<PAGE> 1
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 September 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 October 31, 1996, including 313,600 shares held by
a subsidiary of registrant.
1 of 15
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
CITATION INSURANCE GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
(In thousands) (unaudited)
<S> <C> <C>
ASSETS
Investments $ 120,215 $ 135,270
Cash 480 1,338
Investment income receivable 2,159 2,572
Premiums receivable 8,519 12,687
Earned but unbilled premiums 318 936
Reinsurance recoverable 11,882 12,564
Prepaid reinsurance premiums 2,814 2,907
Deferred policy acquisition costs 2,487 2,346
Property and equipment, net 818 1,035
Deferred income taxes 6,415 10,974
Other assets 2,235 1,603
--------- ---------
TOTAL ASSETS $ 158,342 $ 184,232
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loss and loss adjustment expense $ 100,294 $ 105,969
Unearned premiums 19,498 17,032
Reinsurance balances 1,721 9,896
Other liabilities 1,566 5,232
--------- ---------
TOTAL LIABILITIES 123,079 138,129
STOCKHOLDERS' EQUITY
Common stock 622 620
Additional paid-in capital 45,280 45,207
Treasury stock (2,000) (2,000)
Accumulated deficit (9,277) (1,062)
Unrealized appreciation on investments, net of related tax 638 3,338
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 35,263 46,103
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 158,342 $ 184,232
========= =========
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE> 3
CITATION INSURANCE GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
DIRECT AND ASSUMED PREMIUMS WRITTEN $ 13,146 $ 17,286 $ 41,223 $ 59,788
----------- ---------- ----------- -----------
Net premiums written $ 11,794 $ 10,936 $ 40,689 $ 33,591
Change in unearned premiums 592 558 (2,687) 7,061
----------- ---------- ----------- -----------
NET PREMIUMS EARNED 12,386 11,494 38,002 40,652
Net investment income 2,166 2,531 6,683 9,021
Commission and fee income 31 108 110 530
----------- ---------- ----------- -----------
14,583 14,133 44,795 50,203
----------- ---------- ----------- -----------
EXPENSES
Loss and loss adjustment expense 11,952 9,705 32,810 36,237
Policy acquisition and other
underwriting expense 3,948 3,995 14,159 12,903
Dividends to policyholders 15 58 45 (86)
Other operating costs and expenses 328 300 606 1,035
----------- ---------- ----------- -----------
16,243 14,058 47,620 50,089
----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (1,660) 75 (2,825) 114
INCOME TAXES 1,000 14 5,390 28
----------- ---------- ----------- -----------
NET INCOME (LOSS) $ (2,660) $ 61 $ (8,215) $ 86
=========== ========== =========== ===========
NET INCOME (LOSS) PER SHARE $ (0.44) $ .01 $ (1.35) $ .01
=========== ========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 6,094,203 6,097,109 6,088,251 6,080,829
=========== ========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE> 4
CITATION INSURANCE GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $(11,832) $ (6,370)
-------- --------
INVESTING ACTIVITIES:
Investments purchased (22,648) (45,686)
Investments sold 26,616 49,654
Investments matured 7,000 3,750
Purchases of property and equipment (69) (237)
-------- --------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 10,899 7,481
FINANCING ACTIVITIES:
Issuance of common stock 75 --
-------- --------
INCREASE (DECREASE) IN CASH (858) 1,111
CASH, BEGINNING OF PERIOD 1,338 889
-------- --------
CASH, END OF PERIOD $ 480 $ 2,000
======== ========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE> 5
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
1. BASIS OF ACCOUNTING
The accompanying condensed consolidated financial statements as of September 30,
1996 and for the three and nine month periods ended September 30, 1996 and 1995
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 nine month periods ending
September 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 $28,000 for the first nine months
of 1995 and $5.4 million for the first nine months of 1996. The effective tax
rate for 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 and $1.5 million in the third 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 $0.2 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 may increase tax basis loss
discounts in future tax years. The change in reinsurance may also increase the
net unearned premium reserves which may increase taxable income in future tax
years. In addition, the Company has been re-underwriting the property and
casualty book of
5
<PAGE> 6
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. On November 7, 1996, the Shareholders of the Company and
PICO voted for the approval of the merger. The closing date is expected to be on
or about November 20, 1996.
The transaction is subject to other conditions customary in transactions of this
nature.
6
<PAGE> 7
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, but are not
limited to, 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 SEPTEMBER 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 nine month periods ended
September 30, 1995 and 1996 do not include the operations of CGIC.
Direct and assumed premiums written decreased by $4.2 million, or 24%, in the
three months ended September 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 $1.3
million in aggregate property and casualty premiums and a decrease of
approximately $1.6 million in aggregate personal automobile premiums.
