CII FINANCIAL INC
S-4, 2000-12-26
FIRE, MARINE & CASUALTY INSURANCE
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    As filed with the Securities and Exchange Commission on December 26, 2000
                                                         Registration No. 333-
==============================================================================
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM S-4

                        REGISTRATION STATEMENT UNDER THE

                             SECURITIES ACT OF 1933

                               CII FINANCIAL, INC.
             (Exact name of Registrant as specified in its charter)
<TABLE>

<CAPTION>

<S>                                   <C>                                          <C>
               California             6719                                         95-4188244
    (State or other jurisdiction of   (Primary Standard Industrial                  (I.R.S. Employer
     incorporation or organization)   Classification Code Number)                Identification Number)
                                      2716 North Tenaya Way

                                      Las Vegas, Nevada 89128

                                      (702) 242-7040
</TABLE>



     (Name and address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)

                             David Sonenstein, Esq.

                                 General Counsel

                              2716 North Tenaya Way

                             Las Vegas, Nevada 89128

                                 (702) 242-7046

          (Name and address, including zip code, and telephone number,
                   including area code, of agent for service)

                                   Copies to:

                            Stephen P. Farrell, Esq.

                              Howard A. Kenny, Esq.

                           Morgan, Lewis & Bockius LLP

                                 101 Park Avenue

                            New York, New York 10178

                                 (212) 309-6000

     Approximate date of commencement of proposed sale to the public: As soon as
practicable  after  this  Registration   Statement  is  declared   effective  in
connection with the exchange offer described in the prospectus contained in this
Registration Statement.

     If the  securities  being  registered  on this  Form are being  offered  in
connection  with the formation of a holding company and there is compliance with
General Instruction G, check the following box. o

     If this Form is filed to  register  additional  securities  for an offering
pursuant to Rule 462(b) under the  Securities  Act,  check the following box and
list the Securities Act registration  statement number of the earlier  effective
registration statement for the same offering. o __________

     If this Form is a  post-effective  amendment  filed pursuant to Rule 462(d)
under the  Securities  Act,  check the following box and list the Securities Act
registration  statement number of the earlier effective  registration  statement
for the same offering. o ____________


<PAGE>




                         CALCULATION OF REGISTRATION FEE

<TABLE>

<CAPTION>

                                                      Amount                         Aggregate

             Title of Each Class of                    to be       Offering Price      Offering        Amount of
           Securities to be Registered               Registered       Per Unit          Price       Registration Fee
-------------------------------------------------- --------------- ---------------- --------------- -----------------
9% Senior Subordinated Debentures of CII

<S>                                                 <C>                             <C>         <C>   <C>     <C>
Financial, Inc..............................        $47,059,000          N/A        $47,059,000 (1)   $11,765 (1)
================================================== =============== ================ =============== =================
</TABLE>

     (1) The  registration  fee has been  calculated  pursuant to Rule 457(f)(2)
under the Securities Act, based upon the book value of the $47,059,000 aggregate
principal amount of the 7 1/2% convertible subordinated debentures due September
15, 2001 of CII Financial, Inc. that may be received in the exchange offer.

     The Registrant  hereby amends this  Registration  Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further  amendment  which  specifically  states  that  this  Registration
Statement shall  thereafter  become effective in accordance with Section 8(a) of
the Securities  Act of 1933 or until this  Registration  Statement  shall become
effective on such date as the Commission,  acting pursuant to said Section 8(a),
may determine.

=============================================================================



<PAGE>



                 Subject to Completion. Dated December 26, 2000

------------ ---------------------------------------------------------------
             PROSPECTUS AND EXCHANGE OFFER The  information in this  preliminary
  prospectus is not complete and may be changed.

  The securities may not be sold until the registration statement filed with the
  Securities and Exchange Commission is effective. This preliminary prospects is
  not an offer to sell nor does it seek an offer to buy these  securities in any
  jurisdiction where the offer or sale is not permitted.

                               CII FINANCIAL, INC.

     ------------   EXCHANGE  OFFER  FOR  ALL  OUTSTANDING  7  1/2%  CONVERTIBLE
SUBORDINATED DEBENTURES DUE SEPTEMBER 15, 2001 OF CII FINANCIAL, INC. (CUSIP NO.
12551LAB7)

EXCHANGE OFFER EXPIRATION: January 25, 2001 at 5:00 p.m., New York time.

EXCHANGE OFFER

             We are  offering  to  exchange  new  consideration  for your 7 1/2%
             convertible  subordinated  debentures due September 15, 2001 of CII
             Financial.  You can choose to exchange your debentures under either
             of the following two options:

            o          $1,000 in principal amount of new 9% senior  subordinated
                       debentures  due  September  15, 2006 of CII Financial for
                       each  $1,000  in  principal  amount  of  the  old  junior
                       subordinated debentures that you tender; or

            o          $525 in cash for each $1,000 in  principal  amount of the
                       old junior subordinated debentures that you tender, up to
                       a maximum of $19,500,000 in aggregate principal amount of
                       old junior subordinated debentures, as described below.

             We will pay in cash  accrued and unpaid  interest on all old junior
             subordinated debentures accepted in the exchange offer through, but
             not including, the date of acceptance.


             We intend to list the new senior subordinated debentures on the New
York Stock Exchange.


             We are only offering to purchase a maximum of $19,500,000 aggregate
             principal amount of old junior subordinated debentures for cash. If
             holders of more than $19,500,000  aggregate principal amount of old
             junior  subordinated  debentures elect the cash option, we will not
             have enough cash to pay for all the  debentures  that holders elect
             to sell.  In that case,  we will  purchase  a total of  $19,500,000
             principal amount of old junior subordinated debentures for cash and
             we  will  exchange  the  balance  of the  old  junior  subordinated
             debentures we receive for new senior subordinated  debentures.  All
             holders  who elect the cash option  will be  permitted  to sell the
             same fraction of their old junior subordinated debentures for cash.
             This  fraction  will equal  $19,500,000,  divided by the  aggregate
             principal  amount  of  all  debentures  tendered  for  cash  by all
             holders.


             We  will  not   determine   whether   the  cash   option  has  been
             oversubscribed  until after the  expiration of the exchange  offer.
             You  will  not be  able  to  withdraw  your  tender  of old  junior
             subordinated debentures once we make this determination even though
             it may affect the type of exchange  consideration  you will receive
             in the exchange offer. We will publicly  announce  whether the cash
             option has been  oversubscribed,  and the  resulting  proration  of
             exchange consideration.


             You do not have to choose the same option for all of the old junior
             subordinated  debentures that you tender. You do not have to tender
             all of your old junior  subordinated  debentures to  participate in
             the exchange offer.  You may withdraw all or part of your tender of
             old  junior   subordinated   debentures  at  any  time  before  the
             expiration of the exchange offer.

             The exchange offer is subject to the following conditions:

            o        valid tenders of at least 90% of the aggregate principal
                     amount of the old junior subordinated debentures;

            o          the receipt of the consent of the lenders  under the $185
                       million  senior  secured  credit  facility of our parent,
                       Sierra Health Services,  Inc., which has been irrevocably
                       and unconditionally  guaranteed by us, to the issuance by
                       us of  the  new  senior  subordinated  debentures  in the
                       exchange offer;

            o          the receipt of the approval of the California  Department
                       of Insurance required for one or more of our subsidiaries
                       to directly or indirectly fund all or part of the cash to
                       be paid as exchange consideration;

            o        our obtaining sufficient cash to pay any cash consideration
                     required to be paid as exchange consideration;
                     and

            o        other customary conditions.

             Both acceptance and rejection of this exchange offer involve a high
             degree of risk.  See  "Risk  Factors"  beginning  on page 9 of this
             prospectus  for a  discussion  of  some  of the  risks  you  should
             consider in evaluating  the exchange offer and an investment in the
             securities offered through this prospectus.

             Neither  the  Securities  and  Exchange  Commission  nor any  state
             securities  regulator has approved or disapproved these securities,
             or  determined  if this  prospectus  is adequate or  accurate.  Any
             representation to the contrary is a criminal offense.

             The exclusive dealer manager for the exchange offer is:

                         Banc of America Securities LLC

                        The date of this prospectus is .

--------------------------------------------------------------------------


<PAGE>



------------------------------------------------------------------------------


                                TABLE OF CONTENTS

<TABLE>


<CAPTION>
                                                                                                                      Page

<S>                                                                                                             <C>
PROSPECTUS SUMMARY...............................................................................................1

RISK FACTORS.....................................................................................................9

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS...............................................................14

WHERE YOU CAN FIND ADDITIONAL INFORMATION.......................................................................14

RATIO OF EARNINGS TO FIXED CHARGES..............................................................................15

USE OF PROCEEDS.................................................................................................15

CAPITALIZATION..................................................................................................16

THE EXCHANGE OFFER..............................................................................................17

BUSINESS 28

SELECTED FINANCIAL AND OTHER DATA...............................................................................42

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........................44

MANAGEMENT......................................................................................................53

CERTAIN TRANSACTIONS............................................................................................59

PRINCIPAL STOCKHOLDERS..........................................................................................60

DESCRIPTION OF OTHER INDEBTEDNESS...............................................................................60

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS...........................................................62

DESCRIPTION OF DEBENTURES.......................................................................................67

BOOK-ENTRY SYSTEM-- THE DEPOSITORY TRUST COMPANY................................................................75

UNITED STATES FEDERAL INCOME TAX CONSEQUENCES...................................................................76

LEGAL MATTERS...................................................................................................81

EXPERTS  81

ANNEX I  a-1

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.....................................................................f-1
</TABLE>


<PAGE>



                               PROSPECTUS SUMMARY

This summary  highlights  selected  information from this prospectus and may not
contain all of the  information  that is  important  to you. To  understand  the
exchange  offer fully and for a more complete  description of the legal terms of
the exchange  offer,  you should read carefully  this entire  prospectus and the
other  documents  to  which  we have  referred  you,  including  the  letter  of
transmittal  accompanying  this  prospectus.  Unless otherwise  indicated,  "CII
Financial,"  "we,"  "us,"  and  "our"  refer  to CII  Financial,  Inc.  and  its
subsidiaries.  Although  we refer to CII  Financial,  Inc. in this  manner,  CII
Financial,  Inc. is a holding company and conducts all of its operations through
its  subsidiaries.  CII  Financial,  Inc.  is  the  sole  obligor  on all of the
debentures discussed in this prospectus.

Throughout  this  prospectus,   we  sometimes  refer  to  our  existing  7  1/2%
convertible  subordinated  debentures  due September 15, 2001 as our "old junior
subordinated  debentures,"  to our new 9%  senior  subordinated  debentures  due
September 15, 2006 as our "new senior subordinated  debentures" and to those new
senior subordinated debentures and the cash payment offered in exchange for your
old junior subordinated debentures collectively as the "exchange consideration."

                                                   CII Financial, Inc.

     We are a holding company primarily engaged in writing workers' compensation
insurance  in nine  western  and  midwestern  states  through  our wholly  owned
subsidiaries,   California  Indemnity  Insurance  Company,  Commercial  Casualty
Insurance Company,  Sierra Insurance Company of Texas and CII Insurance Company.
In addition,  we have other smaller  subsidiaries that we consider immaterial to
our overall results.

     Our insurance  subsidiaries  write workers'  compensation  insurance in the
states of California,  Colorado,  Nevada, Texas, Nebraska, Kansas, Missouri, New
Mexico and Utah primarily through  independent  insurance agents and brokers. We
have  licenses in 33 states and the District of Columbia  and have  applications
pending  for  licenses  in  other  states.   California,   Colorado  and  Nevada
represented  approximately 77%, 8%, and 7%, respectively,  of our direct written
premiums for the nine months ending September 30, 2000.

     We were acquired by Sierra Health  Services,  Inc. on October 31, 1995 in a
transaction  treated  as  a  pooling  of  interests.  However,  our  old  junior
subordinated  debentures  remain  solely  our  obligation  and  Sierra  has  not
guaranteed the debentures.  Sierra is a diversified health care services company
that  operates  health   maintenance   organizations,   indemnity  and  workers'
compensation   insurers,   military   health   programs,    preferred   provider
organizations and multi-specialty  medical groups. When Sierra acquired us, each
share of our  common  stock was  exchanged  for .37 of a share of Sierra  common
stock and our old junior subordinated  debentures became convertible into Sierra
common stock.  The old junior  subordinated  debentures are now convertible into
Sierra  common  stock at a conversion  price of $39.398 per share.  As a result,
$1,000 in principal is  convertible  into 25.382  shares of Sierra common stock.
Based on the closing price of Sierra  common stock on December 19, 2000,  25.382
shares of Sierra's common stock had a market value of $84.27. In August 2000, we
became a guarantor of Sierra's revolving credit facility,  which at December 15,
2000 was fully drawn and had an  outstanding  balance of $185  million.  The old
junior subordinated  debentures and the new senior  subordinated  debentures are
subordinated to this guaranty of the credit facility debt.

     We were  incorporated in the State of California on September 15, 1988. The
principal  executive  offices of CII  Financial are located at 2716 North Tenaya
Way, Las Vegas,  Nevada  89128,  and CII  Financial's  telephone  number at that
address is (702) 242-7040.

         Summary Background, Purposes and Effects of the Exchange Offer

     CII Financial,  as a holding  company,  has limited sources for cash and is
dependent upon dividends from its  subsidiary,  California  Indemnity  Insurance
Company,  to meet its debt  payment  obligations.  California  Indemnity  cannot
currently pay any dividends without prior approval by the California  Department
of Insurance.  In addition, CII Financial, as a holding company and sole obligor
under the old junior  subordinated  debentures,  has no available source of cash
with which to pay the old junior  subordinated  debentures  when they  mature on
September 15, 2001. Due to the  foregoing,  we are making this exchange offer in
an effort to extend the maturity date and reduce our indebtedness.

                          Summary of the Exchange Offer

The Old Junior Subordinated Debentures:

     We are making the  exchange  offer with  respect to the entire  $47,059,000
aggregate principal amount of our old junior subordinated debentures,  CUSIP No.
12551LAB7.

The Exchange Offer:

     We are  offering  to acquire  your old junior  subordinated  debentures  in
exchange for:

     o $1,000 in principal amount of new senior subordinated debentures for each
$1,000  in  principal  amount of old  junior  subordinated  debentures  that you
tender; or

     o $525  in  cash  for  each  $1,000  in  principal  amount  of  old  junior
subordinated  debentures  that  you  tender,  up  to a  maximum  of  $19,500,000
aggregate  principal amount of old junior  subordinated  debentures as described
below.

     We are only  offering  to  purchase  a  maximum  of  $19,500,000  aggregate
principal amount of old junior  subordinated  debentures for cash. If holders of
more than  $19,500,000  aggregate  principal  amount of old junior  subordinated
debentures  elect the cash  option,  we will not have enough cash to pay for all
the  debentures  that holders  elect to sell.  In that case,  we will purchase a
total of $19,500,000 principal amount of old junior subordinated  debentures for
cash and we will exchange the balance of the old junior subordinated  debentures
we receive  for new senior  subordinated  debentures.  All holders who elect the
cash  option  will be  permitted  to sell the same  fraction of their old junior
subordinated debentures for cash. This fraction will equal $19,500,000,  divided
by the aggregate  principal  amount of all  debentures  tendered for cash by all
holders. We refer to this as "oversubscription" of the cash option.

