<PAGE> 1
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-25984
=========
SUPERIOR NATIONAL INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3994873
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
26601 AGOURA ROAD
CALABASAS, CA 91302
(Address of principal executive offices)
(818) 880-1600
(Registrant's telephone number, including area code)
=========
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares of Common Stock, without par value, outstanding as of
close of business on March 31, 1996: 3,430,373 shares.
- - --------------------------------------------------------------------------------
<PAGE> 2
SUPERIOR NATIONAL INSURANCE GROUP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets as of
March 31, 1996 (unaudited) and December 31, 1995....................................... 3
Condensed consolidated statements of income for the three months ended
March 31, 1996 (unaudited) and March 31, 1995 (unaudited).............................. 4
Condensed consolidated statement of changes in shareholders' equity
for the three months ended March 31, 1996 (unaudited).................................. 5
Condensed consolidated statements of cash flows for the three months ended
March 31, 1996 (unaudited) and March 31, 1995 (unaudited).............................. 6
Notes to condensed consolidated financial statements (unaudited)................................ 7
Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations........................................................................... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................... 13
SIGNATURE........................................................................................................ 14
EXHIBIT INDEX.................................................................................................... 15
</TABLE>
<PAGE> 3
SUPERIOR NATIONAL INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1996 1995
---- ----
(Unaudited) (*)
<S> <C> <C>
Investments:
Bonds and notes:
Available-for-sale, at market
(cost: 1996, $52,850; 1995, $41,800) $ 52,795 $ 42,053
Equity securities, at market
Common stock (cost: $686; 1996 and 1995) 708 689
Funds withheld from reinsurers, at amortized cost
(market: 1996, $98,908; 1995, $117,073) 100,176 114,921
Invested cash (certificates of deposit and other
short-term instruments) 12,518 6,045
Restricted investment 1,640 1,700
--------- ---------
TOTAL INVESTMENTS 167,837 165,408
Cash (Restricted cash: 1996, $2,072; 1995, $2,686) 2,585 2,952
Reinsurance recoverables 30,679 38,892
Premiums receivables (less allowance for doubtful
accounts of $500 in 1996 and 1995) 13,390 14,724
Deferred policy acquisition costs 3,502 2,780
Income taxes 9,823 10,085
Other assets 8,622 9,501
--------- ---------
TOTAL ASSETS $ 236,438 $ 244,342
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Claims and claim adjustment expenses $ 128,534 $ 140,774
Unearned premiums 9,782 10,220
Long-term debt 8,230 8,530
Policyholder dividends 8,292 8,094
Repurchase transaction 3,640 --
Accounts payable and other liabilities 12,334 12,199
--------- ---------
TOTAL LIABILITIES 170,812 179,817
PREFERRED SECURITIES ISSUED BY AFFILIATE;
authorized 1,100,000 shares; issued and outstanding
922,137 shares in 1996 and 1995 21,659 21,045
Shareholders' Equity:
Common stock, no par value; authorized
25,000,000 shares; issued and outstanding
3,430,373 shares in 1996 and 1995 15,943 15,943
Unrealized gain on equity securities, net of taxes 14 2
Unrealized gain (loss) on available-for-sale
investments, net of income taxes (36) 167
Paid in capital - warrants 2,206 2,206
Retained earnings 25,840 25,162
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 43,967 43,480
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 236,438 $ 244,342
========= =========
</TABLE>
* Derived from audited financial statements
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
SUPERIOR NATIONAL INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
REVENUES:
Premiums written, net of reinsurance ceded $ 18,643 $ 24,562
Increase (decrease) in unearned premiums (254) 1,328
-------- --------
Net premiums earned 18,897 23,234
Net investment income 2,191 2,766
-------- --------
TOTAL REVENUES 21,088 26,000
EXPENSES:
Claims and claim adjustment expenses,
net of reinsurance recoveries 10,275 16,234
Commissions, net of reinsurance commissions 2,475 2,957
Policyholder dividends 299 623
Interest expense 2,528 2,090
General and administrative expenses
Underwriting 3,725 3,312
Other 130 106
-------- --------
TOTAL EXPENSES 19,432 25,322
-------- --------
INCOME BEFORE INCOME TAXES AND PREFERRED
SECURITIES DIVIDENDS AND ACCRETION 1,656 678
Income tax expense 573 190
-------- --------
INCOME BEFORE PREFERRED SECURITIES DIVIDENDS
AND ACCRETION 1,083 488
Preferred securities dividends and accretion,
net of taxes (405) (362)
-------- --------
NET INCOME $ 678 $ 126
======== ========
EARNINGS PER SHARE DATA:
INCOME BEFORE PREFERRED SECURITIES DIVIDENDS
AND ACCRETION $ 0.32 $ 0.14
Preferred securities dividends and accretion (0.12) (0.10)
-------- --------
NET INCOME $ 0.20 $ 0.04
======== ========
</TABLE>
See notes to condensed Consolidated Financial Statements.
