of USF RE on June
29,1999.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company utilizes cash from operations and maturing investments to meet
its insurance obligations to policyholders and claimants, as well as to meet
operating costs. Primary sources of cash from operations include premium
collections, commissions and fees and investment income. The principal uses of
cash from operations are for premium payments to insurance companies, payments
of claims under reinsurance and insurance contracts, and operating expenses
such as salaries, commissions, taxes and general overhead. Cash available from
operations varies between periods primarily due to the timing of premium
collections and the payment of claims. In December 1998, the Company borrowed
an additional $42,700,000 under its existing Credit Agreement for the purchase
of the VASA Group companies. As previously noted, the Company received
$71,750,000 in cash upon completion of the sale of USF RE on June 29,1999 and
utilized $47,550,000 to pay down the loan balance on its Credit Agreement to
$25,000,000, resulting in a greater than 50% reduction of the debt to total
capitalizaiton ratio to 21%. This transaction also produced additional cash of
$24,000,000 available to fund the Company's business. In connection with the
sale of USF RE, the Company entered into a Sixth Amendment to its December
1994 Credit Agreement with Fleet National Bank ("Fleet Bank"), pursuant to
which Amendment certain terms and conditions of the Credit Agreement were
modified. Such modifications include changes in the Company's capital
requirements and interest rates applicable to the outstanding balance of the
bank debt. Amounts outstanding bear interest at LIBOR plus a margin, currently
1.25%. The Company's Credit Agreement contains certain covenants, restrictions
and dividend payment limitations and call provisions in the event of non-
compliance. The Company has notified Fleet Bank that the sale of USF RE and
the charge of $19,621,000 taken by the Company in connection with
discontinuing the property/casualty reinsurance segment in the fourth quarter
of 1998 will have a negative impact on covenants that are based upon the prior
four quarters of financial data. As of June 30,1999, the Company notified
Fleet Bank that it will not meet the minimum fixed charge coverage ratio and
minimum debt service coverage ratio covenants due to the circumstances
previously described. Fleet Bank has indicated that a debt covenant waiver
will be issued to the Company. However, Fleet Bank retains the option to call
the note as prescribed in the Credit Agreement if the waiver is not issued.
The Company has received no indication that Fleet Bank intends to call the
debt.
The investment portfolio reflects an allocation of approximately 92% in
fixed-income investments, primarily taxable, with an "AA" average fixed income
portfolio rating, and 8% in equities. The portfolio does not contain any real
estate investments, derivatives, high yield bonds, private placements or
mortgage loans.
Year 2000
As the Year 2000 approaches, the Company recognizes the need to ensure that
its operations will not be adversely affected by Year 2000 computer software
and hardware issues. Such issues pertain to date sensitive software and
hardware which could incorrectly recognize a two digit date field. This could
result in a system miscalculation or failure and lead to a disruption of
operations, including, among other things, a temporary inability to process
transactions, send invoices, make claims or other payments or engage in
similar activities.
The Company adopted and has implemented a formal plan to evaluate and
implement solutions to Year 2000 related problems which focuses on eight
separate compliance issues: (i) the ability of the Company's systems to handle
the transition to the Year 2000; (ii) the ability of the Company's customers
and business partners to handle the transition to the Year 2000; (iii) the
ability of the Company's vendors and service providers to handle the
transition to the Year 2000; (iv) the Company's disclosure of its Year 2000
compliance efforts to investors and regulators; (v) the Company's potential
exposure to losses from Year 2000 claims under its reinsurance contracts and
insurance policies; (vi) the Company's ability to secure and maintain
insurance coverages protecting the Company against Year 2000 losses; (vii)
budget and resource issues; and (viii) development and implementation of a
Year 2000 contingency plan.
The evaluation phase of the plan was completed in December 1997. Commencing
in 1998 and continuing in 1999, the Company has implemented and tested Year
2000 compliant systems for its corporate financial reporting system and its
medical lines operations. The Company believes that all of its internal
systems have reached a state of Year 2000 readiness and expects to continue
testing its systems during the remainder of 1999.