     We will publicly announce whether the cash option is oversubscribed and the
effect of any required  proration as soon as practicable after the expiration of
the exchange offer.

     You do not  have to  choose  the  same  option  for  all of the old  junior
subordinated  debentures that you tender.  You do not have to tender all of your
old junior subordinated debentures to participate in the exchange offer.


<PAGE>




     Accrued Interest:  We will pay in cash accrued,  and unpaid interest on all
old junior subordinated  debentures accepted in the exchange offer through,  but
not including,  the date of acceptance.  Source of Funds:  We intend to fund the
cash portion of the exchange consideration from:

     o dividends or other  transfers of funds from our  operating  subsidiaries,
subject to approval by the California Department of Insurance; and

     o a loan  from an  affiliate,  which  will  be  represented  by our  demand
promissory  note bearing  interest at a rate equal to the then current  interest
rate on  Sierra's  credit  facility,  which  will rank  senior to the new senior
subordinated debentures and the old junior subordinated debentures.  Purpose: We
are making the exchange offer for old junior  subordinated  debentures to extend
the maturity date of the  debentures and to reduce  indebtedness.  Expiration of
the Exchange  5:00 p.m. New York time,  on January 25,  2001,  unless  extended.
Offer: Exchange Date: The exchange of old junior subordinated debentures for the
exchange  consideration  will be made promptly  following the  expiration of the
exchange offer and the  satisfaction or waiver of all conditions.  Conditions to
the Exchange The exchange offer is subject to the conditions  that:  Offer: o we
must receive valid tenders for at least 90% of the aggregate principal amount of
the old junior subordinated debentures;

     o we must receive the consent of the lenders under Sierra's  senior secured
credit facility,  which has been irrevocably and  unconditionally  guaranteed by
us, to our issuing the new senior subordinated debentures in the exchange offer;

     o we must receive the approval of the  California  Department  of Insurance
required for one or more of our  subsidiaries to directly or indirectly fund all
or part of the cash to be paid as the exchange consideration;

     o we must obtain sufficient cash to pay any cash consideration  required to
be paid as exchange offer consideration; and

     o other customary conditions.

     Subject to  satisfaction  or waiver of the  conditions,  we will accept for
exchange  any  and all old  junior  subordinated  debentures  that  are  validly
tendered  and not  withdrawn  before  5:00  p.m.,  New York  City  time,  on the
expiration date of the exchange offer. However, we reserve the right to:

     o delay  the  acceptance  of the old  junior  subordinated  debentures  for
exchange;

     o terminate the exchange offer;

     o  extend  the  expiration  date and  retain  all old  junior  subordinated
debentures that have been tendered, subject to the right of owners of old junior
subordinated  debentures  to withdraw  their  tendered  old junior  subordinated
debentures;

     o refuse to accept the old junior  subordinated  debentures  and return all
old junior subordinated debentures that have been tendered to us; or

     o waive any condition or otherwise amend the terms of the exchange offer in
any respect.  Procedures for Tendering If you hold your old junior  subordinated
debentures in book-entry Debentures: form, you must request your broker, dealer,
commercial  bank,  trust company or other nominee to effect the  transaction for
you.


<PAGE>


     If you own old junior  subordinated  debentures  that are registered in the
name of a broker,  dealer,  commercial bank, trust company or other nominee, you
must  contact that  broker,  dealer,  commercial  bank,  trust  company or other
nominee.


<PAGE>




     We have arranged to have this exchange  offer  eligible for the  Depository
Trust  Company's,  or  DTC's,  Automated  Tender  Offer  Program,  or ATOP.  DTC
participants   that  are  accepting  the  exchange  offer  must  transmit  their
acceptance  to DTC,  which will verify the  acceptance  and execute a book-entry
delivery to the exchange  agent's  account at DTC. DTC will then send an agent's
message  to the  exchange  agent for its  acceptance.  Delivery  of the  agent's
message by DTC will satisfy the terms of the exchange  offer as to the tender of
old junior subordinated debentures.


<PAGE>




     If you hold physical  certificates  evidencing your old junior subordinated
debentures,  complete and sign the enclosed letter of transmittal, or a manually
signed facsimile thereof,  in accordance with the instructions in that document,
have your  signature  guaranteed  if required by  Instruction 1 of the letter of
transmittal,  and send or deliver your manually signed letter of transmittal, or
manually signed  facsimile,  together with the  certificates  evidencing the old
junior  subordinated  debentures being tendered and any other required documents
to the exchange agent.


<PAGE>




     If you desire to tender old junior subordinated  debentures in the exchange
offer and cannot comply with the  procedures  described in this  prospectus  for
tender  or  delivery  on a  timely  basis  or if your  old  junior  subordinated
debentures  are not  immediately  available,  you may  tender  your  old  junior
subordinated  debentures using the procedures for guaranteed  delivery described
in this prospectus.

Withdrawal of Tenders of Debentures:

     You may withdraw your tender of old junior  subordinated  debentures at any
time  prior  to  the  expiration  of  the  exchange  offer,   but  the  exchange
consideration  will not be payable  in  respect  of any old junior  subordinated
debentures  so withdrawn.  We will not  determine and announce  whether the cash
option for the exchange  consideration has been  oversubscribed  until after the
expiration of the exchange  offer.  You will not be able to withdraw your tender
of old  junior  subordinated  debentures  once we make this  determination  even
though it may affect the type of exchange  consideration you will receive in the
exchange offer.

Untendered Debentures:

     If you do not tender  your old junior  subordinated  debentures,  they will
remain outstanding.  The old junior subordinated debentures will be subordinated
to the new senior  subordinated  debentures.  We will have up to $232,059,000 of
senior indebtedness,  consisting of the new senior subordinated debentures,  the
credit facility guaranty and the demand promissory note held by an affiliate. In
addition,  as a result of the  consummation of the exchange offer, the aggregate
principal amount of the old junior subordinated  debentures that are outstanding
will be significantly reduced, which may adversely affect their market price, if
any.

     Old junior  subordinated  debentures  that remain  outstanding  will remain
convertible into shares of Sierra common stock at $39.398 per share. As of close
of business on December 19, 2000,  the closing  price of Sierra  common stock on
the New York Stock Exchange was $3.32.

Acceptance of Tendered Under the terms of Debentures and Exchange:

Under the terms of the exchange offer and upon satisfaction or our waiver of the
conditions  to the  exchange  offer,  we will  accept  for  exchange  old junior
subordinated  debentures  validly  tendered on or prior to the expiration of the
exchange offer. You will only receive the exchange  consideration if you validly
tender  your old junior  subordinated  debentures.  We will make  payment of the
exchange  consideration for old junior subordinated  debentures validly tendered
and  accepted for payment by deposit of the  appropriate  amount of cash and the
appropriate  amount of new  senior  subordinated  debentures  with the  exchange
agent,  who  will  act  as  agent  for  the  tendering  holders  of  old  junior
subordinated  debentures.  We expect the  exchange  will be made on the exchange
date described in this prospectus.

Accounting Treatment for the Exchange Offer:

The new senior  subordinated  debentures will be recorded at the carrying amount
of the old junior subordinated debentures less cash consideration given, if any,
and that amount will be used to determine the effective interest rate of the new
senior subordinated debentures.

United States Federal Income Tax Considerations:

You are referred to the discussion  about the federal income tax consequences of
the exchange  offer in "United  States  Federal  Income Tax  Consequences."  Tax
matters are very  complicated and the tax  consequences of the exchange offer to
you will depend on the facts of your own situation.  You should consult your own
tax  advisor  for a full  understanding  of the tax  consequences  to you of the
exchange offer.

No Appraisal  Rights:

     In  connection  with the  exchange  offer,  you will not have any  right to
dissent or to receive an appraisal of your old junior subordinated debentures.

Use of Proceeds:
Our new senior  subordinated  debentures  are being  issued only in exchange for
your old junior subordinated debentures.  All old junior subordinated debentures
accepted by us in the exchange  offer will be canceled.  We will not receive any
cash  proceeds  from the issuance of new senior  subordinated  debentures in the
exchange offer.

     "Blue  Sky"  Compliance:

We are  notmaking  this offer to, and we will not
accept  tenders  from,  holders of old  junior  subordinated  debentures  in any
jurisdiction  in which  this  exchange  offer or the  acceptance  of old  junior
subordinated debentures would not comply with the applicable securities or "blue
sky" laws of that jurisdiction.

Dealer Manager:

Banc of America Securities LLC

is serving as exclusive  dealer manager in connection  with the exchange  offer.
Its  address  and  telephone  numbers  are set  forth on the back  cover of this
prospectus.

Exchange Agent:
Wells Fargo Corporate Trust is serving as exchange
agent in connection with the exchange offer.  Its address and telephone  numbers
are located on the back cover of this prospectus.

Information Agent:
D.F. King & Co., Inc. is serving as the  information  agent in connection  with
the exchange offer.  Its address and telephone  numbers are located on the back
cover of this
prospectus.

           Summary Description of New Senior Subordinated Debentures:
The New Senior Subordinated Debentures:       Up to $47,059,000 aggregate
                                              principal amount of 9% senior
                                              subordinated
                                              debentures due September 15, 2006.

Issuer:                                       CII Financial, Inc.

Trustee:                                      Wells Fargo Bank Minnesota, N.A.

Maturity:                                     September 15, 2006

Interest:

Interest on the new senior subordinated  debentures will be payable in cash at a
rate of 9% per  year,  payable  on  March  15 and  September  15 of  each  year,
commencing March 15, 2001.

     Ranking:  The new  senior  subordinated  debentures,  like  the old  junior
subordinated  debentures,  will be subordinated to all our senior  indebtedness,
including  our guaranty of Sierra's  credit  facility.  However,  the new senior
subordinated   debentures   will  rank  senior  to  any   remaining  old  junior
subordinated debentures.

     Optional Redemption:  Until September 15, 2001, the new senior subordinated
debentures  may be redeemed at our option at any time,  from time to time,  at a
price  equal  to  $1,007.50  per  $1,000  principal  amount  of the  new  senior
subordinated  debentures,  plus  accrued  and  unpaid  interest,  if any.  After
September 15, 2001,  the new senior  subordinated  debentures may be redeemed at
our option at any time, from time to time, at a price equal to $1,000 per $1,000
principal  amount of the new senior  subordinated  debentures,  plus accrued and
unpaid interest, if any.

     Repurchase at Option of Holders: In the event of a change in control of CII
Financial,  the holders of these new senior subordinated  debentures may require
that we repurchase the new senior  subordinated  debentures at $1,000 per $1,000
principal  amount of the new senior  subordinated  debentures,  plus accrued and
unpaid interest, if any.

     Listing:  We intend to list the new senior  subordinated  debentures on the
New York Stock Exchange.  However,  we do not expect the new senior subordinated
debentures to be listed until after 30 days  following the  consummation  of the
exchange offer.

     Principal  Differences  Between  Old and New

     o The new senior  subordinated  debentures  will rank senior in Debentures:
right  of  payment  to any old  junior  subordinated  debentures  which  are not
tendered.

     o You will receive a higher rate of interest on the new senior subordinated
debentures,  which  will pay 9% per annum,  than on the old junior  subordinated
debentures, which pay 7 1/2% per annum.

     o The scheduled maturity date of the new senior subordinated  debentures is
September  15, 2006,  which is five years later than  September  15,  2001,  the
scheduled maturity date of the old junior subordinated debentures.

     o The new  senior  subordinated  debentures  will not be  convertible  into
Sierra common stock. The old junior subordinated debentures are convertible into
Sierra common stock at $39.398 per share.


<PAGE>


          Summary Historical Financial and Other Data of CII Financial

     The table below presents our selected  consolidated  financial  information
for the periods  indicated  and at the end of these  periods.  The  consolidated
financial  statement  information  as of December  31, 1999 and 1998 and for the
years ended December 31, 1999,  1998 and 1997 was derived from our  consolidated
financial  statements  included  elsewhere in this  prospectus.  These financial
statements  were prepared in accordance  with  accounting  principles  generally
accepted in the United States of America,  and were audited by Deloitte & Touche
LLP. The consolidated financial statement information at and for the nine months
ended  September  30,  2000  and  1999  has  been  derived  from  our  unaudited
consolidated  financial  statements  included elsewhere in this prospectus.  The
unaudited  consolidated financial statements have been prepared by us on a basis
consistent  with  the  audited  financial  statements  and  include  all  normal
recurring  adjustments  necessary for a fair presentation of the information set
forth therein.  Operating  results for the nine months ended  September 30, 2000
are not  necessarily  indicative of the results that will be achieved for future
periods, including the entire year ending December 31, 2000.

     See the Glossary of Selected Insurance Terms annexed to this prospectus for
an explanation of certain of the financial and other items included below.

<TABLE>

<CAPTION>
                                          Nine Months Ended

                                            September 30,                         Year Ended December 31,
                                          -----------------                       -----------------------
                                          (dollars in thousands)                 (dollars in thousands)
                                            2000            1999           1999            1998            1997
                                            ----            ----           ----            ----            ----
Income Statement Data:

<S>                                       <C>             <C>             <C>             <C>            <C>
Direct written premiums                   $153,034        $106,291        $148,824        $153,914       $135,580
                                          ========        ========        ========        ========       ========

Net written premiums                       $93,857         $60,833         $85,097        $134,147       $130,597
                                           =======         =======         =======        ========       ========

Net earned premiums                        $90,951         $58,254         $82,955        $134,274       $129,197
Net investment income and net
  realized gains and losses                 10,757          11,901          15,395          20,229         17,361
                                           -------         -------         -------         -------        -------

  Total revenues                           101,708          70,155          98,350         154,503        146,558
Total costs and expenses                   115,715          58,301          91,255         136,625        135,745
                                           -------          ------          ------         -------        -------

(Loss) income before
  federal income taxes and
  extraordinary gain                      (14,007)          11,854           7,095          17,878         10,813
Federal income tax (benefit)
  expense                                  (4,902)           4,815           3,602           4,166            272
                                         ---------         -------         -------        --------     ----------

Income before extraordinary gain           (9,105)           7,039           3,493          13,712         10,541

Extraordinary gain from debt
  extinguishment, net of tax                   654               0             111              48              2
                                       -----------     -----------       ---------    ------------  -------------

Net (Loss) Income                         $(8,451)          $7,039          $3,604         $13,760        $10,543
                                          ========          ======          ======         =======        =======

Combined Ratios:

  Loss ratio                                92.38%          59.76%          74.08%          70.26%         72.24%
  Underwriting expense ratio (1)            28.59%          35.61%          31.45%          28.45%         29.67%
                                          --------          ------        --------          ------       --------
  Combined ratio                           120.97%          95.37%         105.53%          98.71%        101.91%
                                           =======          ======         =======          ======        =======

Balance Sheet Data:
Total cash, cash equivalents and
  invested assets                         $231,604        $238,864        $226,572        $283,509
Total assets                               492,852         380,766         404,338         379,880
Total debt                                  47,059          51,196          50,498          51,251
Total liabilities                          434,338         309,669         338,285         305,933
Total stockholder's equity                  58,514          71,097          66,053          73,947
</TABLE>

------------------------------------------------------------------------------
(1)  Includes  policyholders'  dividend  ratio of 1.83%  for nine  months  ended
September 30, 2000.