4
<PAGE> 5
SUPERIOR NATIONAL INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Net Unrealized
Unrealized Gain (Loss) Total
Gain (Loss) on Available- Paid in Share-
Common on Equity for-sale Capital- Retained holders'
Stock Securities Investments Warrants Earnings Equity
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $15,943 $ 2 $ 167 $2,206 $25,162 $43,480
Net income - - - - 678 678
Change in unrealized gain
(loss) on equity securities - 12 - - - 12
Change in unrealized gain
(loss) on available-for-sale
investment, net of taxes - - (203) - - (203)
--------------------------------------------------------------------------
Balance at March 31, 1996 $15,943 $14 $ (36) $2,206 $25,840 $43,967
==========================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
SUPERIOR NATIONAL INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 678 $ 126
-------- --------
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Amortization of bonds and preferred stock (295) (1,000)
(Gain)/loss on sale of investments -- (25)
(Gain)/loss on sale of CentreRe investments (2,463) --
Preferred securities dividends and accretion 613 548
Decrease (increase) in reinsurance recoverables 8,214 (1,416)
Decrease (increase) in premiums receivables 1,334 2,771
Decrease (increase) in deferred policy acquisition costs (722) (1,033)
Decrease (increase) in income taxes 360 --
Increase (decrease) in claims and claim adjustment
expense reserves (12,240) (3,068)
Increase (decrease) in unearned premium reserves (438) 1,257
Increase (decrease) in policyholder dividends payable 198 (1,082)
Increase (decrease) in accounts payable and other
liabilities 1,041 1,761
-------- --------
Total adjustments (4,398) (1,287)
-------- --------
Net cash provided by (used in) operating activities (3,720) (1,161)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of long-term debt (300) (300)
Proceeds from repurchase transaction 3,640 --
-------- --------
Net cash provided by (used in) financing activities 3,340 (300)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of bonds and notes:
Investments available-for-sale (16,300) (6,445)
Investments funds withheld from reinsurers (59,143) --
Investments allocated to discontinued operations -- (1,581)
Sales of bonds and notes: Investments available-for-sale 4,680 2,900
Maturities of bonds and notes:
Investments held-to-maturity -- 5,220
Investments available-for-sale 437 225
Sales and maturities of bonds and notes:
Funds withheld from reinsurers 76,996 --
Net (increase) decrease in short-term investments (6,657) (249)
-------- --------
Net cash provided by (used in) investing activities 13 70
-------- --------
Net increase (decrease) in cash (367) (1,391)
Cash at beginning of period 2,952 2,533
-------- --------
Cash at end of period $ 2,585 $ 1,142
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 4 $ 4
======== ========
Cash paid during the year for interest $ 168 $ 232
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 7
SUPERIOR NATIONAL INSURANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A.1 BASIS OF PRESENTATION
Superior National Insurance Group, Inc. ("SNIG") is a holding company
that, through its wholly-owned subsidiary, Superior National Insurance Company
("SNIC"), is engaged in writings workers' compensation insurance principally in
the State of California, and until September 30, 1993, was engaged in writing
commercial property and casualty insurance. The "Company" refers to SNIG and its
subsidiaries.
The accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of regulation S-X. 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, including normally occurring accruals, considered
necessary for a fair presentation have been included. Certain reclassifications
of prior year amounts have been made to conform with the 1996 presentation.
Operating results for the three months ended March 31, 1996 are not necessarily
indicative of the results to be expected for the year ended December 31, 1996.
For further information, refer to the consolidated financial statements and
footnotes thereto included in SNIG's annual report on Form 10-K for the year
ended December 31, 1995.
A.2 EARNINGS PER SHARE ("EPS")
The EPS calculations for the three months ended March 31, 1996 and 1995
are calculated based upon the weighted average number of shares of common stock,
and adjusted for the effect, if any, of options and warrants considered to be
common stock equivalents. Stock options and warrants are considered to be common
stock equivalents, except when their effect is antidilutive. The number of
shares used in the EPS calculations are 3,430,373 shares and 3,429,873 shares
for the three months ended March 31, 1996 and 1995, respectively.