14
<PAGE>
In addition, the Company has solicited its trading partners including agents
and brokers, suppliers, financial institutions and others who could directly
or indirectly affect the Company's operations as to their Year 2000 compliance
efforts. Presently, these trading partners are in various stages of completion
of their own Year 2000 remediation efforts. The third party vendors providing
the Company's significant operational and financial software systems have
represented to the Company that the software now in use is Year 2000
compliant. The Company will continue to monitor the Year 2000 readiness of its
own systems, as well as the readiness of its customers, business partners,
vendors and service providers on an ongoing basis. It is presently not
possible to quantify the aggregate cost to the Company with respect to
external Year 2000 issues, if any, although the Company does not expect such
matters to have a material adverse effect on its operations.
The Company continues to monitor the status of external Year 2000 issues and
is developing contingency plans for issues that may arise. In support of this
objective, the Company has developed a worst case scenario relating to Year
2000 situations. This scenario indicates that Year 2000 risks relate to the
Company's relationships with its trading partners where concerns such as
telephone availability, fax services and telecommunications including internet
service usage could cause the Company to revise its business practices in the
event of the non availability of such common services. The Company is
presently developing alternative methods to conducting its business in the
event that a worst case scenario or element thereof was to occur. This
scenario considers it unlikely that all external trading relationships would
become useless simultaneously. Therefore, the Company's contingency plan is
based upon alternatives to the specific loss of up to two of the identified
worst case items described. The Company intends to continue testing elements
of its contingency plan throughout 1999.
Strategies have been developed to include identification of and management
of resources which can be operated in reduced or minimal modes, appropriate
recovery processes and use of alternate methods to process data. For example,
insured name clearance can be accomplished using copies of data currently
being compiled and stored off-premises, quote issuance can be performed
manually, and policy issuance can also be performed manually, so long as the
Company has access to photocopy systems and can maintain a log, either via
spreadsheet or manual listing. If necessary, claims could be processed and
paid manually and the data could be input into its systems once any problems
are resolved. Premiums, commissions, and other financial data could be
processed on a spreadsheet and checks typed on a manual basis. Alternatively,
record keeping could be kept in spreadsheet format, and the Company may rely
on the systems of one or more of its affiliated companies to perform some of
the functions affected.
In the event that the Company's systems do not function as expected and the
Company has to implement its contingency plan, the Company does not believe
there will be a material impact on the Company's operations. Critical
operational tasks which could be negatively impacted include: insured name
clearance, quote issuance, policy contract issuance, claims processing,
generation of management reports, accounting, and communications with clients.
Critical operational task data currently being produced is backed-up daily and
stored at an off-site facility and will be available for processing by either
an outside third party vendor or by the Company on a manual basis or on off-
the-shelf software which could be purchased.
As mentioned, the Company is working to make certain that its business
partners are aware of the potential risks and that they are taking steps to
make certain their systems are Year 2000 compliant. In the event a vendor,
supplier or service provider cannot certify or establish Year 2000 compliance
status to the Company by October 1, 1999, the Company will contract with
alternative sources for products and services. Further, the failure of one of
the Company's business partners to achieve compliance, or a finding that its
systems do not function as expected, may have an impact on the Company. The
Company has communicated with its business partners to determine their extent
of compliance and has learned that a variety of operating systems are being
used by them. The Company believes that it is unlikely that the failure of one
operating system to perform as expected will affect a significant portion of
its business partners at any one time.
15
<PAGE>
The Company has also taken steps to ensure that it will have adequate
insurance coverages for any Year 2000 losses that it may incur by monitoring
its coverages to ensure that there are no Year 2000 restrictions or
limitations on its policies, renewing its D&O and E&O coverages early without
any limitations pertaining to Year 2000, and by obtaining multi-year contracts
that will extend beyond the Year 2000 to ensure that its coverages are not
restricted or canceled during 1999. In addition, it is the Company's intention
to renew all of its other principal coverages to ensure that such coverages
also do not contain Year 2000 restrictions.