<PAGE>




                                                       RISK FACTORS

     By  exchanging  your old junior  subordinated  debentures  for the exchange
consideration,  you may be  choosing  to invest in the new  senior  subordinated
debentures.  If you do not participate in the exchange offer,  you will continue
to hold old junior  subordinated  debentures.  An investment  in our  debentures
involves a high degree of risk. In addition to the other  information  contained
in or  incorporated  by reference  into this  prospectus,  you should  carefully
consider  the  following  risk  factors in  deciding  whether to tender your old
junior  subordinated   debentures  in  the  exchange  offer  and  what  form  of
consideration to request.

Risks relating to CII Financial

We may not be able to repay  the  principal  amount of our  debentures  at their
maturity date.

     CII  Financial,  as a holding  company  and sole  obligor of the old junior
subordinated  debentures,  has no available source of cash with which to pay the
old junior  subordinated  debentures when they mature on September 15, 2001. Our
ability to service our indebtedness  following the exchange offer, including our
payment  obligations  under the new senior  subordinated  debentures and any old
junior subordinated  debentures that remain  outstanding,  and to meet our other
financial obligations, will depend upon our future operating performance,  which
in turn is subject to market  conditions  and other factors,  including  factors
beyond our control.  CII  Financial,  as a holding  company,  does not currently
generate cash flows that will be  sufficient to pay the principal  amount of the
debentures on their stated maturity  dates.  Our ability to repay the debentures
or to refinance our debentures will depend on the availability of new sources of
funding,  which will in turn depend on our operating  performance,  the state of
the  financial  markets  and other  factors at the time that we want to repay or
refinance the  debentures.  Accordingly,  we can give no assurance  that we will
have the cash resources required to meet our obligations to repay the old junior
subordinated or new senior subordinated debentures when they become due.

Our operational structure adversely affects our ability to service our debt.

     Substantially  all our assets consist of  investments in our  subsidiaries,
and  our  operations   are  currently   conducted   through  our   subsidiaries.
Accordingly,  our ability to service our debt,  including the  debentures,  will
depend  upon  both  the  earnings  of our  subsidiaries  and  their  ability  to
distribute  those  earnings to us. Our  subsidiaries  are  separate and distinct
legal  entities and have no  obligation,  contingent  or  otherwise,  to pay any
amounts due pursuant to the  debentures,  whether by  dividends,  loans or other
payments. In addition,  the payment of dividends and the making of loan advances
to us by our  subsidiaries  are and will continue to be subject to statutory and
regulatory  restrictions.  California Indemnity Insurance Company,  which is our
only direct  subsidiary,  cannot  currently  pay any dividends to us without the
prior approval of the California Department of Insurance.

Our guaranty of Sierra's credit facility puts your investment at risk.

     In August 2000, CII Financial,  as a holding company, became a guarantor of
Sierra's  revolving credit facility,  which at December 15, 2000 was fully drawn
and had an  outstanding  balance of $185  million.  The old junior  subordinated
debentures and the new senior  subordinated  debentures are  subordinated to our
guaranty of the credit  facility  debt.  In the event of a default in payment on
our old junior subordinated  debentures,  Sierra's senior lenders would have the
right to  receive  payment  in full by us on our  guaranty  of  Sierra's  credit
facility prior to any payment being made on the old debentures.  On December 15,
2000, Sierra amended and restated its credit facility.  Prior to this amendment,
Sierra  was not in  compliance  with  some of the  credit  facility's  financial
covenants.

We have  significant  indebtedness  which has and could  continue  to  adversely
affect our business operations.

     CII  Financial,   as  a  holding  company,  has  a  significant  amount  of
outstanding indebtedness.  Upon consummation of the exchange offer, we will have
up to  $232,059,000  of  senior  indebtedness,  consisting  of  the  new  senior
subordinated debentures,  the credit facility guaranty and the demand promissory
note  held by an  affiliate.  As a  result,  we  will  remain  highly  leveraged
following the exchange offer. This high leverage will restrict our flexibility.

Significant  geographic  and industry  concentration  may  adversely  affect our
business.

     Our current business is concentrated  geographically  and by industry.  For
the nine  months  ended  September  30,  2000,  approximately  77% of our direct
written premiums were in California,  8% were in Colorado and 7% were in Nevada.
Policyholders  whose primary business is construction  account for approximately
32% of our premiums. As a result of this geographic and industry  concentration,
the economic condition of these areas and of the construction industry will have
a significant effect on our operating results.

We may experience adverse loss development on prior accident years.

     In both 1999 and 2000 we were  required  to  increase  reserves  for losses
incurred in prior  accident  years.  For the year ended  December 31,  1999,  we
increased  reserves related to losses on prior accident years by a net amount of
$9.9  million.  For the nine months  ended  September  30,  2000,  we  increased
reserves  related  to losses on prior  accident  years by a net  amount of $20.2
million.  A significant  portion of this adverse loss development was related to
the 1996 through 1998 accident years and was primarily attributable to increased
severity of claims in California.

     The average  cost per claim under our  workers'  compensation  policies has
increased  each year since  1995.  Two of the  factors  increasing  the costs of
claims are medical inflation and, in California, adverse court decisions related
to medical control of claims.

     The California workers'  compensation  industry has been adversely affected
by higher claim severity,  and adverse loss development on prior years' incurred
losses.  We cannot  assure you that we will not be required  to make  additional
increases in our loss reserves for prior year  incurred  losses or that any such
losses will not have a material impact on our results of operations or financial
position.

If  our  reinsurers  do not  perform  their  obligations,  we  would  experience
significant losses and profitability would be adversely affected.

     In the ordinary  course of our business we reinsure our losses with several
reinsurers.  Reinsurance  does not,  however,  relieve us of our  obligation  to
policyholders. As of September 30, 2000, we had over $211 million of reinsurance
receivables from our reinsurers.  A single reinsurer  accounts for approximately
87.6% of this  amount.  Should these  reinsurance  companies  not perform  their
obligations to reimburse us for losses paid by us under the direct policies,  we
would experience  significant  losses and our  profitability  would be adversely
affected.

We have reduced our reinsurance  coverage,  which will expose us to greater risk
of ultimate loss.

     For policies  issued after June 30, 2000,  our  reinsurance  coverage has a
much higher retention of liability,  and covers claims in excess of $250,000 per
occurrence,  compared to our former  retention that had a maximum of $17,000 per
occurrence.  As a result,  we must pay a  substantially  higher  portion of each
claim before we have recourse to our reinsurers. This exposes us to greater risk
of ultimate loss.

The  competitive  environment  in California has and could continue to adversely
affect our profitability.

     For the nine months  ended  September  30, 2000,  approximately  77% of our
direct  written  premiums  were in  California.  There  has been  intense  price
competition in California since that state replaced its minimum rate law with an
open rating premium law in 1995. While workers' compensation rates have risen in
California  during 2000,  the premiums  charged  remain lower than those charged
prior to the 1995 change in law. This price  competition  has affected and could
continue to affect our  profitability.  Many of our  competitors  are larger and
have significantly greater resources than us.

The open rating environment in Nevada scheduled for July 1, 2001 could adversely
affect our profitability.

     For the nine months  ended  September  30,  2000,  approximately  7% of our
direct written premiums were in Nevada. Nevada is scheduled to change to an open
rating  environment  from a minimum rating  environment  beginning July 1, 2001.
After the introduction of open rating in California, premium rates were reduced.
As a result,  premium  revenues and operating  profits  became  uncertain due to
increased price competition and the risk of incurring losses. Although we intend
to underwrite each account taking into consideration the insured's risk profile,
prior  loss   experience,   loss   prevention   plans  and  other   underwriting
considerations,  we cannot assure you that we will be able to operate profitably
in the Nevada workers' compensation industry in the open rating environment.

A rating downgrade from insurance rating agencies could adversely affect us.

     A downgrade of our  insurance  subsidiaries'  rating by A.M.  Best or Fitch
could have a material  adverse effect on our business,  financial  condition and
results  of  operations.  In  the  event  we  default  on  our  debentures,  our
subsidiaries' rating may be downgraded.

Regulations  and regulatory  development  could increase our costs and adversely
affect our financial condition and operations.

     Our  insurance  subsidiaries  are subject to  extensive  regulation  by the
California  and  Texas  Departments  of  Insurance,  and  are  also  subject  to
regulation  in each  additional  jurisdiction  in which they become  licensed to
transact  business.  These  regulations  could  increase our costs and limit our
ability  to  react  to  changes  in the  marketplace  or take  advantage  of new
opportunities in a timely manner. In addition, because insurance regulations are
designed primarily for the protection of policyholders  rather than stockholders
or creditors,  these  regulations  could impede our creditors'  ability to fully
enforce their rights.  Changes in regulation  could further  increase our costs.
Our failure to comply with these regulations could result in various  regulatory
actions including oversight of our insurance subsidiaries or other actions which
could  adversely  affect our operations and our ability to service our debt. The
nature and extent of such regulations  varies from jurisdiction to jurisdiction,
but typically involves:

o        standards of solvency and minimum amounts of capital and surplus
         which must be maintained;

o        limits on types and amounts of investments;

o        restrictions on the size of risks which may be insured by a single
         company;

o        licensing of insurers and their agents;

o        required deposits of securities for the benefit of policyholders;

o        approval of policy forms;

o        establishment of statutory reporting practices and the form and
         content of statutory financial statements;

o        establishment of methods for setting statutory loss and expense
         reserves;

o        review, and in some instances, prior approval of premium rates;

o        limits on transactions among insurers and their affiliates;

o        approval of all proposed changes of control;

o        approval of dividends;

o        setting and collecting guarantee fund assessments; and

o         required  filing  of annual  and other  reports  with  respect  to the
          financial  condition  and  operation of insurers.  In addition,  state
          regulatory  examiners  perform  periodic  financial  and  underwriting
          examinations of insurers.

We  cannot  predict  the  impact  of  changes  that may be made by the  National
Association of Insurance Commissioners.

     In recent  years,  the insurance  regulatory  framework has been subject to
increased scrutiny by the National  Association of Insurance  Commissioners,  or
the NAIC,  state  legislatures  and insurance  regulators  and the United States
Congress.  The  NAIC  is a  voluntary  organization  of  state  regulators.  Its
principal  mission is to encourage  uniformity in state  regulation of insurance
through the drafting of model laws and the  continuing  refinement  of insurance
accounting practices and reporting procedures. None of the NAIC's pronouncements
has any legal effect unless enacted by individual  states. The NAIC is currently
engaged in a project to codify statutory  accounting practices that is likely to
change the definition of what constitutes  prescribed versus permitted statutory
accounting  practices and may result in changes to the accounting  policies that
insurance  enterprises use to prepare their statutory financial  statements.  At
this time, we are unable to predict how such initiative may affect our insurance
subsidiaries'  statutory  financial  statements or how insurance rating agencies
will  interpret or react to any such  changes.  No  assurance  can be given that
future legislative or regulatory changes resulting from such activities will not
adversely affect us.

If we are unable to maintain and improve our management  information system, our
operations would be adversely affected.

         Our management information system is critical to our current and future
operations. The information gathered and processed by our management information
system  assists us in, among other  things,  pricing our product,  invoicing and
collecting our premiums,  processing  and paying our claims and vendor  invoices
and providing us with  information  to manage our business.  In the past we have
encountered  some  difficulty  with  replacing or enhancing our systems.  If our
systems were to fail or if we were unable to expand or enhance the capability of
our systems, our business would be adversely affected.

Our operating results could be affected by factors which are beyond our control.

     In the  workers'  compensation  insurance  business,  changes  in  economic
conditions  can lead to  reduced  premium  levels due to lower  payrolls  and to
increased  claims  due to the  tendency  of  workers  who are laid off to submit
workers'  compensation  claims.  Changes in market interest rates can affect the
amount of interest income that we can earn on our investment portfolio,  as well
as the amount of realized and  unrealized  gains or losses on specific  holdings
within our investment  portfolio.  Legislative  and regulatory  changes can also
cause the operating results of our workers' compensation insurance businesses to
vary.

We are controlled by Sierra.

     All of CII Financial's common stock is owned by Sierra. Sierra thus is able
to elect our board of directors and thereby  indirectly control our policies and
those of our  subsidiaries,  including  mergers,  sales of  assets  and  similar
transactions.  The  interests of Sierra may not be the same as the  interests of
holders of our debentures. Shares of our common stock and shares of common stock
of our  subsidiaries  may  from  time to time be  pledged,  subject  to  certain
regulatory requirements,  to secure obligations of Sierra or its affiliates. CII
Financial has guaranteed Sierra's obligations under its fully drawn $185 million
senior secured credit facility.

Risks relating to our debentures

You may not be able to  trade  the  debentures  easily  because  there  may be a
limited market for them.

     The old junior  subordinated  debentures  are not listed on any  securities
exchange or quoted on The Nasdaq  Stock  Market.  Although we intend to list the
new senior  subordinated  debentures on the New York Stock  Exchange,  we do not
expect any active trading market for our debentures to exist.  Accordingly,  you
may have difficulty selling your debentures after the expiration of the offer.

     To the extent that the old junior subordinated  debentures are tendered and
accepted in the exchange offer,  the outstanding  principal amount available for
trading will be reduced,  and consequently,  any existing trading market for the
remaining  old junior  subordinated  debentures  will  likely  become  even more
limited than it is now.

The debentures are subordinated to our guaranty of Sierra's credit facility;  in
the event of a default, you may lose part or all of your investment.

     CII  Financial,  as a  holding  company,  has  guaranteed  Sierra's  credit
facility,  and both the old junior  subordinated  debentures  and the new senior
subordinated debentures will rank junior to our obligations under this guaranty,
as well as any other senior debt we incur. As a result of such subordination, in
the event of  Sierra's  liquidation  or  insolvency  or a payment  default  with
respect to its credit facility,  our assets will be available to pay obligations
on the debentures  only after the credit  facility has been paid in full.  There
may not then be sufficient assets remaining to pay amounts due on the debentures
then outstanding. As of December 15, 2000, Sierra had approximately $185 million
outstanding  under its fully drawn credit facility.  The terms of our debentures
do not limit our ability to incur additional senior debt.

The old  junior  subordinated  debentures  will rank  junior  to the new  senior
subordinated debentures.

     The old junior  subordinated  debentures will rank junior to the new senior
subordinated  debentures  and to our  guaranty of Sierra's  credit  facility and
other senior debt.

Risk Associated with the Exchange Offer

You may not receive the  exchange  consideration  you  requested in the exchange
offer.

     If  holders  of more than  $19,500,000  aggregate  principal  amount of old
junior  subordinated  debentures elect the cash option,  we will not have enough
cash to pay for all the debentures  that holders elect to sell. In that case, we
will purchase a total of $19,500,000 principal amount of old junior subordinated
debentures  for  cash  and we  will  exchange  the  balance  of the  old  junior
subordinated debentures we receive for new senior subordinated  debentures.  All
holders who elect the cash option will be permitted to sell the same fraction of
their old junior  subordinated  debentures  for cash.  This  fraction will equal
$19,500,000,  divided  by the  aggregate  principal  amount  of  all  debentures
tendered for cash by all  holders.  To receive the maximum  amount of cash,  you
must tender all of your old junior subordinated  debentures for the cash option.
We will not determine whether the cash option for the exchange consideration has
been  oversubscribed  until after the expiration of the exchange offer. You will
not be able to withdraw your tender of old junior subordinated debentures at the
time we make this  determination  even though it may affect the type of exchange
consideration you will receive in the exchange offer.