A.3 CLAIMS AND CLAIM ADJUSTMENT EXPENSES RESERVES
The liability for unpaid claims and claim adjustment expenses is based
on an evaluation of reported losses and on estimates of incurred but unreported
losses. The reserve liabilities are determined using adjusters' individual case
estimates and statistical projections, which can be affected by many external
factors that are difficult to predict, including changes in the economy, trends
in medical treatments and litigation, changes in regulatory environment, medical
services, and employment rights. The liability is reported net of estimated
salvage and subrogation recoverable. Adjustments to the liability resulting from
subsequent developments or revisions to the estimate are reflected in results of
operations in the period which such adjustment become known. While there can be
no assurance that the reserves at any given date are adequate to meet SNIG's
obligations, the amounts reported on the balance sheet are management's best
estimate of that amount.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
The following selected financial data and analysis provide an
assessment of SNIG's financial results for the three months ended March 31, 1996
as compared to the three months ended March 31, 1995. Certain prior period
amounts have been reclassified to conform to the current period presentation.
Selected financial data as reported for the three months ended March 31, 1996
and 1995 are presented below.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
(Dollars in thousands) 1996 1995
- - --------------------------------- -------- --------
<S> <C> <C>
Gross premiums written $ 20,785 $ 26,344
Net premiums written $ 18,643 $ 24,562
Net premiums earned $ 18,897 $ 23,234
Less: Net claims and LAE (10,275) (16,234)
Underwriting expenses (6,200) (6,269)
Policyholder dividends (299) (623)
-------- --------
Underwriting profit $ 2,123 $ 108
======== ========
Net investment income $ 2,191 $ 2,790
Net investment gains (losses) $ -- $ (24)
Underwriting ratios (GAAP Basis):
Net claims and LAE ratio 54.4% 69.9%
Underwriting expense ratio 32.8% 26.9%
Policyholder dividends ratio 1.6% 2.7%
-------- --------
Combined ratio 88.8% 99.5%
======== ========
</TABLE>
Underwriting profit from continuing operations increased $2.0 million
in the first quarter of 1996. The improvement in underwriting results for the
first quarter of 1996 is due to improved claim and claim adjustment expense
margins. The improved underwriting results also reflect the Company's focus on
maintaining underwriting margins by controlling writings that are not within the
Company's underwriting guidelines, curtailing writings in unprofitable agencies,
and emphasizing loss control management.
Gross premiums written decreased $5.6 million or 21% in the first
quarter of 1996. The decrease was expected as a result of the lack of mandated
rates due to the replacement of California's minimum rate law by an open rating
system effective January 1, 1995. The competitive market conditions have been
further intensified by certain carriers who are willing to underwrite business
at apparently inadequate rates. At the end of the first quarter of 1996,
production measured in policy counts was 21% higher than the first quarter of
1995, but the estimated annual premium associated with those policies was down
14%. The Company chooses not to sacrifice margin and shareholder return for the
sake of market share, and the Company will remain cautious in its premium
production consistent with its disciplined underwriting philosophy. The Company
will remain focused on small to medium size
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)
customers employing a pricing strategy adequate to produce a reasonable profit.
SNIC believes the rates it has filed with the Department of Insurance (the
"DOI") are adequate, but it is unable to predict the degree to which such rates
are competitive in the marketplace given the intense competition among insurers.
Net premiums written decreased $5.9 million or 24% in the first quarter
of 1996. The decrease in net premiums written is reflective of the decrease in
gross premiums written as discussed above.
Net premiums earned decreased $4.3 million or 19% in the first quarter
of 1996. The decrease in net premiums earned reflects the decrease in net
premiums written described above.
Net claims and LAE decreased $6.0 million or 37% in the first quarter
of 1996. The net claims and LAE ratio decreased 15.5 percentage points to 54.4%
in the first quarter of 1996 from 69.9% in the same period in 1995. The
improvement in 1996 was due primarily to improved net claims and LAE margins on
the 1996 accident year. The Company continues to experience favorable direct
development with respect to prior accident years, but adverse ceded development
generally negated favorable direct experience during the first quarter of 1996.
Underwriting expenses, excluding policyholder dividends, were flat for
the first quarter 1996 compared to 1995. However, the underwriting expenses
ratio increased 5.9 points to 32.8% for the first quarter of 1996 from 26.9% for
the corresponding period in 1995. The increase in ratio is due primarily to
decreased premium production with fixed overhead costs.
Policyholder dividends decreased $0.3 million in the first quarter of
1996. Prior to open rating, policyholder dividends served both as an economic
incentive to employers for safe operations and as a means of price
differentiation. As a result of consumers' preference for the lowest net price
at the policy's inception under open rating, dividend paying is no longer a
significant factor in the marketing or selling of workers' compensation
insurance in California. Consequently, only 17% of the estimated earned premium
effective in the first quarter of 1996 was written on a participating basis
compared to 29% in 1995 which caused the decrease in the 1996 policyholder
dividend expenses.
