<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 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: 0-18786
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 April 30, 1996, including 313,600 shares held by a
subsidiary of registrant.
1 of 11
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
CITATION INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(In thousands) (unaudited)
<S> <C> <C>
ASSETS
Investments $ 127,887 $ 135,270
Cash 2,478 1,338
Investment income receivable 2,417 2,572
Premiums receivable 10,685 12,687
Earned but unbilled premiums 715 936
Reinsurance recoverable 12,958 12,564
Prepaid reinsurance premiums 707 2,907
Deferred policy acquisition costs 4,208 2,346
Property and equipment, net 964 1,035
Deferred income taxes 11,851 10,974
Other assets 1,764 1,603
--------- ---------
TOTAL ASSETS $ 176,634 $ 184,232
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loss and loss adjustment expense $ 104,019 $ 105,969
Unearned premiums 17,570 17,032
Reinsurance balances 6,643 9,896
Other liabilities 3,509 5,232
--------- ---------
TOTAL LIABILITIES 131,741 138,129
STOCKHOLDERS' EQUITY
Common stock 622 620
Additional paid-in capital 45,280 45,207
Treasury stock (2,000) (2,000)
Accumulated deficit (626) (1,062)
Unrealized appreciation on investments, net 1,617 3,338
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 44,893 46,103
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 176,634 $184,232
========= ========
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE> 3
CITATION INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
REVENUES
Direct and assumed premiums written $ 12,969 $ 20,266
----------- -----------
Net premiums written $ 15,627 $ 9,897
Change in unearned premiums (2,727) 6,055
----------- -----------
NET PREMIUMS EARNED 12,900 15,952
Net investment income 2,212 2,442
Commission and fee income 40 276
----------- -----------
15,152 18,670
----------- -----------
EXPENSES
Loss and loss adjustment expense 10,343 14,279
Policy acquisition and other
underwriting expense 4,239 4,905
Dividends to policyholders 15 135
Other operating costs and expenses 119 306
----------- -----------
14,716 19,625
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 436 (955)
INCOME TAXES -- --
----------- -----------
NET INCOME (LOSS) $ 436 $ (955)
=========== ===========
NET INCOME (LOSS) PER SHARE $ .07 $ (.16)
=========== ===========
WEIGHTED AVERAGE SHARES AND COMMON
EQUIVALENT SHARES OUTSTANDING 6,107,292 6,069,203
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE> 4
CITATION INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1996 1995
------- --------
<S> <C> <C>
(in thousands)
NET CASH USED IN OPERATING ACTIVITIES $(3,689) $ (4,492)
INVESTING ACTIVITIES:
Investments purchased (5,264) (5,031)
Investments sold 5,049 14,480
Investments matured 5,000 --
Purchases of property and equipment (31) (119)
------- --------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 4,754 9,330
FINANCING ACTIVITIES:
Issuance of common stock 75 --
------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 75 --
------- --------
INCREASE IN CASH 1,140 4,838
CASH, BEGINNING OF PERIOD 1,338 889
------- --------
CASH, END OF PERIOD $ 2,478 $ 5,727
======= ========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE> 5
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
The accompanying condensed consolidated financial statements as of March 31,
1996 and for the three month periods ended March 31, 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 quarters ending March 31, 1995 and
1996 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.
On March 4, 1996, the Company and Physicians Insurance of Ohio ("PICO")
announced that they had signed a letter of intent for a stock-for-stock merger,
pursuant to which PICO will become a wholly-owned subsidiary of Citation. The
definitive agreement to merge the two companies was signed on May 3, 1996. As a
result of the transaction, the shareholders of PICO will own over 80 percent of
the combined company.
Under the terms of the agreement, each of PICO's outstanding shares will be
converted into Citation common stock based upon a floating exchange rate. The
exchange rate is calculated by dividing the PICO share value by $5.03 per share
of Citation stock. The PICO share value is the average closing price of PICO's
common stock for the 20 trading days prior to the determination date, within a
range of $25.20 to $30.80 per share, inclusive. The determination date will be
set by the occurrence of approvals by regulators and shareholders of both
companies. If the average closing price is less than $25.20, the PICO share
value will be $25.20, but the agreement is subject to termination by Citation if
the PICO average closing price is below $22.50. If the average closing price is
greater than $30.80, the PICO share value will be $30.80, but the agreement is
subject to termination by PICO if the average closing price is above $33.50
The transaction is subject to regulatory approvals, approval of the transaction
by shareholders of the Company and PICO and satisfactory completion of other
conditions customary in transactions of this nature.
5
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
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 quarters ending March 31, 1995 and
1996 do not include the operations of CGIC.
Direct and assumed premiums written decreased by $7.3 million, or 36.0%, in the
three months ended March 31, 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 $4.5
million in aggregate property and casualty premiums and a decrease of
approximately $1.5 million in aggregate personal automobile premiums.