The  exchange  offer does not  reflect  any  valuation  of the old  subordinated
debentures.

     Our board of directors has made no  determination  that the exchange  offer
represents a fair  valuation  of the old  subordinated  debentures.  We have not
obtained a fairness opinion from any financial advisor about the fairness of the
exchange  offer to you or us. We cannot  assure you that if you tender  your old
junior  subordinated  debentures  you will  receive  more  value than if you had
chosen to keep them.

We may not be able to fund the cash portion of the exchange consideration.

     We intend to fund the cash portion of the exchange  consideration through a
combination  of  dividends  or other  transfers  from our  California  insurance
subsidiaries and a loan from an affiliate. The insurance subsidiaries may not be
permitted to declare and pay dividends or make other  transfers to us unless the
California  Department of Insurance approves.  We cannot assure you that we will
receive this regulatory approval. Our affiliates are under no obligation to loan
funds to us. If we are unable to obtain the cash required for this  transaction,
we will not be able to consummate the exchange offer.

Sierra may not receive the consent of Sierra's  lenders  under its $185  million
credit facility to the exchange offer.

     The consent of the lenders under  Sierra's  credit  facility is required in
order for us to consummate the exchange  offer. We cannot assure you that Sierra
will receive the lenders' consent.  If the consent is not received,  we will not
be able to complete the exchange offer.


<PAGE>





                SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

     We have made  forward-looking  statements  with  respect  to our  financial
condition,  results of operations and business and on the expected impact of the
exchange  offer  on our  financial  performance.  Words  such as  "anticipates,"
"expects,"  "intends,"  "plans,"  "believes,"  "seeks,"  "estimates" and similar
expressions   identify   forward-looking   statements.   These   forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties,   including   those   described  under  "Risk  Factors"  in  this
prospectus,  that  could  cause  actual  results to differ  materially  from the
results contemplated by the forward-looking statements.

     In  evaluating  the  exchange  offer,  you should  carefully  consider  the
discussion of risks and  uncertainties in the section entitled "Risk Factors" on
page 9 of this prospectus.

                    WHERE YOU CAN FIND ADDITIONAL INFORMATION

     We have  filed a  registration  statement  on Form S-4  under  which we are
registering the new senior subordinated debentures to be issued to our debenture
holders in the exchange offer.  This  prospectus is a part of that  registration
statement.

     This prospectus does not contain all of the information in the registration
statement  and the exhibits and  schedules to it. For further  information  with
respect to us and our new senior  subordinated  debentures,  we refer you to the
registration  statement  and to the exhibits and  schedules to the  registration
statement.  Statements  contained in this  prospectus  as to the contents of any
contract or any other document referred to are not necessarily complete,  and in
each instance,  we refer you to the copy of the contract or other document filed
as an  exhibit  to the  registration  statement.  Each of  these  statements  is
qualified in all respects by this reference.

     You may inspect copies of the registration statements without charge at the
SEC's principal office in Washington, D.C., and copies of all or any part of the
registration  statement may be obtained from the Public Reference Section of the
SEC,  450 Fifth  Street,  N.W.,  Washington,  D.C.  20549,  upon payment of fees
prescribed by the SEC.

     We do not  currently  file  reports  and  information  with the  SEC.  Upon
completion of this  offering,  we will be subject to the  information  reporting
requirements  of the  Securities  Exchange Act of 1934 and we will file reports,
and other information with the SEC.

     You may read and copy any reports,  statements or other information that we
file  with  the  SEC  at the  SEC's  public  reference  rooms  at the  following
locations:

Public Reference Room     New York Regional Office  Chicago Regional Office
450 Fifth Street, N.W.    7 World Trade Center      Citicorp Center
Room 1024                 Suite 1300                500 West Madison Street
Washington, D.C. 20549    New York, NY 10048        Suite 1400
                                                    Chicago, IL 60661-2511

     Please call the SEC at 1-800-SEC-0330 for further information on the public
reference  rooms.  These SEC  filings  are also  available  to the  public  from
commercial  document  retrieval  services and at the Internet worldwide web site
maintained by the SEC at  "http://www.sec.gov".  Reports,  proxy  statements and
other information  concerning Sierra may also be inspected at the offices of the
New York Stock Exchange, which is located at 20 Broad Street, New York, New York
10005.

     The old junior  subordinated  debentures  are  convertible  into  shares of
Sierra common stock. Sierra has filed a registration statement on Form S-3 under
which it registered  the shares of Sierra common stock into which the old junior
subordinated  debentures  are  convertible.  In addition,  Sierra files  annual,
quarterly  and special  reports and other  information  with the SEC.  Documents
filed  by  Sierra  with  the  SEC  can  be  obtained  as  described  above.  The
registration  statement and Sierra's periodic filings under the Exchange Act are
not incorporated by reference in this prospectus.


<PAGE>


                       RATIO OF EARNINGS TO FIXED CHARGES

<TABLE>

<CAPTION>
                                       Nine Months Ended

                                         September 30,                   For the year Ended December 31,
                                        2000        1999       1999        1998       1997        1996        1995
                                     (dollars in thousands)                   (dollars in thousands)

Pre-tax (loss) income before
  discontinued operations and
<S>                                    <C>          <C>         <C>        <C>        <C>          <C>         <C>
  extraordinary gains                  $(14,007)    $11,854     $7,095     $17,878    $10,813      $10,630     $9,083

Fixed Charges:
Interest expense                           2,717      2,751      3,706       4,301      4,091        4,123      4,868
Capitalized interest                           0        130        130           0          0            0          0
Interest relating to rental
  expense (1)                                704        632        867         438        438          542        491
                                          ------     ------     ------      ------     ------       ------     ------
    Total fixed charges                    3,421      3,513      4,703       4,739      4,524        4,665      5,359

Earnings available for fixed
charges                                $(10,586)    $15,367    $11,798     $22,617    $15,342      $15,295    $14,442

Ratio of earnings to fixed charges       (3.09x)      4.37x      2.51x       4.77x      3.39x        3.28x      2.69x

</TABLE>

------------------------------------------------------------------------------

     (1) The representative  interest portion of rental expense was deemed to be
one-third of all rental expense.

     Earnings were not  sufficient to cover fixed charges  during the first nine
months of 2000 by $14,007,000;  all other periods had sufficient income to cover
charges.

                                 USE OF PROCEEDS

     The new  senior  subordinated  debentures  issued  in  connection  with the
exchange   offer  are  only  being  issued  in  exchange  for  your  old  junior
subordinated debentures. We will not receive any cash proceeds from the issuance
of new senior  subordinated  debentures  pursuant to the exchange offer. All old
junior  subordinated  debentures  accepted by us in the  exchange  offer will be
canceled.


<PAGE>


                                 CAPITALIZATION

     The following table sets forth as of September 30, 2000:

o        our actual capitalization; and

o       our  capitalization  adjusted to reflect  the tender of all  $47,059,000
        aggregate principal amount of old junior subordinated  debentures in the
        exchange offer and full  subscription of the cash option, so that owners
        tendering  outstanding old junior subordinated  debentures will receive,
        in the aggregate,  $10,237,500 in cash and $27,559,000  principal amount
        of new senior subordinated debentures under the exchange offer.

     We intend  to fund a  portion  of the cash  consideration  of the  exchange
offer,  as well as  interest  and  expenses,  through a loan  from an  affiliate
evidenced by a demand  promissory note, which we refer to as the affiliate note.
The  amount of this  loan  will be  determined  prior to the  expiration  of the
exchange  offer.  For purposes of this table, we have assumed that the amount of
the affiliate note will be $5.0 million.

     To the  extent  that old junior  subordinated  debentures  are not  validly
tendered or accepted in the exchange offer, the amount set out below in the "pro
forma" column for the new senior subordinated debentures and the affiliate note,
depending on the election of the debenture  holder,  may decrease and the amount
set out  below  in the  "pro  forma"  column  for the  old  junior  subordinated
debentures would increase. In addition, it is possible that the cash option will
not be fully subscribed.  In that event, the amount set below in the "pro forma"
column for the new senior subordinated  debentures would increase and the amount
of the  affiliate  note  may  decrease.  This  information  should  be  read  in
conjunction with our consolidated  financial  statements and notes thereto which
are included elsewhere in this prospectus.

<TABLE>

<CAPTION>
                                                                               September 30, 2000
                                                                    Historical                    Pro forma
                                                                   (dollars in thousands, except share data)
Total debt:

<S>                                  <C>                                   <C>                        <C>
  New senior subordinated debentures (1).............                      0                          $36,822
  Old junior subordinated debentures.................                 $47,059                               -
  Notes payable-affiliates ..........................                       -                           5,000
  Other debt.........................................                       -                               -
                                                                  -----------                    ------------
    Total debt.......................................                  47,059                          41,822
                                                           ------------------                      ----------

Stockholder's equity:................................
  Common stock, no par value; 1,000 shares authorized;
     100 shares issued and outstanding                                  3,604                          3,604
---------------------------------------------------------              64,450                         64,450
  Additional paid-in capital.........................
Accumulated other comprehensive loss:
    Unrealized holding loss on available-for-sale
      investments ...................................                 (8,651)                        (8,651)
Accumulated deficit .................................                   (889)                          (889)
                                                                -------------                     ----------
    Total stockholder's equity.......................                  58,514                         58,514
                                                                  -----------                    -----------
    Total capitalization.............................                $105,573                       $100,336
                                                                    =========                      =========
</TABLE>

(1) New senior  subordinated  debentures  will have an accounting  book value of
    $36,821,500, which includes a deferred gain of $9,262,500. This premium will
    be amortized over the life of the senior subordinated debentures.

------------------------------------------------------------------------------



<PAGE>


                                                    THE EXCHANGE OFFER

     This section of the prospectus describes the proposed exchange offer. While
we believe that the description covers the material terms of the exchange offer,
this  summary may not contain all of the  information  that is important to you.
You  should  read  this  entire  document  and the other  documents  we refer to
carefully for a more complete understanding of the exchange offer.

Terms of the Exchange Offer

     Upon the terms and  subject to the  conditions  of the  exchange  offer set
forth in this prospectus and in the accompanying letter of transmittal,  you can
choose to exchange your old junior subordinated debentures for:

o        $1,000 in principal amount of new senior subordinated debentures for
          each $1,000 in principal amount of old
          junior subordinated debentures that you tender; or

o         $525 in cash for each  $1,000 in  principal  amount of the old  junior
          subordinated   debentures  that  you  tender,   up  to  a  maximum  of
          $19,500,000  aggregate  principal  amount of old  junior  subordinated
          debentures as described below.

     We  will  pay in  cash  accrued  and  unpaid  interest  on all  old  junior
subordinated  debentures  accepted  in  the  exchange  offer  through,  but  not
including, the date of acceptance.

     We are only  offering  to  purchase  a  maximum  of  $19,500,000  aggregate
principal amount of old junior  subordinated  debentures for cash. If holders of
more than  $19,500,000  aggregate  principal  amount of old junior  subordinated
debentures  elect the cash  option,  we will not have enough cash to pay for all
the  debentures  that holders  elect to sell.  In that case,  we will purchase a
total of $19,500,000 principal amount of old junior subordinated  debentures for
cash and we will exchange the balance of the old junior subordinated  debentures
we receive  for new senior  subordinated  debentures.  All holders who elect the
cash  option  will be  permitted  to sell the same  fraction of their old junior
subordinated debentures for cash. This fraction will equal $19,500,000,  divided
by the aggregate  principal  amount of all  debentures  tendered for cash by all
holders.

     The following table illustrates how new senior subordinated  debentures and
cash will be distributed in the aggregate  under three  scenarios,  all of which
assume that 100% of the old junior  subordinated  debentures  are tendered,  but
each of which  assumes that a different  percentage  of holders  elects the cash
option.  The  three  scenarios  are:  first,  that  no old  junior  subordinated
debentures  are  tendered  for cash;  second,  that  $19,500,000  of old  junior
subordinated  debentures are tendered for cash; and third,  that  $47,059,000 of
old junior subordinated debentures are tendered for cash.

<TABLE>

<CAPTION>
   Principal amount of                                   Principal amount of new
        old junior                                         senior subordinated
       subordinated            Cash paid for old          debentures issued for
   debentures tendered        junior subordinated        old junior subordinated
         for cash                  debentures                  debentures
  -----------------------    -----------------------    --------------------------

<S>    <C>                    <C>                              <C>
       $         0            $             0                  $47,059,000

       $19,500,000                $10,237,500                  $27,559,000

       $47,059,000                $10,237,500                  $27,559,000
</TABLE>

     We will not determine whether the cash option has been oversubscribed until
after the  expiration  of the exchange  offer.  You will not be able to withdraw
your  tender  of  old  junior   subordinated   debentures   once  we  make  this
determination  even though it may affect the type of exchange  consideration you
will receive in the exchange offer. We will publicly  announce  whether the cash
option has been  oversubscribed  and the  effect of any  required  proration  of
exchange  consideration  as soon as  practicable  after  the  expiration  of the
exchange offer.

     You do not  have to  choose  the  same  option  for  all of the old  junior
subordinated  debentures that you tender.  You do not have to tender all of your
old junior subordinated debentures to participate in the exchange offer. You may
withdraw  your tender of old junior  subordinated  debentures at any time before
the expiration of the exchange offer.

     Our board of directors makes no  recommendation to owners of the old junior
subordinated  debentures  whether  or  not to  tender  their  debentures  in the
exchange  offer  or as to the  form  of  exchange  consideration  to  elect.  In
addition,  we have not authorized  anyone to make a recommendation on our behalf
regarding the exchange offer. Owners of the old junior  subordinated  debentures
must make their own  decision  whether to tender  their old junior  subordinated
debentures in the exchange offer and as to the form of exchange consideration to
elect.

     Principal  Differences between the Old Junior  Subordinated  Debentures and
the New Senior Subordinated Debentures

     The terms of our old  junior  subordinated  debentures  and our new  senior
subordinated  debentures  are  described in more detail in the  sections  headed
"Description of Debentures." The principal differences are as follows:

o         The new senior  subordinated  debentures  will rank senior in right of
          payment  to any  old  junior  subordinated  debentures  which  are not
          tendered.

o         You  will  receive  a  higher  rate  of  interest  on the  new  senior
          subordinated debentures,  which will pay 9% per annum, than on the old
          junior subordinated debentures, which pay 7 1/2% per annum.

o         The scheduled maturity date of the new senior subordinated  debentures
          is September  15, 2006,  which is five years later than  September 15,
          2001,  the  scheduled  maturity  date of the old  junior  subordinated
          debentures.

o         The new senior  subordinated  debentures will not be convertible  into
          Sierra  common  stock.  The old  junior  subordinated  debentures  are
          convertible into Sierra common stock at $39.398 per share.