Net investment income decreased $0.6 million or 21% in the first
quarter of 1996 compared to the same period in 1995. $0.4 million of the
decrease was attributable to a decrease in the portfolio investment yield to
5.58% in the first quarter of 1996 from 6.43% in the same period in 1995. The
decrease is due primarily to investment dispositions in 1995 of higher yielding
investments in the funds withheld pledged assets portfolio which were replaced
by lower yielding securities. Also contributing to lower investment income in
the first quarter of 1996 is the $0.14 million decrease in investment income due
to a 5.2% (or $9.1 million) decrease in the average investable assets in the
first quarter of 1996 compared to the same period in 1995. A summary of net
investment income (excluding capital gains (losses)), the investment portfolio,
and the change in carrying value of invested assets for the three months ended
March 31, 1996 and 1995 are as follows:
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)
A summary of net investment income, excluding capital gains (losses),
for the three months ended March 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
(Dollars in thousands) 1996 1995
---- ----
<S> <C> <C>
Interest on debt instrument $2,232 $2,498
Interest on invested cash 81 354
------ ------
Total investment income 2,313 2,852
Investment expense 122 62
------ ------
Net investment income $2,191 $2,790
====== ======
</TABLE>
The distribution of SNIG's consolidated investment portfolio is as
follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
Amortized Market Amortized Market
Available for Sale: Cost Value Cost Value
- - ------------------- ---- ----- ---- -----
<S> <C> <C> <C> <C>
Government
Agencies & Authorities $34,032 $33,817 $22,549 $22,524
Collateralized Mortgage Obligations 10,475 10,284 10,753 10,779
Corporate Instruments 7,243 7,554 7,398 7,612
State & Political Subdivisions 1,100 1,140 1,100 1,138
------- ------- ------- -------
Total Available for Sale $52,850 $52,795 $41,800 $42,053
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
Amortized Market Amortized Market
Funds Withheld from Reinsurers Cost Value Cost Value
- - ------------------------------ ---- ----- ---- -----
<S> <C> <C> <C> <C>
U.S. Government $ 85,896 $ 84,847 $103,496 $105,554
Agencies & Authorities
Collateralized Mortgage Obligations 6,700 6,645 2,306 2,316
Special Revenue 2,113 2,140 2,118 2,183
Corporate Instruments 5,218 5,027 7,001 7,020
Invested Cash 249 249 -- --
-------- -------- -------- --------
Total Funds Withheld From Reinsurers $100,176 $ 98,908 $114,921 $117,073
======== ======== ======== ========
</TABLE>
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
Market Market
Equity Securities Cost Value Cost Value
- - ----------------- ---- ----- ---- -----
<S> <C> <C> <C> <C>
Corporate $686 $708 $686 $689
---- ---- ---- ----
Total $686 $708 $686 $689
==== ==== ==== ====
</TABLE>
The Company's management monitors the matching of assets and
liabilities and attempts to keep investment duration at the mid-point of the
length of its net claim and LAE payout pattern. Investment duration is the
weighted average measurement of the current maturity of a fixed income security,
in terms of time, of the present value of the future payments to be received
from that security. However, in selecting assets to purchase for its investment
portfolio, the Company considers each security's modified duration and the
effect of that security's modified duration on the portfolio's overall modified
duration. Modified duration is a measurement that estimates the percentage
change in market value of an investment for a small change in interest rates.
The modified duration of fixed maturities at March 31, 1996 was 2.19 years
compared to 4.69 years at December 31, 1995. At March 31, 1996, 98% of the
carrying values of investments in the fixed maturities portfolio were rated as
investment grade by the Securities Valuation Office of the National Association
of Insurance Commissioners.
DISCONTINUED OPERATIONS:
Discontinued operations claims moderated during the first quarter of
1996 after seven months of heavy activity associated with a California Supreme
Court decision affecting construction defect claim coverage. The Company has
significant exposure to construction defect liabilities on casualty insurance
policies underwritten from 1986 to 1991. Management believes its current
reserves are adequate to cover this increase in claims activity depending on the
length of time the recent reporting trends continue. There can be no assurance,
therefore, that further upward development of ultimate loss costs associated
with construction defect claims will not occur. The Company will continue to
monitor the adequacy of its loss reserves in the discontinued operations very
closely.