The 22% decrease in workers' compensation premiums written from $5.8 million in
the third quarter of 1995 to $4.5 million in the third 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 number of policies in-force from
approximately 2,758 at September 30, 1995 to 1,974 at September 30, 1996.
The 13% decrease in property and casualty premiums written from $9.8 million in
the third quarter of 1995 to $8.5 million in the third quarter of 1996 was
primarily the result of a decrease in average premium per policy of $4,808 at
September 30, 1995 to $4,367 at September 30, 1996 which was primarily caused by
a reduction in the size of risks underwritten by the Company. Management
believes that this was primarily a result of the reduction of the insurance
company subsidiary's A.M. Best rating late in the second quarter of 1995 which
caused larger insured risks to seek coverage with companies with higher A.M.
Best ratings.
The 94% decrease in personal automobile premiums written from $1.7 million in
the third quarter of 1995 to $0.1 million in the third quarter of 1996 resulted
from the Company's decision to withdraw from the personal auto line of business
in January, 1995. While management believes the volume of this business will
continue to decline over the next several quarters, policy renewal offer
requirements may result in some level of premium revenue being reported during
the next two calendar years.
Net premiums written increased $0.9 million, or 8%, in the three months ended
September 30, 1996 compared to the same period in 1995. This increase was the
net result of an increase of approximately $3.7
7
<PAGE> 8
million attributable to property and casualty premiums, a decrease of
approximately $1.6 million attributable to personal automobile premiums and a
decrease of approximately $1.2 million attributable to workers' compensation
premiums.
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 $3.0 million. Of the decrease in ceded premiums from the third
quarter of 1995, $2.8 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 $0.2 million decrease in ceded premiums from the third 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 increased by $0.9 million, or 8%, in the three months ended
September 30, 1996 compared to the same period in 1995. This increase was
primarily the net result of a reduction of approximately $0.8 million
attributable to workers' compensation premiums, an increase of approximately
$3.3 million attributable to property and casualty premiums and a decrease of
$1.6 million attributable to personal automobile premiums. For the three months
ended September 30, 1996, 35%, 63% and 2% of net premiums earned related to
workers' compensation premiums, property and casualty premiums and personal
automobile premiums, respectively, compared to 45%, 39% and 16% in the same
period in 1995.
Net investment income decreased by $0.4 million or 14%, in the three months
ended September 30, 1996 compared to the third quarter of 1995. The decrease is
principally a result of a reduction in the average investment portfolio during
1996 compared to 1995.
Total revenues for the third quarter of 1996 were $14.6 million, a 3% increase
from the third quarter of 1995.
The Company's underwriting results for the three months ended September 30, 1996
and 1995 (computed on a GAAP basis), are as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------
1996 1995
---- ----
<S> <C> <C>
Loss and Loss Adjustment Expense Ratio 96.5% 84.4%
Underwriting Expense Ratio 31.9 34.8
Policyholder Dividend Ratio 0.1 0.5
----- -----
Combined Ratio 128.5% 119.7%
===== =====
</TABLE>
Loss and loss adjustment expenses increased $2.2 million or 23% in the third
quarter of 1996 from the third quarter of 1995. This increase was primarily due
to an increase in the loss ratio described below and an increase
8
<PAGE> 9
in net earned premiums of 8%. The loss and loss adjustment expense ratio
increased to 96.5% in the third quarter of 1996 from 84.4% in the third quarter
of 1995.
The increase in loss and loss adjustment expense ratio from the prior year
quarter is attributable to an increase in both the workers' compensation loss
and loss adjustment expense ratio from 77.9% to 123.2% and the commercial
property and casualty loss and loss adjustment expense ratio from 83.0% to 83.2%
in 1996 partially offset by a decrease in personal automobile loss and loss
adjustment expense ratio from 106.4% to 50.1%.
The increase in workers' compensation loss and loss expense ratio from 77.9% in
the third quarter of 1995 to 123.2% in the third quarter of 1996 was primarily a
result of unfavorable loss development from prior year reserves during 1996
compared to favorable loss development in the third quarter of 1995 and from an
increase in the projected 1996 accident year loss and loss adjustment expense
ratio. The favorable loss development from prior years' reserves in the third
quarter of 1995 was $2.3 million compared to an unfavorable loss development in
the third quarter of 1996 of $1.0 million. The 1995 and 1996 accident year loss
and loss expense ratios reflect the reductions in policy premium rates as a
result of the open rating environment effective in California since January 1,
1995.
The commercial property and casualty loss and loss adjustment expense ratio was
approximately the same in the third quarter of 1995 as in the third quarter of
1996. The loss and loss expenses in the third quarter of 1996 include
unfavorable loss development from prior year reserves of approximately $0.2
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
106.4% in the third quarter of 1995 to 50.1% in 1996. The decrease in the 1996
loss and loss adjustment expense ratio was primarily due to a decrease during
the quarter in loss reserves of $0.2 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 as developed through September 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.