Period For Tendering Your Debentures

     Subject to applicable  securities laws and the terms and conditions in this
prospectus,  we will  accept for  exchange  any and all old junior  subordinated
debentures  that are validly  tendered and not withdrawn  before 5:00 p.m.,  New
York City time,  on the  expiration  date of the  exchange  offer.  However,  we
reserve the right to:

o        delay the acceptance of the old junior subordinated debentures for
         exchange;

o        terminate the exchange offer;

o         extend the  expiration  date and  retain  all old junior  subordinated
          debentures that have been tendered,  subject to the right of owners of
          old junior  subordinated  debentures  to withdraw  their  tendered old
          junior subordinated debentures;

     o refuse to accept the old junior  subordinated  debentures  and return all
old junior subordinated debentures that have been tendered to us; or

     o waive any condition or otherwise amend the terms of the exchange offer in
any respect.

     The rights we reserve in this  paragraph  are in  addition  to our right to
terminate the exchange offer described  under  "Conditions to, and Amendment of,
the Exchange Offer."

     If we make a  material  change  in the terms of the  exchange  offer or the
information  concerning the exchange offer or waive a material  condition to the
exchange  offer,  we will  disseminate  additional  exchange offer materials and
extend the exchange offer to the extent required by law. In addition, we may, if
we deem  appropriate,  extend the exchange  offer for any other  reason.  If the
consideration  to be paid in the exchange offer is increased or decreased or the
principal amount of old junior  subordinated  debentures subject to the exchange
offer is  decreased,  the  exchange  offer will remain open at least 10 business
days from the date we first  give  notice  to you,  by  public  announcement  or
otherwise,  of that  increase or  decrease.  In the case of an  extension of the
exchange  offer,  the  announcement  will be issued no later than 9:00 a.m., New
York time, on the next business day after the previously scheduled expiration of
the exchange offer. Without limiting the manner in which any public announcement
may be made,  we will have no  obligation  to publish,  advertise  or  otherwise
communicate any public  announcement  other than by issuing a release to the Dow
Jones News Service.

Market and Trading Information Regarding the Old Junior Subordinated Debentures

     The   old   junior   subordinated    debentures    currently   are   traded
over-the-counter. There is no established reporting system or trading market for
trading  in the old junior  subordinated  debentures.  Accordingly,  there is no
practical  way to determine the trading  history of the old junior  subordinated
debentures.  We believe that trading in the old junior  subordinated  debentures
has been limited and  sporadic.  We believe that the trading  market for the old
junior subordinated  debentures that remain outstanding after the exchange offer
will be very limited.

Acceptance for Exchange of Debentures

     Upon the terms and  subject to the  conditions  of the  exchange  offer and
applicable law, we will exchange the applicable  exchange  consideration for all
old junior subordinated  debentures validly tendered and not withdrawn under the
exchange offer on or prior to the expiration of the exchange offer.

     This  exchange  will be made by our deposit of the  exchange  consideration
with the  exchange  agent as soon as  practicable  after the  expiration  of the
exchange  offer so that  the  exchange  consideration  may be paid to you on the
exchange date.

     The exchange agent will act as agent for you for the purpose of issuing the
exchange  consideration  for the old junior  subordinated  debentures.  Under no
circumstances  will  interest  on the  exchange  consideration  be paid by us by
reason of any delay on behalf of the exchange agent in making that exchange.

     We expressly  reserve the right, in our sole discretion and subject to Rule
14e-l(c) under the Exchange Act of 1934, to delay acceptance for exchange of, or
the exchange of, old junior subordinated debentures in order to comply, in whole
or in part, with any applicable law or regulation.

     In all cases,  the exchange  agent will deliver the exchange  consideration
for old junior subordinated  debentures accepted for exchange under the exchange
offer only after timely receipt by the exchange agent of:

o         certificates  representing your old junior subordinated  debentures or
          timely  confirmation  of a  book-entry  transfer  of your  old  junior
          subordinated debentures into the exchange agent's account at DTC;

     o a  properly  completed  and duly  executed  letter of  transmittal,  or a
manually signed  facsimile  thereof or, in the case of book-entry  transfer,  an
"agent's message"; and

o        any other documents required by the letter of transmittal.

     For  purposes  of  the  exchange   offer,   validly   tendered  old  junior
subordinated  debentures,   or  defectively  tendered  old  junior  subordinated
debentures  for which we have  waived that  defect,  will be deemed to have been
accepted for exchange by us if, as and when we give  written  notice  thereof to
the exchange agent.

     If the  exchange  offer  is  terminated  or  withdrawn,  or the old  junior
subordinated debentures are not accepted for exchange, no exchange consideration
will be paid or payable. If any tendered old junior subordinated  debentures are
not  exchanged  under the exchange  offer for any reason,  or  certificates  are
submitted evidencing more old junior subordinated  debentures than are tendered,
those old junior subordinated debentures not exchanged will be returned, without
expense, to you, or, in the case of old junior subordinated  debentures tendered
by  book-entry  transfer,  those  old  junior  subordinated  debentures  will be
credited  to  the  account  maintained  at  DTC  from  which  those  old  junior
subordinated debentures were delivered,  unless otherwise requested by you under
the  heading  "Special  Delivery  Instructions"  in the  letter of  transmittal,
promptly  after the  expiration  of the  exchange  offer or  termination  of the
exchange offer.

Procedures for Exchanging Debentures

     In order to receive  the  exchange  consideration  you must tender your old
junior  subordinated  debentures  under  the  exchange  offer on or  before  its
expiration.

     The method of delivery of old junior subordinated debentures and letters of
transmittal, any required signature guarantees and all other required documents,
including  delivery  through  DTC  and  any  acceptance  of an  agent's  message
transmitted  through  ATOP,  is at your  election and risk.  Except as otherwise
provided in the letter of  transmittal,  delivery  will be deemed made only when
actually received by the exchange agent. If delivery is by mail, we suggest that
you use properly  insured,  registered mail with return receipt  requested,  and
that the  mailing  be made  sufficiently  in advance  of the  expiration  of the
exchange offer.

     It is  contemplated  that our new senior  subordinated  debentures  will be
delivered  in  book-entry  form  through  DTC.  Accordingly,  if you  anticipate
tendering  other than  through  DTC,  you are urged to promptly  contact a bank,
broker  or  other  intermediary  that  has the  capability  to  hold  securities
custodially  through  DTC,  to  arrange  for  the  receipt  of  any  new  senior
subordinated  debentures to be delivered as part of the exchange  consideration,
and to obtain  the  information  necessary  in the  letter of  transmittal.  The
payment of any cash to you will be paid to you by the exchange agent.

     If you have any questions or need help in tendering your notes, please call
the  information  agent whose  address and phone number are on the back cover of
this prospectus.

     Tenders of debentures.  Your tender of old junior subordinated  debentures,
and  subsequent  acceptance by us, by one of the  procedures  set out below will
constitute a binding  agreement  between us and you in accordance with the terms
and subject to the  conditions  set forth in this  prospectus,  in the letter of
transmittal and, if applicable, in the notice of guaranteed delivery.

     Tenders of  debentures  held in physical  form. To  effectively  tender old
junior subordinated debentures held in physical form:

o         you must properly  complete and duly execute a letter of  transmittal,
          or a  manually  signed  facsimile  thereof,  and any  other  documents
          required by the letter of  transmittal,  and those  documents  must be
          received  by the  exchange  agent at its  address  set out on the back
          cover of this prospectus; and

o         you must  ensure  that  certificates  representing  those  old  junior
          subordinated  debentures  are received by the  exchange  agent at that
          address on or prior to the expiration of the exchange offer.

     Letters of transmittal  and old junior  subordinated  debentures  should be
sent only to the  exchange  agent and should not be sent to us, the  information
agent or the dealer manager.

     If your old junior subordinated  debentures are registered in the name of a
person other than the signatory to the letter of transmittal,  then, in order to
tender those old junior  subordinated  debentures  under the exchange offer, the
old  junior  subordinated  debentures  must be  endorsed  or  accompanied  by an
appropriate written instrument or instruments of transfer signed exactly as that
name appears on the old junior  subordinated  debentures,  with the signature on
the old junior subordinated  debentures or instruments of transfer guaranteed as
provided below.

     Tender  of  debentures  held  through  a  custodian.  If  your  old  junior
subordinated  debentures  are  registered  in  the  name  of a  broker,  dealer,
commercial  bank,  trust  company or other nominee and if you wish to tender old
junior subordinated  debentures and deliver a letter of transmittal,  you should
contact that broker,  dealer,  commercial  bank,  trust company or other nominee
promptly  and  instruct  him or  her or it to  tender  old  junior  subordinated
debentures  and  deliver a letter of  transmittal  on your  behalf.  A letter of
instructions  is enclosed in the materials  provided along with this  prospectus
which may be used by you in this  process to instruct the  registered  holder to
tender  old  junior  subordinated  debentures.  If you wish to tender  those old
junior  subordinated  debentures  yourself,  you must,  prior to completing  and
executing the letter of transmittal and delivering those old junior subordinated
debentures,  either make appropriate  arrangements to register  ownership of the
old  junior  subordinated  debentures  in your  name or  follow  the  procedures
described  in the  immediately  preceding  paragraph.  The  transfer  of  record
ownership may take considerable time.

     Tender of debentures  held through DTC. We have confirmed with DTC that the
old junior subordinated  debentures may be tendered using ATOP. DTC participants
may  electronically  transmit their  acceptance of the exchange offer by causing
DTC to transfer their old junior  subordinated  debentures to the exchange agent
using the ATOP  procedures.  In connection  with the transfer,  DTC will send an
"agent's message" to the exchange agent. The agent's message states that DTC has
received  instructions  from the  participant to tender old junior  subordinated
debentures  and  that the  participant  agrees  to be bound by the  terms of the
letter of transmittal.

     By using the ATOP procedures to tender old junior subordinated  debentures,
you will not be  required  to deliver a letter of  transmittal  to the  exchange
agent. However, you will be bound by its terms just as if you had signed it.

     Book-entry delivery procedures.  The exchange agent will establish accounts
with respect to the old junior  subordinated  debentures  at DTC for purposes of
the exchange offer within two business days after the date of this prospectus.

     Although  delivery of old junior  subordinated  debentures  may be effected
through book-entry transfer into the exchange agent's account at DTC, the letter
of  transmittal,  or a manually  signed  facsimile  thereof,  with any  required
signature  guarantees,  or an agent's  message,  in connection with a book-entry
transfer,  and any other required documents,  must, in any case, be transmitted,
to and received by the exchange agent at one or more of its addresses set out on
the back cover of this  prospectus on or prior to the expiration of the exchange
offer in connection with the tender of those old junior subordinated debentures.
Delivery of documents to DTC does not constitute delivery to the exchange agent.

     The confirmation of a book-entry transfer into the exchange agent's account
at DTC as described  above is referred to in this  prospectus  as a  "book-entry
confirmation." The term "agent's message" means a message transmitted by DTC to,
and  received  by,  the  exchange  agent and  forming  a part of the  book-entry
confirmation,  which states that DTC has received an express acknowledgment from
a DTC participant  that such  participant has received the letter of transmittal
and agrees to be bound by the terms of the letter of transmittal.

     Signature  guarantees.  Signatures  on all letters of  transmittal  must be
guaranteed  by a  recognized  participant  in  the  Securities  Transfer  Agents
Medallion  Program,  unless  your tender of old junior  subordinated  debentures
tendered are tendered:

o         by a registered holder of old junior subordinated debentures,  or by a
          participant in DTC whose name appears on a security  position  listing
          as the owner of those old junior subordinated debentures,  who has not
          completed any of the boxes entitled "Special Payment  Instructions" or
          "Special Delivery Instructions" on the letter of transmittal; or

o         for the account of a member firm of a registered  national  securities
          exchange,  a member of the National Association of Securities Dealers,
          Inc.  or a  commercial  bank or trust  company  having  an  office  or
          correspondent  in the United  States,  which  entities  we refer to as
          "eligible institutions".

     If your old junior subordinated  debentures are registered in the name of a
person other than the  signatory to the letter of  transmittal  or if old junior
subordinated  debentures  not  accepted  for  exchange or not tendered are to be
returned to a person other than the registered holder, then the signature on the
letter  of  transmittal   accompanying  the  tendered  old  junior  subordinated
debentures  must  be  guaranteed.  See  Instructions  1 and 5 of the  letter  of
transmittal.

     Mutilated, lost, stolen or destroyed certificates.  If you desire to tender
old junior subordinated  debentures,  but the certificates  evidencing those old
junior subordinated  debentures have been mutilated,  lost, stolen or destroyed,
you  should  contact  us for  information  about the  procedures  for  obtaining
replacement certificates for old junior subordinated debentures at the following
address or telephone number:  2716 North Tenaya Way, Las Vegas,  Nevada 89128 or
(702) 242-7040.

     Guaranteed  delivery.  If  you  want  to  tender  old  junior  subordinated
debentures  under the  exchange  offer prior to the  expiration  of the exchange
offer and,

o        your certificates representing those old junior subordinated debentures
         are not immediately available;

o         time will not permit  your  letter of  transmittal,  the  certificates
          representing  your old junior  subordinated  debentures  and all other
          required  documents  to reach  the  exchange  agent on or prior to the
          expiration of the exchange offer; or

o         the  procedures  for  book-entry  transfer,  including  delivery of an
          agent's message,  cannot be completed on or prior to the expiration of
          the  exchange  offer,  you may  nevertheless  tender  your old  junior
          subordinated  debentures with the effect that tender will be deemed to
          have been received on or prior to the expiration of the exchange offer
          if all the following conditions are satisfied:

o        the tender is made by or through an eligible institution;

o         a properly  completed and duly executed notice of guaranteed  delivery
          or an agent's  message with  respect to  guaranteed  delivery  that is
          accepted by us is received  by the  exchange  agent on or prior to the
          expiration of the exchange offer as provided below; and

o         the certificates for the tendered old junior subordinated  debentures,
          in proper  form for  transfer,  or a  book-entry  confirmation  of the
          transfer of those old junior subordinated debentures into the exchange
          agent's account at DTC as described  above,  together with a letter of
          transmittal,  or manually signed facsimile  thereof,  that is properly
          completed and duly  executed,  with any signature  guarantees  and any
          other documents  required by the letter of transmittal,  or a properly
          transmitted agent's message, are received by the exchange agent within
          two  business  days  after  the date of  execution  of the  notice  of
          guaranteed delivery.

     The notice of guaranteed  delivery may be sent by hand delivery,  facsimile
transmission  or mail to the  exchange  agent and must include a guarantee by an
eligible institution in the form set out in the notice of guaranteed delivery.

     Under no  circumstances  will interest be paid by us by reason of any delay
in exchanging old junior subordinated  debentures for the exchange consideration
to any person using the guaranteed  delivery  procedures  that results from this
guaranteed  delivery.  The exchange  consideration  for old junior  subordinated
debentures tendered under the guaranteed delivery procedures will be the same as
for old junior  subordinated  debentures  delivered to the exchange  agent on or
prior  to  the  expiration  of the  exchange  offer,  even  if  the  old  junior
subordinated  debentures  to be  delivered  subject to the  guaranteed  delivery
procedures are not so delivered to the exchange agent, and therefore exchange by
the exchange agent on account of those old junior subordinated debentures is not
made, until after the exchange date.