LIQUIDITY AND CAPITAL RESOURCES:
Liquidity is a measure of an entity's ability to secure sufficient cash
to meet its contractual obligations and operating needs. The Company's cash
inflows are generated from cash collected for policies sold, investment income
on the existing portfolio and sales and maturities of investments. The Company's
cash outflows consist primarily of payments for policyholders' claims, operating
expenses and dividend obligations.
Cash flow used in operations for the three months ended March 31, 1996
was $3.7 million compared to $1.2 million for the corresponding period in 1995.
The $2.6 million decline in cash from operating activities was due primarily to
a $3.2 million decrease in premiums received and $1.0 million in increased
claims payments. Partially offsetting these increases was a reduction in
policyholders dividend payments of $1.5 million in 1996.
The Company generated $3.3 million in cash from financing activities
for the three months ended March 31, 1996 and used $0.3 million for the
corresponding period in 1995. The cash generated by financing activities in the
first quarter of 1996 was funded by the proceeds received from a repurchase
transaction which was partially offset by the principal paydown of the bank term
note. The use of cash in the first quarter of 1995 was related to the principal
paydown of the bank term loan.
SNIG believes that it has adequate short-term investments and readily
marketable investment grade securities to cover both claim payments and
expenses. As of March 31, 1996, the Company had total cash, cash equivalents and
investments of $170.4 million. This amount includes $100.2 million in funds
withheld from Centre Re and $1.6 million in restricted cash. The Company's
remaining invested assets were comprised of $52.8 million
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)
in bonds and notes, held at market value; $0.7 million in equity securities; and
$12.5 million in invested cash, including certificates of deposit with
maturities less than one year and money market deposits.
Early in 1995, SNIC entered into an agreement with a national brokerage
house to allow it to enter into $5 million in repurchase agreements that are
secured by either U.S. treasuries or government agency bonds. This type of
financing allows SNIC a great deal of flexibility to manage short-term
investments, avoiding the unnecessary realization of losses to satisfy short
term cash needs. As of March 31, 1996, the book value including accrued interest
for repurchase agreement outstanding was $3.6 million. The market value of the
security underlying the agreement was $3.5 million. The agreement matured on
April 19, 1996 with an interest rate of 5.35%.
Because SNIG depends on dividends from its insurance subsidiary for its
net cash flow requirements, absent other sources of cash flow, SNIG cannot pay
dividends materially in excess of the amount of dividends that could be paid by
SNIC to SNIG. Insurance companies are also subject to restrictions affecting the
amount of stockholder dividends and advances that may be paid within any one
year without the prior approval of the DOI. The California Insurance Code
provides that amounts may be paid as dividends on an annual noncumulative basis
(generally based on the greater of (1) net income for the preceding year or (2)
10% of statutory surplus as regards policyholders as of the preceding December
31) without prior notice to, or approval by, the DOI. No ordinary dividends were
paid during the three months ended March 31, 1996.
SNIC is a party to various leases principally associated with the
Company's home and branch office space. Such leases contain provisions for
scheduled lease charges and escalations in base rent over the lease term. The
Company's minimum commitment with respect to these leases in 1996 is
approximately $1.9 million. These leases expire from 1996 to 2001.
Other than the Company's obligations to pay claims, policyholder
dividends, ceded reinsurance premiums, lease expenses and the Company's
commitments to pay principal and interest on the bank debt, the Company has no
significant cash commitments.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
Exhibit Description
27 Financial Data Schedule
(b) Reports on Form 8-K:
On February 28, 1996, the Company filed a Current Report on
Form 8-K (File No. 0-25984), under "Item 5. Other Events," in
order to report that SNIC had canceled, effective January 1,
1996, the multi-year aggregate excess of loss reinsurance
contract it had entered into with Centre effective January 1,
1993.
13
<PAGE> 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 1996 SUPERIOR NATIONAL INSURANCE GROUP, INC.
By /s/ J. Chris Seaman
----------------------
Name: J. Chris Seaman
Title: Executive Vice President and
Chief Financial Officer
14
<PAGE> 15
EXHIBIT INDEX
Exhibit Description Page
27 Financial Data Schedule 16
15
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 52,795
<DEBT-CARRYING-VALUE> 100,176
<DEBT-MARKET-VALUE> 98,908
<EQUITIES> 708
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 167,837
<CASH> 2,585
<RECOVER-REINSURE> 347
<DEFERRED-ACQUISITION> 3,502
<TOTAL-ASSETS> 236,438
<POLICY-LOSSES> 128,534
<UNEARNED-PREMIUMS> 9,782
<POLICY-OTHER> 0
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21,659
0
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18,897
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</TABLE>