Policy acquisition costs and other underwriting expenses were approximately the
same in the third quarter of 1995 as compared to the third quarter of 1996. As a
percentage of net earned premium the underwriting expense ratio decreased to
31.9% from 34.8% in the third quarter of 1995. This decrease was the net result
of a decrease in the commercial property and casualty underwriting expense ratio
from 54.2% to 35.7%, an increase in the personal automobile underwriting expense
ratio from 26.7% to 36.9%, and an increase in the workers' compensation
underwriting expense ratio from 20.2% to 24.5%. The decrease in the property and
casualty expense ratio and increase in the workers' compensation expense ratio
was primarily due to a change in the third quarter of 1995 in the allocation of
overhead expenses in connection with changes in the Company's mix of business
and cost structure. The decrease in the property and casualty expense ratio was
partially offset by 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 third quarter of 1996 compared
with $58,000 in the third quarter of 1995.
9
<PAGE> 10
The Company reported an income tax expense of $14,000 for the third quarter of
1995 and $1.0 million for the third quarter of 1996. The effective tax rate for
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 $1.5 million during the third 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 $0.2 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 may 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.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Direct and assumed premiums written decreased by $18.6 million, or 31%, in the
nine months ended September 30, 1996 compared to the same period in 1995. This
decrease was the net result of a reduction of approximately $2.7 million in
aggregate workers' compensation premiums, a reduction of approximately $11.4
million in aggregate property and casualty premiums and a decrease of
approximately $4.5 million in aggregate personal automobile premiums.
The 15% decrease in workers' compensation premiums written from $17.4 million in
the first nine months of 1995 to $14.7 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 number of policies in-force from
approximately 2,758 at September 30, 1995 to 1,974 at September 30, 1996.
The 31% decrease in property and casualty premiums written from $37.4 million in
the first nine months of 1995 to $26.0 million in the same period of 1996 was
primarily the result of approximately $9.2 million of non-recurring premium in
the first nine 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 nine months of 1995 was a
result of the previously reported agreement with the California Department of
Insurance regarding CGIC. The decrease was also partially a result of a decrease
in average premium per policy from $4,808 at September 30, 1995 to $4,367 at
September 30, 1996 which was primarily caused by a reduction in the insurance
company subsidiary's A.M. Best rating late in the second quarter of 1995.
The 90% decrease in personal automobile premiums written from $5.0 million in
the first nine months of 1995 to $0.5 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.
10
<PAGE> 11
Net premiums written increased $7.1 million, or 21%, in the nine months ended
September 30, 1996 compared to the same period in 1995. This increase was the
net result of a reduction of approximately $2.6 million attributable to workers'
compensation premiums, an increase of approximately $14.2 million attributable
to property and casualty premiums and a decrease of approximately $4.5 million
attributable to personal automobile premiums.
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 decreased
premiums ceded to reinsurers from 1995 under two reinsurance agreements
aggregating $16.1 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
higher ceded premiums during the first quarter of 1995, $13.8 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 $2.3 million decrease in
ceded premiums from 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.
Net premiums earned decreased by $2.6 million, or 7%, in the nine months ended
September 30, 1996 compared to the same period in 1995. This decrease was
primarily the net result of a reduction of approximately $3.1 million
attributable to workers' compensation premiums, an increase of approximately
$5.8 million attributable to property and casualty premiums and a decrease of
$5.3 million attributable to personal automobile premiums. For the nine months
ended September 30, 1996, 39%, 58% and 3% 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 $2.3 million or 26%, in the nine months ended
September 30, 1996 compared to the same period of 1995. The principal reason for
the decrease was that the Company realized $1.9 million of capital gains in the
first nine months of 1995 compared to $0.2 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 nine months of 1996 were $44.8 million, an 11%
decrease from the first nine months of 1995.
11
<PAGE> 12
The Company's underwriting results for the nine months ended September 30, 1996
and 1995 (computed on a GAAP basis), are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1996 1995
---- ----
<S> <C> <C>
Loss and Loss Adjustment Expense Ratio 86.3% 89.1%
Underwriting Expense Ratio 37.3 31.7
Policyholder Dividend Ratio 0.1 (0.2)
----- -----
Combined Ratio 123.7% 120.6%
===== =====
</TABLE>
Loss and loss adjustment expenses decreased $3.4 million or 9% in the nine
months of 1996 from the same period of 1995. This decrease was primarily due to
the decrease in net earned premium of 7% and a decrease in the loss ratio
described below. The loss and loss adjustment expense ratio decreased to 86.3%
in the nine months of 1996 from 89.1% in the first nine 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 155.8% to 41.9% partially offset by an increase in
both the workers' compensation loss and loss adjustment expense ratio from 61.9%
to 79.0% in 1996 and the commercial property and casualty loss and loss
adjustment expense ratio from 92.0% to 93.9%.