     Backup United States  federal  income tax  withholding.  To prevent  backup
federal  income tax  withholding  you must provide the exchange  agent with your
current taxpayer  identification  number and certify that you are not subject to
backup  federal income tax  withholding  by completing  the Substitute  Form W-9
included in the letter of transmittal.

     Determination  of  validity.  All  questions  as  to  the  validity,  form,
eligibility,  including  time of receipt,  and  acceptance  of any  tendered old
junior subordinated  debentures subject to any of the procedures described above
will be determined by us, in our sole discretion,  which  determination shall be
final and binding.

     We  reserve  the  right to  reject  any or all  tenders  of any old  junior
subordinated  debentures  that we  determine  not to be in proper form or if the
acceptance for tender of those old junior  subordinated  debentures  may, in the
opinion of our counsel,  be unlawful.  We also reserve the right to waive any of
the conditions of the exchange offer or any defect or irregularity in any tender
of your old junior  subordinated  debentures,  whether or not similar defects or
irregularities   are  waived  in  the  case  of  other  holders  of  old  junior
subordinated debentures.

     Our  interpretation  of the terms and  conditions  of the  exchange  offer,
including the letter of transmittal and the instructions  thereto, will be final
and binding.  Neither we, the exchange  agent nor any other person will be under
any duty to give  notification  of any defects or  irregularities  in tenders or
will incur any liability for failure to give any such notification.  If we waive
our right to reject a defective  tender of old junior  subordinated  debentures,
you will be entitled to the exchange consideration.

Withdrawal of Tendered Old Junior Subordinated Debentures

     You may  withdraw  tenders  of  debentures  at any  time on or prior to the
expiration of the exchange offer,  but the exchange  consideration  shall not be
payable in respect of old junior subordinated  debentures so withdrawn.  We will
not determine  whether the cash option for the exchange  consideration  has been
oversubscribed until after the expiration of the exchange offer. You will not be
able to withdraw your tender of old junior  subordinated  debentures at the time
we make this  determination  even  though  it may  affect  the type of  exchange
consideration you will receive in the exchange offer.

     Tenders of old junior  subordinated  debentures may be validly withdrawn if
the exchange offer is terminated without any old junior subordinated  debentures
being exchanged thereunder. In this case, the old junior subordinated debentures
tendered under the exchange offer will be promptly returned to you.

     If we make a material  change in the terms of the exchange offer or waive a
material  condition  of the  exchange  offer,  we  will  disseminate  additional
exchange offer materials and extend the exchange offer to the extent required by
law. In addition, we may, if we deem appropriate,  extend the exchange offer for
any other  reason.  If the  consideration  to be paid in the  exchange  offer is
increased  or  decreased  or the  principal  amount of old  junior  subordinated
debentures  subject to the exchange offer is decreased,  the exchange offer will
remain open at least 10 business days from the date we first give notice to you,
by public announcement or otherwise, of that increase or decrease.

     For a  withdrawal  of tendered  old junior  subordinated  debentures  to be
effective,  a written or facsimile  transmission  notice of  withdrawal  must be
received by the  exchange  agent on or prior to the  expiration  of the exchange
offer at its  address  set out on the back  cover of this  prospectus.  Any such
notice of withdrawal must:

o        specify the name of the person who tendered the old junior
         subordinated debentures to be withdrawn;

o         contain the description of the old junior  subordinated  debentures to
          be withdrawn and identify the  certificate  number or numbers shown on
          the particular  certificates  evidencing those old junior subordinated
          debentures,  unless  those old  junior  subordinated  debentures  were
          tendered by book-entry  transfer,  and the aggregate  principal amount
          represented by those old junior subordinated debentures; and

o         be signed in the same manner as the  original  signature on the letter
          of transmittal by which those old junior subordinated  debentures were
          tendered,   including  any  required  signature   guarantees,   or  be
          accompanied  by evidence  sufficient  to the  exchange  agent that the
          person   withdrawing  the  tender  has  succeeded  to  the  beneficial
          ownership of the old junior subordinated debentures.

     If the  old  junior  subordinated  debentures  to be  withdrawn  have  been
delivered or otherwise  identified  to the exchange  agent,  a signed  notice of
withdrawal  is effective  immediately  upon written or facsimile  notice of that
withdrawal even if physical release is not yet effected.

     Any permitted  withdrawal of old junior subordinated  debentures may not be
rescinded,  and any old junior  subordinated  debentures properly withdrawn will
thereafter  be deemed not validly  tendered for purposes of the exchange  offer.
Withdrawn old junior  subordinated  debentures may,  however,  be re-tendered by
again following one of the appropriate  procedures  described in this prospectus
at any time on or prior to the expiration of the exchange offer.

     If we extend the  exchange  offer or if for any reason,  whether  before or
after any old junior subordinated  debentures have been accepted for tender, the
acceptance for tender of old junior subordinated  debentures is delayed or if we
are unable to accept the tender of old junior subordinated  debentures under the
exchange offer,  then, without prejudice to our rights under the exchange offer,
tendered  old junior  subordinated  debentures  may be retained by the  exchange
agent on our behalf and may not be withdrawn, subject to Rule 14e-l(c) under the
Exchange Act,  which requires that an offeror pay the  consideration  offered or
return the securities  deposited by or on behalf of the investor  promptly after
the termination or withdrawal of a tender offer, except as otherwise provided in
this section.

     All questions as to the validity,  form and eligibility,  including time of
receipt,  of  notices  of  withdrawal  will be  determined  by us,  in our  sole
discretion,  which  determination  shall be final and  binding.  Neither we, the
exchange agent, the dealer manager,  the information  agent nor any other person
will be under any duty to give  notification of any defects or irregularities in
any notice of  withdrawal,  or incur any  liability for failure to give any such
notification.


<PAGE>


Conditions to, and Amendment of, the Exchange Offer

     The exchange offer is subject to the conditions that:

o        we must receive valid tenders for at least 90% of the aggregate
         principal amount of the outstanding old junior
          subordinated debentures;

o         we must  receive  the  consent of the  lenders,  under  Sierra's  $185
          million senior secured credit  facility,  which has been guaranteed by
          us to our  issuing  the  new  senior  subordinated  debentures  in the
          exchange offer;

o         we must receive the approval of the California Department of Insurance
          required for one or more of our subsidiaries to directly or indirectly
          fund all or part of the cash to be paid as the exchange consideration;

     o we must obtain sufficient cash to pay any cash consideration  required to
be paid as exchange offer consideration; and

     o  the  exchange  offer  complies  with   applicable  laws  and  applicable
interpretations of the staff of the SEC;

     o the new senior  subordinated  debentures  must be approved for listing on
the New York Stock Exchange;

o         no  litigation  has been  instituted or threatened or law enacted that
          could prohibit the exchange  offer,  materially  adversely  affect our
          business or materially impair the benefits of the exchange offer;

o         no event has  occurred  affecting  our business  that could  prohibit,
          prevent or significantly  delay consummation of the exchange offer, or
          materially impair our contemplated benefits of the exchange offer; and

o         no tender or exchange offer for our equity  securities or any business
          combination  involving  us  has  been  proposed  or  announced  or has
          occurred.

     Subject to  satisfaction  or waiver of the  conditions,  we will accept for
exchange  any  and all old  junior  subordinated  debentures  that  are  validly
tendered  and not  withdrawn  before  5:00  p.m.,  New York  City  time,  on the
expiration date of the exchange offer. However, we reserve the right to:

     o delay the  acceptance  of your old  junior  subordinated  debentures  for
exchange;

o        terminate the exchange offer;

o         extend the  expiration  date and  retain  all old junior  subordinated
          debentures that have been tendered,  subject to the right of owners of
          the old junior subordinated  debentures to withdraw their tendered old
          junior subordinated debentures;

     o refuse to accept the old junior  subordinated  debentures  and return all
old junior subordinated debentures that have been tendered to us; or

     o waive any condition or otherwise amend the terms of the exchange offer in
any respect.

United States Federal Income Tax Consequences of the Exchange Offer

     You  are  referred  to  the   discussion   about  the  federal  income  tax
consequences   of  the  exchange   offer  under  "United   States   Federal  Tax
Consequences".  Tax matters are very complicated and the tax consequences of the
exchange offer to you will depend on the facts of your own situation. You should
consult your own tax advisor for a full understanding of the tax consequences to
you of the exchange offer.

Exchange Agent

     We have appointed  Wells Fargo Bank  Minnesota,  N.A. as the exchange agent
for the exchange offer of the old junior subordinated debentures. We have agreed
to pay  Wells  Fargo  Corporate  Trust  reasonable  and  customary  fees for its
services  and will  reimburse  Wells Fargo  Corporate  Trust for its  reasonable
out-of-pocket  expenses.  All  executed  letters  of  transmittal  and any other
required  documents  should be sent or delivered  to the  exchange  agent at the
address set forth below.  Questions  and requests for  assistance,  requests for
additional  copies  of this  prospectus  or of the  letter  of  transmittal  and
requests for notices of guaranteed  delivery  should be directed to the exchange
agent, addressed as follows:

         Wells Fargo Corporate Trust:

         By Registered & Certified Mail:

         WELLS FARGO BANK MINNESOTA, N.A.
         Corporate Trust Operations

         MAC N9303-121
         PO Box 1517
         Minneapolis, MN  55480

         By Regular Mail or Overnight Courier:

         WELLS FARGO BANK MINNESOTA, N.A.
         Corporate Trust Operations

         MAC N9303-121
         Sixth & Marquette Avenue
         Minneapolis, MN  55479

         In Person by Hand Only:

         WELLS FARGO BANK MINNESOTA, N.A.
         12th Floor - Northstar East Building
         Corporate Trust Services
         608 Second Avenue South

         Minneapolis, MN

         By Facsimile (for Eligible Institutions only):

         (612) 667-4927

         For Information or Confirmation by
         Telephone:

         (800) 344-5128

     Delivery of a letter of  transmittal  to an address other than that for the
exchange agent as set forth above or transmission of instructions  via facsimile
other than as set forth above does not  constitute a valid  delivery of a letter
of transmittal.

Dealer Manager

     We have retained  Banc of America  Securities  LLC as our exclusive  dealer
manager  in  connection  with the  exchange  offer.  We will pay Banc of America
Securities  LLC a  customary  fee  for its  services.  We have  also  agreed  to
reimburse  Banc of America  Securities  LLC for its expenses and to indemnify it
against certain expenses and liabilities,  including  liabilities  under federal
securities laws. These expenses are not included in the fees set forth above.

Information Agent

     We have  appointed D.F. King & Co.,  Inc.,  the  information  agent for the
exchange offer of the old junior subordinated debentures.  We have agreed to pay
D.F. King reasonable and customary fees for its services and will reimburse D.F.
King for its reasonable  out-of-pocket  expenses.  Any questions  concerning the
exchange  offer  procedures or requests for  assistance or additional  copies of
this prospectus or the letters of transmittal may be directed to the information
agent at:

         D.F. King & Co., Inc.
         77 Water Street
         New York, New York 10005

         Banks and Brokers, call collect:

         (212) 269-5500

         Others, call toll free:
         (800) 735-3591

Fees and Expenses

     We will bear the expenses of soliciting  tenders for the exchange offer. We
are making the principal  solicitation by mail.  However, we may make additional
solicitations  by  telephone,  facsimile,  e-mail or in person by  officers  and
regular employees of ours and those of our affiliates.

     In addition, we may make payments to brokers,  dealers or others soliciting
acceptance of the exchange offer. We will also pay the exchange agent reasonable
and  customary  fees for its services and will  reimburse it for its  reasonable
out-of-pocket expenses.

     We will  pay the  cash  expenses  to be  incurred  in  connection  with the
exchange  offer and are  estimated  in the  aggregate to be  approximately  $1.6
million.  Such  expenses  include fees and  expenses of the  exchange  agent and
trustee, accounting and legal fees and printing costs, among others.

Payment of Solicitation Fee

     We will pay to soliciting dealers a solicitation fee of $2.50 per $1,000 of
old junior  subordinated  debentures  tendered,  accepted  for purchase and paid
pursuant to the exchange offer,  provided,  that the aggregate  solicitation fee
paid to any one soliciting  dealer shall not exceed $15,000.  As used herein,  a
"soliciting  dealer"  is an  entity  covered  by a letter of  transmittal  which
designated its name as having solicited and obtained the tender, and is:

     o any broker or dealer in securities,  excluding the dealer manager,  which
is a member of any national securities exchange or of the NASD;

o         any foreign  broker or dealer not eligible for  membership in the NASD
          which  agrees to  conform  to the  NASD's  Rules of Fair  Practice  in
          soliciting  tenders  outside  the United  States to the same extent as
          though it were an NASD member; or

o        any bank or trust company.

     No such fee shall be payable to a  soliciting  dealer  with  respect to the
tender of old junior  subordinated  debentures  by a holder unless the letter of
transmittal  accompanying such tender designates such soliciting dealer. No such
fee  shall  be  payable  to  a  soliciting  dealer  in  respect  of  old  junior
subordinated  debentures registered in the name of such soliciting dealer unless
such old junior  subordinated  debentures are held by such soliciting  dealer as
nominee and such old junior  subordinated  debentures are being tendered for the
benefit  of  one  or  more  beneficial   owners  identified  on  the  letter  of
transmittal.  No such fee  shall  be  payable  to a  soliciting  dealer  if such
soliciting  dealer is required for any reason to transfer the amount of such fee
to a  depositing  holder  (other  than  itself).  No such fee shall be paid to a
soliciting dealer with respect to old junior  subordinated  debentures  tendered
for such soliciting dealer's own account. No broker, dealer, bank, trust company
or fiduciary  shall be deemed to be the agent of us, DTC, the dealer  manager or
the information agent for purposes of the exchange offer. For all purposes noted
in all materials  related to the exchange  offer,  the term  "solicit"  shall be
deemed to mean no more  than  "processing  old  junior  subordinated  debentures
tendered" or "forwarding to customers materials relating to the exchange offer."

     We will also, upon request, reimburse soliciting dealers for reasonable and
customary handling and mailing expenses incurred by them in forwarding materials
relating to the exchange offer to their customers.

Transfer Taxes

     Owners who tender  their old junior  subordinated  debentures  for exchange
will not be obligated to pay any transfer taxes. If, however,

     o new senior  subordinated  debentures are to be delivered to, or issued in
the name of,  any  person  other  than the  registered  owner of the old  junior
subordinated debentures; or

     o old junior  subordinated  debentures  are  registered  in the name of any
person other than the person signing the letter of transmittal; or

o         a transfer  tax is imposed for any reason  other than the  exchange of
          new  senior  subordinated   debentures  for  old  junior  subordinated
          debentures in connection with the exchange offer;

then the amount of any transfer taxes,  whether imposed on the registered  owner
or any other persons,  will be payable by the tendering  holder. If satisfactory
evidence of payment of such taxes or exemption  from them is not submitted  with
the  letter of  transmittal,  the amount of such  transfer  taxes will be billed
directly to the tendering holder.

No Appraisal Rights

     You will not have any right to dissent and receive an appraisal of your old
junior subordinated debentures in connection with the exchange offer.