The 21% decrease in workers' compensation premiums written from $6.4 million in
the first quarter of 1995 to $5.1 million in the first quarter of 1996, was
primarily a result of (a) reductions in minimum rates of 16% effective October
1, 1994, partially offset by a rate increase by the Company of 9.3% effective
January 1, 1996 and (b) a decrease in the average premium per policy to $7,132
at March 31, 1996 from $12,100 at March 31, 1995 which was primarily a result of
rate reductions and the intense competition in the California workers'
compensation market caused by the competitive rate law which went into effect
January 1, 1995.
The 37% decrease in property and casualty premiums written from $12.1 million in
the first quarter of 1995 to $7.6 million in the first quarter of 1996 was
primarily the result of approximately $4.3 million of non-recurring premium in
the first quarter of 1995 related to the transfer of in force policies of
Citation General Insurance Company (CGIC) to Citation Insurance Company. The
$4.3 million of premium related to the transfer of in force policies of CGIC
during the first quarter of 1995 was a result of the previously reported
agreement with the California Department of Insurance regarding CGIC. At March
31, 1995, CGIC had approximately $3.7 million of remaining unexpired premium on
in force policies which was transferred to Citation Insurance Company during the
second quarter of 1995.
The 85% decrease in personal automobile premiums written from $1.8 million in
the first quarter of 1995 to $0.3 million in the first quarter of 1996 resulted
from the Company's decision to withdraw from the personal auto line of business
as further described below. Due to unsatisfactory results, the Company
terminated its agreement in October 1994 with the managing general agency
("MGA"), which had been producing this business since the Company entered this
line of business, and decided to withdraw from this business as described in
previous filings. Although the Company is attempting to withdraw from the
personal automobile business as quickly as possible, it may be required to offer
existing policyholders the opportunity to renew their policies. While management
believes the volume in this business will continue to decline rapidly over the
next several quarters, the policy renewal offer requirements may result in some
level of premium revenue being reported during the next two calendar years.
Net premiums written increased $5.7 million, or 58%, in the three months ended
March 31, 1996 compared to the same period in 1995. This increase was the net
result of a reduction of approximately $1.3 million attributable to workers'
compensation premiums, an increase of approximately $8.5 million attributable to
property and casualty premiums and a decrease of approximately $1.5 million
attributable to personal automobile premiums.
6
<PAGE> 7
The decrease 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 $7.4 million and the cancellation of these two treaties on January
1, 1996 which resulted in a reduction of ceded written premiums of $7.6 million
during the first quarter of 1996. This was partially offset by $2.8 million of
premiums ceded to a new reinsurance contract effective January 1, 1996. Of the
increase in ceded premiums during the first quarter of 1995, $5.9 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 $1.5 million increase in
ceded premiums in 1995 resulted from the Company amending the existing property
excess of loss reinsurance agreement whereby the reinsurance premium calculation
would be based upon written premiums rather than earned premiums. Since both the
new reinsurance agreement and the amendment to the existing reinsurance
agreement required initial cessions of unearned premiums in amounts equal to
ceded written premiums, these agreements had no effect on net earned premiums
during the first quarter of 1995; however, these agreements resulted in a
decrease in unearned premiums and deferred policy acquisition costs of
approximately $7.4 million and $3.0 million, respectively, and an increase in
reinsurance balances payable of approximately $4.4 million as of March 31, 1995.
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
occurence 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 $3.0 million, or 19%, in the three months ended
March 31, 1996 compared to the same period in 1995. This decrease was primarily
the net result of a reduction of approximately $1.7 million attributable to
workers' compensation premiums, an increase of approximately $0.7 million
attributable to property and casualty premiums and a decrease of $2.0 million
attributable to personal automobile premiums. For the three months ended March
31, 1996, 40%, 54% and 6% of net premiums earned related to workers'
compensation premiums, property and casualty premiums and personal automobile
premiums, respectively, compared to 43%, 39% and 18% in the same period in 1995.
Net investment income decreased by $230,000 or 9.4%, in the three months ended
March 31, 1996 compared to the first quarter of 1995. The principal reason for
the decrease was a reduction in the average investment portfolio in the 1996
period. The Company realized no net capital gains during the first quarter of
1996 compared to $38,000 of net capital gains realized during the first quarter
of 1995.
Total revenues for the first quarter of 1996 were $15.2 million, a 19% decrease
from the first quarter of 1995.
7
<PAGE> 8
The Company's underwriting results for the three months ended March 31, 1996 and
1995 (computed on a GAAP basis), are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
----- -----
<S> <C> <C>
Loss and Loss Adjustment Expense Ratio 80.2% 89.5%
Underwriting Expense Ratio 32.9 30.7
Policyholder Dividend Ratio 0.1 0.8
----- -----
Combined Ratio 113.2% 121.0%
===== =====
</TABLE>
Loss and loss adjustment expenses decreased $3.9 million or 28% in the first
quarter of 1996 from the first quarter of 1995. This decrease was primarily due
to the decrease in net earned premium of 19% and a decrease in the loss ratio
described below. The loss and loss adjustment expense ratio decreased to 80.2%
in the first quarter of 1996 from 89.5% in the first quarter of 1995.