The commercial property and casualty loss and loss adjustment expense ratio
increased from 92.0% in the nine months of 1995 to 93.9% in the same period of
1996. The increase is primarily a result of unfavorable loss development during
the first nine months of 1996 from prior year reserves of approximately $1.1
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
155.8% in the first nine months of 1995 to 41.9% in 1996. The first nine 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 $1.0 million for prior 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 61.9% in
the first nine months of 1995 to 79.0% 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 nine months of 1995. The favorable
loss development from prior years' reserves in the first nine months of 1995 and
1996 resulted in a decrease in loss and loss adjustment expense of $6.4 million
and $1.0 million, respectively. Notwithstanding the increase in the loss ratio,
the workers' compensation loss and loss adjustment expense ratios in the nine
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 more than offset by reductions in policy premium
rates as a result of the open rating environment effective in California since
January 1, 1995 which affected the 1995 and 1996 accident year loss and loss
expense ratios.
12
<PAGE> 13
Policy acquisition costs and other underwriting expenses increased $1.3 million
or 10% from the first nine months of 1995. This increase was primarily due to
the Company writing off $2.2 million in policy acquisition costs associated with
the property and casualty line of business due to a premium deficiency in the
first nine months of 1996, partially offset by the decline in expenses related
to the lower net earned premiums during 1996. As a percentage of net earned
premium the underwriting expense ratio increased to 37.3% from 31.7% in the
first nine months of 1995. This increase was the net result of an increase in
the commercial property and casualty underwriting expense ratio from 38.2% to
44.4%, a decrease in the personal automobile underwriting expense ratio from
34.7% to 27.2%, and an increase in the workers' compensation underwriting
expense ratio from 24.9% to 27.5%. The increase in the property and casualty
expense ratio was primarily due to the write off of $2.2 million in policy
acquisition costs in the first nine months of 1996 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 in the nine month period
ended September 30, 1995.
Dividends to policyholders were $45,000 in the first nine months of 1996
compared with ($86,000) 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 $28,000 for the first nine months
of 1995 and $5.4 million for the same period of 1996. The effective tax rate for
1996 differed from the statutory rate primarily due to changes in the valuation
allowance against deferred taxes. As previously discussed, the Company recorded
a $5.9 million increase in the valuation allowance during the first nine months
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 $11.8 million of
funds in operations in the first nine months of 1996 and used $6.4 million
during the first nine months of 1995. Funds used in the first nine 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.
13
<PAGE> 14
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 September 20, 1996 at a Special
Meeting of Shareholders scheduled on November 7, 1996.
1. To consider and vote upon a proposed merger (the "Merger")
of Citation Holdings, Inc., an Ohio corporation ("Holdings")
and a wholly-owned subsidiary of Citation, with and into
Physicians Insurance Company of Ohio, an Ohio corporation
("PICO"), pursuant to an Agreement and Plan of
Reorganization (the "Merger Agreement"), dated as of May 1,
1996, as amended, by and among PICO, Citation and Holdings.
2. If the Merger is approved, to consider and vote upon certain
amendments to Citation's Articles of Incorporation in
connection with the Merger, including an increase in the
authorized capitalization of Citation.
3. If the Merger is approved, to consider and vote upon certain
amendments to Citation's Bylaws in connection with the
Merger.
At the meeting, the Merger was approved by a vote of
4,013,521 in favor, 2,900 against, 40,054 abstain and
122,331 broker non-votes. The Amendment to the Articles of
Incorporation was approved by a vote of 4,048,934 in favor,
88,818 against and 41,054 abstain. The Amendment to the
By-Laws was approved by 4,124,727 in favor, 2,400 against
and 51,679 abstain.
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
September 30, 1996.
14
<PAGE> 15
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: November 14, 1996 Robert M. Erickson
------------------------------
Acting Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1996 Robert M. Erickson
------------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
15
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS OF CITATION INSURANCE GROUP AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 120,215
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 120,215
<CASH> 480
<RECOVER-REINSURE> 1,452
<DEFERRED-ACQUISITION> 2,487
<TOTAL-ASSETS> 158,342
<POLICY-LOSSES> 100,294
<UNEARNED-PREMIUMS> 19,498
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 622
<OTHER-SE> 34,641
<TOTAL-LIABILITY-AND-EQUITY> 158,342
38,002
<INVESTMENT-INCOME> 6,510
<INVESTMENT-GAINS> 173
<OTHER-INCOME> 110
<BENEFITS> 32,810
<UNDERWRITING-AMORTIZATION> 10,995
<UNDERWRITING-OTHER> 3,164
<INCOME-PRETAX> (2,825)
<INCOME-TAX> 5,390
<INCOME-CONTINUING> (8,215)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,215)
<EPS-PRIMARY> (1.35)
<EPS-DILUTED> (1.35)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