Forward Looking Statements
Some of the statements included within this quarterly report on Form 10-Q,
including but not limited to Management's Discussion and Analysis of Financial
Condition and Results of Operations, Condensed Consolidated Financial
Statements and related notes thereto, which are not historical facts may be
considered to be forward looking statements within the meaning of Section 29A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Such forward looking statements are subject to certain risks and
uncertainties which could cause the actual results to differ materially from
those suggested by such statements. Such risks and uncertainties include, but
are not limited to the following: catastrophic losses or a material
aggregation of such losses in the Company's insurance lines; changes in
federal or state law affecting an employer's ability to self-insure or other
adverse regulatory changes; the adequacy of the Company's reinsurance
programs; general economic conditions in this country or abroad; adverse
developments in the securities markets and their impact on the Company's
investment portfolio; the effects of competitive market pressures within the
medical lines or property/casualty marketplaces; the effect of changes
required by generally accepted accounting practices or statutory accounting
practices; failure of the company's computer systems to perform in an
appropriate manner following Year 2000 remediation efforts; failure of the
company's trading partners, customers or key vendors to make their computer
systems Year 2000 compliant in a timely manner; and other risks which are
described from time to time in the company's filings with the Securities and
Exchange Commission. The words "believes", "anticipates", " expects" and
similar expressions are intended to identify forward-looking statements.
Although the Company believes that the assumptions underlying the forward-
looking statements contained herein are reasonable, any of the assumptions
could prove to be inaccurate and, therefore there can be no assurance that
such forward-looking statements will themselves prove to be accurate. In the
light of the significant uncertainties inherent in the forward-looking
statements, the inclusion of such information should not be regarded as a
representation by the Company or by any other person that the objectives and
plans of the Company will be achieved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not believe there have been any material changes in the
market risks since December 31, 1998, which would impact the fair value of
certain assets and liabilities included in the Condensed Consolidated Balance
Sheets.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's 1999 Annual Meeting of Stockholders ("Annual Meeting") was
held on May 12, 1999 at the Company's offices in Costa Mesa, California. A
total of 10,364,216 shares were voted at the Annual Meeting in person or by
proxy, representing 89% of the shares of the Company's $.01 par value common
stock issued, outstanding and eligible to vote on the record date, March 19,
1999.
(b) The Company's board currently consists of seven directors, each serving
for three years, who are divided into three classes. Two directors are elected
at two Annual Meetings and three directors are elected at a third Annual
Meeting. At this 1999 Annual Meeting, the Company's stockholders elected two
of the Company's seven directors for a term of three years, which term expires
at the Annual Meeting of Stockholders in the year 2002. The two individuals
nominated by the Company for election at this 1999 Annual Meeting were
existing director Roxani M. Gillespie and Jose A. Velasco, the Company's
Senior Vice President and General Counsel. No individuals were nominated in
opposition to the Company's slate of directors. Set forth below are the
results of the voting for the director nominees as reported by the Inspector
of Elections for the Company's Annual Meeting. There were no broker non-votes
on this proposal.
<TABLE>
<CAPTION>
Name For Against
---- ---------- -------
<S> <C> <C>
Roxani M. Gillespie.................................... 10,279,620 84,595
Jose A. Velasco........................................ 10,283,863 80,352
</TABLE>
The five directors who are continuing in office are David L. Cargile, John
F. Kooken, L. Steven Medgyesy, Charles L. Schultz and Howard S. Singer.
(c) The Company's stockholders were asked to consider one other matter as
noted below. The affirmative vote of a majority of the shares of the Company's
common stock present at the Annual Meeting in person or by proxy and entitled
to vote was required for adoption of such matter. The results of the vote on
the proposal as reported by the Inspector of Elections is set forth below.
Ratification of the selection by the Board of Directors of KPMG LLP to
continue to serve as the Company's independent auditors for the fiscal year
ending December 31, 1999.