Listing

     We intend to list the new senior  subordinated  debentures  on the New York
Stock Exchange. However, we do not expect the new senior subordinated debentures
to be listed  until after 30 days  following  the  consummation  of the exchange
offer.

Accounting Treatment of the Exchange Offer

     The new senior  subordinated  debentures  will be recorded at the  carrying
amount of the old junior subordinated  debentures less cash consideration given,
if any, and that amount will be used to determine the effective interest rate of
the new senior subordinated debentures.

Fractional Debentures

     We will issue new senior subordinated debentures in denominations of $1,000
and integral multiples of $1,000. Any fractional  principal amount of new senior
subordinated  debentures  which a  registered  holder is  entitled to receive as
exchange consideration will be paid in cash.

"Blue Sky" Compliance

     We are making this exchange offer to all holders of old junior subordinated
debentures.  We are not aware of any  jurisdiction  in which  the  making of the
exchange offer is not in compliance  with  applicable law. If we become aware of
any  jurisdiction  in which the  making of the  exchange  offer  would not be in
compliance  with applicable law, we will make a good faith effort to comply with
any such law. If, after such good faith  effort,  we cannot comply with any such
law,  the  exchange  offer will not be made to,  nor will  tenders of old junior
subordinated  debentures  be  accepted  from or on behalf of, the holders of old
junior subordinated debentures residing in such jurisdiction.


<PAGE>



                                    BUSINESS

General

     We are a holding company whose subsidiaries, California Indemnity Insurance
Company,  Commercial  Casualty  Insurance  Company,  Sierra Insurance Company of
Texas and CII  Insurance  Company  are  primarily  engaged in  writing  workers'
compensation insurance in nine Western and Midwestern states.  Substantially all
of our assets and our  operations  are conducted  through our  subsidiaries.  In
addition,  we have other smaller subsidiaries that we consider immaterial to our
overall results.

     We were acquired by Sierra on October 31, 1995 in a transaction  treated as
a pooling of interests.  However, our old junior subordinated  debentures remain
solely  our  obligation  and  Sierra  has  not  guaranteed  the  payment  of the
debentures.

     Our  subsidiaries  write workers'  compensation  insurance in the states of
California,  Colorado, Nevada, Texas, Nebraska, Kansas, Missouri, New Mexico and
Utah  primarily  through  independent  insurance  agents and  brokers,  and have
licenses in 33 states and the District of Columbia and applications  pending for
licenses  in  other  states.   California,   Colorado  and  Nevada   represented
approximately 77%, 8% and 7%,  respectively,  of our direct written premiums for
the nine months ended September 30, 2000.

     We  focus  on  writing  lower-severity  classes  of  workers'  compensation
insurance  for  primarily  small and  mid-sized  employers  although we actively
pursue accounts of all sizes. This strategy allows us to direct our managed care
expertise to employers  that may lack the  in-house  resources  needed to manage
costs  effectively  and to return injured  employees to work safely and quickly.
These techniques  include the use of specialized  preferred  provider  networks,
utilization  review by our board certified  occupational  medicine physician and
the  employment  of  nurse  case  managers,  medical  bill  reviewers,  and  job
developers to  facilitate  early return to work.  In  particular,  our Return to
Work, or RTW,  Program has brought a large number of injured workers back to the
job more quickly and at a lower cost than would have otherwise been possible.

     By focusing primarily on small and mid-sized  employers,  we seek to target
under-served  segments of the workers'  compensation  market and avoid the price
competition  associated  with large  accounts.  As of September 30, 2000, we had
16,155 policies in force and an average policy size of approximately $11,700.

     The following table sets forth the  percentages of our written  premiums in
force on June 30, 2000, December 31, 1999, and July 31, 1998 attributable to the
listed risk classifications identified as the policy holders governing class:

<TABLE>

<CAPTION>
                                               June 30, 2000           Dec. 31, 1999          July 31, 1998
                                           ----------------------- ---------------------- -----------------------
<S>                                                <C>                    <C>                     <C>
Construction                                       31.60%                 28.41%                  26.63%
Manufacturing                                      15.61%                 15.97%                  14.69%
Service Industry                                   12.81%                 12.82%                  12.27%
Agriculture                                        11.93%                 11.80%                  11.39%
Other (1)                                          28.05%                 31.00%                  35.02%
                                                   ------                 ------                  ------
Total                                             100.00%                 100.00%                100.00%
</TABLE>

(1)  Includes  all  other  risk  classifications  insured  by us,  none of which
     accounted for more than 9.5% of our written  premiums in force as of any of
     the above dates.

Underwriting

     Prior to insuring a particular  risk, we review,  among other factors,  the
employer's prior loss experience and other pertinent  underwriting  information.
Additionally, we determine whether the employer's employment classifications are
among the  classifications  that we have elected to insure and if the amounts of
the premiums for the classifications are within our guidelines.  We review these
classifications  periodically to evaluate  whether they are  profitable.  Of the
approximately 550 employment  classifications  in California,  we are willing to
insure  approximately  two-thirds.  The  remaining  classifications  are  either
excluded by our reinsurance  treaty or are believed by us to be too hazardous or
not  profitable.   In  addition,   we  increase  our  requirements  for  certain
classifications to increase the likelihood of profitability.

     Once an employer has been insured by us, our loss  control  department  may
assist the insured in developing and maintaining  safety programs and procedures
to minimize  on-the-job  injuries  and  industrial  health  hazards.  The safety
programs and procedures  vary from insured to insured.  Depending upon the size,
classifications and loss experience of the employer, our loss control department
will  periodically  inspect the employer's  places of business and may recommend
changes  that  could  prevent  industrial  accidents.  In  addition,  severe  or
recurring injuries may also warrant on-site  inspections.  In certain instances,
members of our loss control department may conduct special educational  training
sessions  for  insured  employees  to assist  in the  prevention  of  on-the-job
injuries.  For  example,  employers  engaged  in  contracting  may be  offered a
training  session on general first aid and  prevention of injuries from specific
work exposures.

Claims

     Our claims  operation is organized into a centralized  claims/managed  care
service office in Las Vegas,  Nevada,  and four regional claims service offices.
Major claims,  those of high severity,  complex nature and/or which are expected
to exceed  applicable  reinsurance  retention levels,  are handled directly,  or
supervised, by the reinsurance claims staff.

     Our  approach  to  claims  administration  relies  upon  a  high  level  of
interaction  with the  injured  worker and the  insured to resolve  claims in an
efficient and cost effective  manner.  Claims personnel act as the contact point
with the insured and refer the claim to the appropriate  support services within
our managed care and Return To Work, or RTW, divisions.

     We  have  sought  to  reduce  medical  and  indemnity  cost  by  minimizing
litigation and litigation expense, returning workers to work safely and quickly,
and having access to medical attention at competitive  prices. We have sought to
accomplish this by:

     o using  statewide  medical  provider  networks,  the members of which have
agreed to provide hospital and physician services at reduced fee schedules;

     o utilizing  in-house  medical bill review  services which advise us of any
excess charges submitted by providers;

     o facilitating early return to work and managing vocational  rehabilitation
costs;

o        improving customer service to allow for faster reporting; and

o        outsourcing legal defense.

     Use of Managed Care. We use managed care  techniques to manage claim costs.
Except where limited by law, our managed care strategy  directs  injured workers
to  preferred  provider  organizations,  which  we refer  to as  PPO's,  to take
advantage of rates negotiated by the PPO's with  participating  providers and to
utilize  doctors who understand the  procedures  and  communication  required to
allow  injured  workers to return to work safely and quickly.  This strategy has
led us to spend substantially less on medical costs than otherwise payable under
state  established  fee  schedules.  From 1995 to September 30, 2000, our use of
PPO's as a percentage of total medical bills where a saving was achieved,  known
as "PPO  penetration",  increased from 25% to 50%. In addition to increasing PPO
penetration we also increased the savings from state  established  fee schedules
to 33% through September 30, 2000, from 22% of such schedules for 1995.

     Management  of the medical  portion of any claim  assists  the  employer in
managing  the cost of the  indemnity  benefit.  Our  staff of  nurses  evaluates
lost-time  cases and directs the injured  employee to  preferred  providers.  We
utilize  a  board  certified  occupational  medicine  physician  as our  medical
director  to  provide  prospective,  concurrent,  and  retrospective  review  of
inpatient  admissions.  The  medical  director  can  communicate  directly  with
treating  physicians  to assist with the  direction  of  appropriate  and timely
medical care. By requesting the treating provider to obtain  authorization prior
to the administration of medical care, we seek to receive medical  justification
for proposed  treatments,  which often leads to more accurate medical diagnoses.
We have used the medical  authorization  process to reduce the costs  associated
with over-treating or under-treating by medical care providers.

     In-house  Medical Bill Review.  We use in-house  medical bill  reviewers to
manage costs. By performing the bill review work in-house, we have increased our
bill review  savings as a percentage of state fee schedules from 25% for 1995 to
38% for the nine months ended September 30, 2000.

     Return to Work,  or "RTW",  Program.  A  critical  component  of our claims
administration  approach and our accompanying  efforts to reduce indemnity costs
is our RTW Program. The program assigns certain claims to a RTW technician,  who
contacts the injured  worker's  physician  and employer to ascertain  functional
capacity  restrictions and determines  whether the employee can perform modified
or temporary work. In an unmanaged environment, the doctor typically relies upon
the injured worker's  description of job duties and bases the medical impairment
and disability  status upon that  subjective  description.  Such reliance on the
worker's  description can lead to increased amounts of lost time and, therefore,
much higher indemnity  payments by us. The RTW technician's task is to work with
the doctor and the employer to formally  define job duties and to compare  those
against functional capacity restrictions. This process allows the RTW technician
to  determine  the  extent  of  job  disability  and  the  need  for  vocational
rehabilitation  as required by the state.  By being  directly  involved with the
assessment  process,  we not only  strive  to  obtain  an  objective  disability
diagnosis,  but also  provide a valuable  service to our smaller  insureds,  who
typically do not have formalized processes for return to work.

     Customer  Service.  Early claims  reporting allows us to direct the injured
worker to in-network medical care providers,  to enroll those workers in the RTW
program,  and to reduce the chance of litigation.  We have  instituted a 24-hour
per day,  seven days per week,  toll free "800"  telephone  number  that  allows
employers to notify us of a potential claim as quickly as possible.

     Our customer service call center directs  policyholders and injured workers
to the nearest preferred health care facility and provides  assistance to claims
examiners by asking specific investigative questions which allow the examiner to
make prompt claim decisions.  The customer service representatives  additionally
answer questions relating to provider bill status, pharmacy  authorization,  and
agent/employer requests for information.

     Legal Defense.  In April 1997, we  discontinued  our in-house  claims legal
defense unit in Southern California and entered into a five-year contract with a
law firm specializing in the defense of workers' compensation claims. This legal
arrangement  defines roles for the  attorneys  and claims  personnel to maximize
efficient handling of litigated claims.

Competition

     Workers'  compensation  is a statutory  system that requires an employer to
provide  its  employees  with  medical  care and other  specified  benefits  for
work-related  injuries,  even though the  injuries  may have  resulted  from the
negligence or wrongs of a person,  including the employee.  Employers  typically
purchase workers' compensation insurance to provide these benefits. The benefits
payable are generally established by statute.

     The  California  workers'  compensation  insurance  industry  is  extremely
competitive.  Approximately 185 companies wrote workers' compensation  insurance
in California in 1999, including the State Compensation Insurance Fund, which is
the largest writer in California.  Many of these companies have been in business
longer,  have a larger  volume of  business,  offer a more  diversified  line of
insurance   coverage,   have  greater  financial   resources  and  have  greater
distribution  capability than us. We believe that the dominant competitor in the
industry is the State of California  Compensation Insurance Fund. We concentrate
on insuring workers'  compensation  accounts in the small to medium-size  range,
where we  compete  primarily  on the basis of  service  and  where  policyholder
dividends are not a significant factor.

     Based on 1999 direct written  premiums,  we were the 13th largest writer of
workers'  compensation  insurance in  California,  with a 2% market  share.  Our
insurance subsidiaries are currently rated "B++" by A.M. Best.

     The following table provides an illustration of our subsidiary,  California
Indemnity Insurance Company, and the top 10 workers' compensation writers in the
state of California for 1999:

                     California Workers' Compensation Market

           For the Year Ended December 31, 1999 (dollars in millions)

<TABLE>

<CAPTION>
                                                                Direct   Written

         Insurer                                             Premiums           Market Share

<S>                                                             <C>                  <C>
           State Compensation Fund                              $  1,244.7           21.6

           Fremont Comp Insurance Group*                             520.4            9.0

                                                                     482.2            8.4
           Superior National Insurance Group*

           Liberty Mutual Insurance                                  463.0            8.0

           Fireman's Fund/Allianz                                    232.6            4.0

           Kemper Insurance Companies                                213.7            3.8

           Farmers Insurance Group                                   184.6            3.2

           Reliance Insurance*                                       184.1            3.2

           Great American P&C                                        173.3            3.0

           Legion Insurance Co.                                      173.0            3.0


           California Indemnity Insurance Company                    120.5            2.0
</TABLE>

Source: California Workers' Compensation Institute Bulletin No. 00-15

*    These  three  companies  have  significantly   reduced  their  writings  in
     California  or announced  their intent to do so.  Fremont and Superior each
     had an "E"  (under  regulatory  supervision)  rating  by  A.M.  Best  as of
     December 10,  2000.  Reliance  had a "D" (poor)  rating by A.M.  Best as of
     December 10, 2000.


<PAGE>


     Prior to 1995,  California law set minimum premium rates. This minimum rate
law was repealed by the California  legislature  with policies issued or renewed
on or after  January  1,  1995.  From 1995  until the end of 1999,  our  pricing
declined  significantly as competitors  sought to write more business by cutting
their prices.  Beginning in December 1999 we began  achieving  rate increases on
renewing  policies.  This increasing rate trend has continued  through September
2000.

     In other states in which we are currently writing business, competition for
workers' compensation  insurance is primarily driven by pricing,  dividend plans
and agents'  commission.  In these states,  the National Council on Compensation
Insurance,  or NCCI, is usually the  designated  rating  organization.  The NCCI
accumulates  statistical information and recommends pure loss cost rates to each
state's  department of insurance who has final approval  authority.  We then add
loss cost  multipliers  or expense loads to derive  premium rates for each filed
company.  Rating  plans in NCCI states are more  "standardized"  pricing  models
based upon plans (algorithms)  developed by the NCCI and approved by departments
of insurance.

     Both  Colorado and Nevada have  competitive  and dominant  state  insurance
funds who  represent  the  major  competition  in their  respective  states.  In
Colorado,  the state  fund is  Pennacol  Insurance  Company.  In  Nevada,  it is
Employers  Insurance Company of Nevada,  formerly a state fund but now a private
mutual insurer. In addition to these two organizations,  there are approximately
200 other companies competing for business in states outside of California.  The
major  competitive  tool in NCCI  states is the use of  participating  policies,
which grant  policyholders'  dividends,  and policies with  retrospective  rated
premium.  We  currently  write  participating  policies  in  Colorado,   Nevada,
Missouri, Nebraska, New Mexico and Kansas.

     Nevada is scheduled to change to an open rating  environment from a minimum
rating environment beginning July 2001.