The decrease in loss and loss adjustment expense ratio from the prior year
quarter is attributable to a decrease in both the commercial property and
casualty loss and loss adjustment expense ratio from 90.1% to 85.8% and the
personal automobile loss and loss adjustment expense ratio from 152.8% to 89.6%
partially offset by an increase in the workers' compensation loss and loss
adjustment expense ratio from 63.3% to 71.2% in 1996.
The commercial property and casualty loss and loss adjustment expense ratio
decreased from 90.1% in the first quarter of 1995 to 85.8% in the first quarter
of 1996. Management believes that the decrease is a reflection of the ongoing
re-underwriting of the book of business which began in the third quarter of 1995
and the decision to discontinue writing the artisan contractor line of business
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
152.8% in the first quarter of 1995 to 89.6% in 1996. The first quarter of 1995
results included an increase in loss reserves of $964,000 for the 1994 accident
year which increased the loss ratio during the quarter from 118.8% to 152.8%.
The decrease in the 1996 loss and loss adjustment expense ratio was primarily
due to the rate increase of approximately 70% which was effective in November
1995. Primarily due to the poorer than expected operating results, the Company
decided in January 1995 to withdraw from this line of business and focus on its
primary business segments.
The increase in the loss and loss expense ratio from 63.3% in the first quarter
of 1995 to 71.2% in the first quarter of 1996 was primarily a result of the
reduction in the favorable loss development from prior year reserves during
1996 compared to the first quarter of 1995. The favorable loss development from
prior years' reserves in the first quarter of 1995 and 1996 resulted in a
decrease in loss and loss adjustment expense of $1.9 million and $1.4 million,
respectively. Notwithstanding the increase in the loss ratio, the workers'
compensation loss and loss adjustment expense ratios in the first quarter of
1995 and 1996 were affected by a continued favorable trend in loss development
for prior accident years. This favorable trend is a result of fewer than
expected newly reported claims particularly for the 1993, 1994 and 1995
accident years and claim settlements for amounts lower than originally
provided. These positive factors were partially offset by reductions in policy
premium rates as a result of the open rating environment effective in
California since January 1, 1995.
Policy acquisition costs and other underwriting expenses declined $0.7 million
or 14% from the first quarter of 1995. This decrease was primarily due to the
decline in net earned premium during the same comparative periods of 19%. As a
percentage of net earned premium the underwriting expense ratio increased to
32.9% from 30.7% in the first quarter of 1995. This increase was the net result
of an increase in the commercial property and
8
<PAGE> 9
casualty underwriting expense ratio from 36.0% to 37.0%, a decrease in the
personal automobile underwriting expense ratio from 41.4% to 15.1%, and an
increase in the workers' compensation underwriting expense ratio from 21.7% to
30.1%. The increase in the underwriting expense ratio was generally a result of
fixed overhead expenses being incurred against a smaller premium base. The
significant decrease in the personal automobile underwriting expense ratio
resulted primarily from the Company writing off the deferred policy acquisition
costs associated with this business aggregating $485,000 at March 31, 1995.
Dividends to policyholders were $15,000 in the first quarter of 1996 compared
with $135,000 in the first quarter of 1995.
The Company reported no net income tax expense for the first quarter of 1995 and
1996. The 1996 effective tax rate was lower than statutory rates primarily due
to a reduction of $138,000 in the valuation allowance against deferred taxes.
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 $3.7 million of
funds in operations in the first three months of 1996 and used $4.5 million
during the first three months of 1995. Funds used in the first quarter 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.
9
<PAGE> 10
CITATION INSURANCE GROUP
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As described in previous filings, the Company terminated its
agreement in October 1994 with the managing general agency
("MGA"), which had been producing the personal auto line of
business since the Company entered this line of business, and
decided to withdraw from this business. The MGA obtained an
injunction which effectively allowed it to continue renewing
business and collecting commissions for two years from the
termination date of the agreement. The Company was successful in
obtaining a dissolution of the injunction in March 1996,
followed by a settlement with the MGA in April 1996. The terms
of the settlement included dismissal of pending litigation with
the MGA and relinquishing of security rights and records by the
MGA to the Company. There are no other legal proceedings 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
None
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
March 31, 1996
10
<PAGE> 11
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: May 16, 1996 /s/ Donald Henderson
-----------------------------------
President & Chief Executive Officer
(Principal Executive Officer)
Date: May 16, 1996 /s/ Robert M. Erickson
-----------------------------------
Chief Financial Officer
(Principal Financial and Accounting
Officer)
11
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 127,887
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 127,887
<CASH> 2,478
<RECOVER-REINSURE> 1,555
<DEFERRED-ACQUISITION> 4,208
<TOTAL-ASSETS> 176,634
<POLICY-LOSSES> 104,019
<UNEARNED-PREMIUMS> 17,570
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 622
<OTHER-SE> 44,271
<TOTAL-LIABILITY-AND-EQUITY> 176,634
12,900
<INVESTMENT-INCOME> 2,212
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 40
<BENEFITS> 10,343
<UNDERWRITING-AMORTIZATION> 3,260
<UNDERWRITING-OTHER> 979
<INCOME-PRETAX> 436
<INCOME-TAX> 0
<INCOME-CONTINUING> 436
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 436
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