<TABLE>
<S> <C> <C> <C>
Broker
For Against Abstain Non-Votes
---------- ------- ------- ----------
10,073,443 277,878 12,895 --
</TABLE>
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following is a list of exhibits required to be filed as part of this
Form 10-Q by Item 601 of Regulation S-K:
<TABLE>
<C> <S>
3.1, 4.1 The Company's Restated Certificate of Incorporation, as amended, as
presently in effect. Filed as Exhibits 3.1 and 4.1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
(the "1997 Form 10-K"), and incorporated herein by this reference.
3.2, 4.2 Amended and Restated Bylaws of the Company, as presently in effect.
Filed as Exhibits 3.2 and 4.2 to the Company's 1997 Form 10-K, and
incorporated herein by this reference.
4.3 Stock Certificate of the Company. Filed as Exhibit 4.3 to the
Company's Quarterly report on Form 10-Q for the quarter ended June
30, 1997, and incorporated herein by this reference.
4.4 Rights Agreement. Filed as Exhibit 2 to the Company's Current
Report on Form 8-K dated May 24, 1990, and incorporated herein by
this reference.
4.5 First Amendment to Rights Agreement. Filed as Exhibit 1 to the
Company's Current Report on Form 8-K dated January 16, 1992, and
incorporated herein by this reference.
4.6 Second Amendment to Rights Agreement. Filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated April 29, 1994, and
incorporated herein by this reference.
4.7 Third Amendment to Rights Agreement. Filed as Exhibit 4 to the
Company's Current Report on Form 8-K dated September 28, 1995, and
incorporated herein by this reference.
4.8 Fourth Amendment to Rights Agreement. Filed as Exhibit 1 to the
Company's Current Report on Form 8-K dated July 23, 1997, and
incorporated herein by this reference.
4.9 Fifth Amendment to Rights Agreement. Filed as Exhibit 1 to the
Company's Current Report on Form 8-K dated January 28, 1998, and
incorporated herein by this reference.
11. Computation of Earnings per Share
See Note 7 of the Notes to the Condensed Consolidated Financial
Statements of The Centris Group, Inc. for the period ended
June 30,1999 set forth in Item 1 of Part 1 hereof.
15.* Independent Auditors' letter regarding unaudited interim financial
information.
27.* Financial Data Schedules
</TABLE>
- --------
* Describes exhibits filed with this Quarterly Report on Form 10-Q.
(b) During the second quarter of 1999, from April 1, 1999 through June 30,
1999 the Company did not file any Current Reports on Form 8-K with the
Securities and Exchange Commission.
18
<PAGE>
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.
The Centris Group, Inc.
Date: August 2, 1999
By: /s/ David L. Cargile
----------------------------------
David L. Cargile
Chairman of the Board, President
and Chief Executive Officer
Date: August 2, 1999 By: /s/ Charles M. Caporale
----------------------------------
Charles M. Caporale
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
19
<PAGE>
EXHIBIT 15
Independent Auditors' Review Report
-----------------------------------
The Board of Directors and Shareholders
The Centris Group, Inc.:
We have reviewed the condensed consolidated balance sheet of The Centris Group,
Inc. and subsidiaries as of June 30, 1999, and the related condensed
consolidated income statements for the quarters and six-month periods ended June
30, 1999 and 1998, and condensed consolidated statements of cash flows for the
six-month periods ended June 30, 1999 and 1998. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of The Centris Group, Inc. and
subsidiaries as of December 31, 1998, and the related consolidated income
statement, statements of stockholders' equity and cash flows for the year then
ended (not presented herein); and in our report dated March 26, 1999, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1998, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/S/ KPMG LLP
Los Angeles, California
July 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 72,236
<CASH> 27,529
<RECOVER-REINSURE> 171,687
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 473,547
<POLICY-LOSSES> 114,903
<UNEARNED-PREMIUMS> 15,601
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 25,000
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 473,547
43,811
<INVESTMENT-INCOME> 4,057
<INVESTMENT-GAINS> 70
<OTHER-INCOME> 47,826
<BENEFITS> 37,826
<UNDERWRITING-AMORTIZATION> 14,209
<UNDERWRITING-OTHER> 39,990
<INCOME-PRETAX> 3,739
<INCOME-TAX> 1,329
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,410
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.20
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