Losses and Loss Adjustment Expenses

     Often,  several years may elapse  between the  occurrence of a loss and the
final  settlement of the loss. To recognize  liabilities  for unpaid losses,  we
establish reserves,  which are balance sheet liabilities  representing estimates
of future amounts needed to pay claims and related  expenses for insured events.
We also  establish  reserves for events that have been incurred but have not yet
been reported to us, which we refer to as "incurred but not reported" or "IBNR".

     When a claim is reported, our claims personnel initially establish reserves
on a case-by-case basis for the estimated amount of the ultimate payment.  These
estimates reflect the judgment of the claims personnel based on their experience
and  knowledge  of the  nature and value of the  specific  type of claim and the
available  facts at the time of  reporting  as to severity of injury and initial
medical  prognosis.  Included in these reserves are estimates of the expenses of
settling  claims,  including legal and other fees.  Claims  personnel adjust the
amount of the case reserves as the claim develops and as the facts warrant.

     IBNR reserves are  established for unreported  claims and loss  development
relating to current  and prior  accident  years.  In the event that a claim that
occurred  during  a prior  accident  year was not  reported  until  the  current
accident year, the case reserve for such claim typically will be established out
of previously established IBNR reserves for that prior accident year.

     The National Association of Insurance Commissioners requires that we submit
a formal actuarial  opinion  concerning loss reserves with each statutory annual
report. The annual report must be filed with each applicable state department of
insurance on or before March 1 of the  succeeding  year.  The actuarial  opinion
must be signed by a qualified actuary as determined by the California  Insurance
Commissioner.  We retain the  services  of a  qualified  independent  actuary to
review our loss reserves.  California  Indemnity,  Commercial  Casualty,  Sierra
Insurance Company of Texas and CII Insurance Company all received an unqualified
opinion  from that  actuary as of  December  31,  1999.  After our June 30, 2000
review of our loss  reserves,  we increased  our loss reserves by a net of $20.2
million.

     We and an  independent  actuary  test the  adequacy of our  reserves  using
generally accepted  actuarial methods.  Both paid loss and incurred loss methods
are used to  estimate  the  amount of the  ultimate  reserves.  We also test our
reserves  by  comparing  our paid  losses and  incurred  losses to similar  data
provided by the California Workers Compensation  Insurance Rating Bureau for all
California workers' compensation insurance companies.

     We  review  the  adequacy  of our  reserves  with our  independent  actuary
periodically  and  consider  external  forces  such as  changes  in the  rate of
inflation,  the regulatory  environment,  the judicial administration of claims,
medical  costs and other  factors  that  could  cause  actual  losses and LAE to
change. The actuarial  projections  include a range of estimates  reflecting the
uncertainty of projections.  Management evaluates the reserves in the aggregate,
based upon the actuarial  indications and makes adjustments  where  appropriate.
Our  consolidated  financial  statements  provide  for  reserves  based  on  the
anticipated ultimate cost of losses.

     The following  table sets forth the number of claims reported to us for the
nine month  accident  period ended  September 30, 2000 and accident  years ended
December 31, 1999,  1998 and 1997, and related direct earned premiums and claims
frequency, or the number of claims per million dollars of direct earned premium.

<TABLE>

<CAPTION>
                                                              Nine
                                                          months ended
                                                          September 30,              Year ended December 31,
                                                              2000              1999           1998          1997

<S>                                                          <C>               <C>             <C>           <C>
Number of claims reported during the period ended            15,600            17,200          18,600        18,100
Direct earned premiums (in millions)                            150.1             146.7          154.0         134.2
Claims frequency                                                103.9             117.2          120.8         134.8
</TABLE>

---------------------------------------------------------------------------

     The  following  table sets forth,  for the nine months ended  September 30,
2000 and the years ended December 31, 1999,  1998, and 1997, the cumulative loss
ratio net of  reinsurance  for each accident year or nine-month  period and also
shows the loss "development" for each of these accident periods' loss ratios.

<TABLE>

<CAPTION>
                                       Cumulative
                                       Loss Ratios

                                    Nine months ended                  Cumulative Loss Ratios
                                      September 30,                    Year ended December 31,
         Accident Year                    2000                   1999              1998           1997
<S>      <C>                             <C>                    <C>               <C>            <C>
         1995 and prior                  72.32%                 72.05%            73.76%         76.60%
         1996                            93.22%                 89.60%            85.72%         83.84%
         1997                            96.43%                 90.42%            84.21%         79.18%
         1998                            85.87%                 83.64%            77.45%
         1999                            66.11%                 62.13%
         2000                            70.20%
</TABLE>

------------------------------------------------------------------------------

     The liabilities for losses and loss adjustment  expense,  which we refer to
as LAE, are determined  using loss  evaluations and statistical  projections and
represent  estimates  of the  ultimate  net cost of all  unpaid  losses  and LAE
incurred  through  December 31 of each year.  These estimates are subject to the
effect of trends in claim  severity and frequency and are  continually  reviewed
and adjusted to reflect new  experience  and  information,  as it becomes known.
Such adjustments,  if any, are reflected in current operations.  Notwithstanding
the fact that the claims for which reserves are  established may not be paid for
many years, the reserves for losses and LAE payments are not discounted,  except
to calculate the liability for federal income taxes.  The  anticipated  price or
cost  increases due to inflation are  considered  in estimating  ultimate  claim
costs.   Historical  trends,   adjusted  to  reflect   anticipated   changes  in
underwriting  standards,  policy provisions and general economic trends, provide
the basis for predicting the severity of future claims.  Actual developments are
monitored and anticipated trends are modified, if necessary.

     The  following  table  provides a  reconciliation  of beginning  and ending
liability  balances  for the nine months ended  September  30, 2000 and 1999 and
years ended December 31, 1999, 1998 and 1997.

        Reconciliation of Liability for Loss and Loss Adjustment Expenses
                                 (in thousands)
<TABLE>

<CAPTION>
                                                    Nine months ended

                                                      September 30,                  Year ended December 31,
                                                   2000          1999          1999           1998          1997
<S>                                                <C>            <C>           <C>            <C>           <C>
Net Beginning Loss and LAE Reserve                 $134,305       $174,467      $174,467       $181,643      $172,100

Net Provision for Insured Events Incurred in:
      Current Year                                   63,843        36,061         51,540       103,990        102,302
      Prior Years                                    20,177        (1,248)         9,920        (9,643)        (8,970)
                                                     ------        -------         -----        -------        -------
  Total Net Provision                                84,020        34,813         61,460        94,347         93,332
                                                     ------        ------         ------        ------         ------

Net Payments for Loss and LAE
   Attributable to Insured Events Incurred

    In:
      Current Year                                   15,763         12,836        21,206         29,591        26,812
      Prior Years                                    49,893         64,668        80,416         71,932        56,977
                                                     ------         ------      --------       --------       -------
  Total Net Payments                                 65,656         77,504       101,622        101,523        83,789
                                                     ------         ------       -------        -------       -------

Net Ending Loss and LAE Reserve                     152,669        131,776       134,305        174,467       181,643
Reinsurance Recoverable                             189,233         81,367       110,089         37,797        21,056
                                                    -------       --------       -------       --------      --------

Gross Ending Loss and LAE Reserve                  $341,902       $213,143      $244,394       $212,264      $202,699
                                                   ========       ========      ========       ========      ========
</TABLE>


<PAGE>


     The following  table  discloses our development of the liability for losses
and LAE for the nine  months  ended  September  30, 2000 and the ten years ended
December 31, 1999.

           ANALYSIS OF LOSSES AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
                                 (in thousands)
<TABLE>

<CAPTION>
                               September                                         Year ended December 31,
                                   30,

                                 2000    1999    1998     1997      1996      1995     1994      1993     1992      1991    1990

<S>                           <C>     <C>      <C>       <C>       <C>      <C>      <C>      <C>      <C>      <C>      <C>
Losses and LAE Reserve......  341,902 $244,394 $212,264  $202,699  $187,776 $182,318 $190,962 $200,356 $178,460 $112,749 $ 67,593
Less Reinsurance
   Recoverables (1).........  189,233  110,089   37,797    21,056    15,676   25,871   29,342   25,841   20,207
                            --------- --------- ---------- -------- ------ -------- -------- --------  ________


Net Loss and LAE Reserves...  152,669  134,305   174,467  181,643   172,100  156,447  161,620  174,515  158,253

Net Reserve Re-estimated
   as of (2)
1 Year Later................           154,482   184,386  172,000   163,130  141,163  139,741  160,562  154,388  140,815   83,841
2 Years Later...............                     201,265  173,596   146,987  132,193  125,279  141,100  147,167  142,447   96,011
3 Years Later...............                              187,491   140,563  113,766  117,792  126,483  134,747  143,433   97,142
4 Years Later...............                                        146,692  102,652  102,955  122,517  132,193  137,143   97,942
5 Years Later...............                                                 104,400   95,997  114,443  131,112  135,249   94,852
6 Years Later...............                                                           96,530  112,284  127,258  135,299   93,561
7 Years Later...............                                                                   112,506  125,936  133,729   93,672
8 Years Later...............                                                                            126,163  132,696   92,851
9 Years Later...............                                                                                     132,906   92,104
10 Years Later..............                                                                                               92,226

Cumulative Net Paid as of

   (2):

1 Year Later................             49,893   80,416   71,933   56,977    45,731   44,519  50,210    50,360   57,611    39,118
2 Years Later...............                     115,256  117,794   91,765    70,854   68,619  79,788    84,465   89,177    65,165
3 Years Later...............                              137,737  113,054    83,674   80,645  94,865   104,569  108,849    76,988
4 Years Later...............                                       122,386    91,115   86,381 102,395   114,293  120,539    83,822
5 Years Later...............                                                  94,557   89,601 106,012   119,462  126,100    87,618
6 Years Later...............                                                           91,074 107,850   122,000  129,060    89,607
7 Years Later...............                                                                  108,785   123,291  130,649    90,721
8 Years Later...............                                                                            123,956  131,346    91,354
9 Years Later...............                                                                                     131,744    91,598
10 Years Later..............                                                                                                91,745

Cumulative (Deficiency)
   Redundancy (2)...........           (20,177) (26,799)  (5,848)   25,408    52,047   65,090  62,009    32,090  (20,157)  (24,633)

Net Reserve.................  152,669  134,305  174,467  181,643   172,100   156,447  161,620 174,515
Reins. Recoverables.........  189,233  110,089   37,797   21,056    15,676    25,871   29,342  25,841
                              ------- ---------  ------ --------- ------ -- ------ -- ------ -------
Gross Reserve............... $341,902 $244,394 $212,264 $202,699  $187,776  $182,318 $190,96 $200,356
                             ======== ======== ======== ========  ========  ======== ======== ========


Net Re-estimated Reserve.........      154,482  201,265  187,491   146,692   104,400  96,530  112,506
Re-estimated Reins.
   Recoverables.............           135,654   45,866   21,487    16,049    26,712  29,874   26,180
                                       ------- -------- ------- -------- -------- -------- --------
Gross Re-estimated

   Reserve..................           290,136  247,131  208,978   162,741   131,112 126,404  138,686
                                      -------- -------- --------   -------   ------- -------  -------
Gross Cumulative
   (Deficiency)

   Redundancy...............          $(45,742)$(34,867)$ (6,279) $ 25,035   $51,206  $ 64,558  $ 61,670
                                     ========= ========= ========= ========  =======  ========  ========

</TABLE>

(1)  Amounts  reflect  reinsurance  recoverable  under  prospective  reinsurance
     contracts only. Reinsurance recoverables on unpaid losses and LAE are shown
     as an asset on the balance  sheets at  September  30, 2000 and December 31,
     1999 and 1998.

(2)  The last amount in each column and the cumulative  (deficiency)  redundancy
     represent development through nine months ended September 30, 2000.


<PAGE>


     Our average cost per claim has increased each year since 1995. The majority
of our claims occur in California.  The entire California workers'  compensation
industry  has been  adversely  affected by higher  claim  severity.  The average
ultimate loss per  indemnity  claim for  California  increased 58% from accident
year 1995 to  accident  year 1999,  according  to a  published  estimate  of the
California Workers Compensation  Insurance Rating Bureau in October 2000. Two of
the factors  influencing  this increase are medical  inflation and adverse court
decisions related to medical control of claimant's treatment.

-------------------------------------------------------------------------------

     Unallocated  loss  adjustment  expense  reserves  are  established  for the
estimated costs related to the general  administration  of the claims adjustment
process. We review the adequacy of our reserves on a periodic basis and consider
external  forces  such as  changes  in the  rate of  inflation,  the  regulatory
environment,  the judicial  administration  of claims,  medical  costs and other
factors that could cause actual losses and loss  adjustment  expenses to change.
Reserves  are  reviewed  with our  independent  actuary at least  annually.  The
actuarial projections include a range of estimates reflecting the uncertainty of
projections.  Management evaluates the reserves in the aggregate, based upon the
actuarial  indications,  and makes adjustments where appropriate.  Our financial
statements  provide  for  reserves  based on the  anticipated  ultimate  cost of
losses.

Investments

     As of  September  30,  2000,  our bond and  preferred  stock  portfolio  is
invested primarily in high quality investment grade securities,  which represent
approximately 98% of total bond and preferred stock investments.  The total bond
and preferred stock portfolio is comprised of approximately 32% in U.S. Treasury
securities;  approximately 33% in U.S.  Government-sponsored  Agency securities;
approximately  6% in AAA-rated  corporate bonds;  approximately  20% in AA-rated
corporate bonds;  approximately 7% in A-rated corporate bonds; and approximately
2% in BAA-rated corporate bonds.

     In addition to our cash and cash equivalents,  preferred stocks,  and fixed
income bond  portfolio,  other  investments  include  mortgage loans with a book
value of $16.5 million and a real estate limited  partnership  with a book value
of $7.1 million.  The mortgage loan  investments are comprised of  approximately
$10.3 million in two commercial mortgages extended to Sierra and a subsidiary of
Sierra;  approximately  $4.6  million in  relocation  mortgages  extended to our
current  and  former  employees  prior to the 1995  merger of Sierra and us; and
approximately  $1.6 million in commercial  mortgages  extended to third parties.
The real estate limited  partnership  represents our interest in the partnership
which owns our Las Vegas headquarters.

     Approximately $22 million of our investment assets as of September 30, 2000
are booked as "assets  held to maturity"  according  to FAS 115.  Assets held to
maturity  are carried at  amortized  cost;  changes in the market value of these
assets do not affect their book value for reporting  purposes  under  accounting
principles generally accepted in the United States of America.

     The following table reflects  investments,  interest earned thereon and the
average annual yield on investments for the periods indicated:

<TABLE>

<CAPTION>
                                                    Nine Months Ended

                                                      September 30,               Years Ended December 31,
                                                          2000                1999          1998           1997
                                                                                   (dollars in thousands)
Total cash, cash equivalents and invested
<S>                                                      <C>                <C>            <C>           <C>
  assets at end of period                                $231,604           $226,572       $283,509      $278,479
Net investment income including net
  realized gains and losses before taxes                   10,757             15,395         20,229        17,361
Average annual yield on investment
-----------------------------------------------
  portfolio (before realized gains and
  losses and taxes)                                          6.5%               6.2%           6.5%          6.2%

</TABLE>


<PAGE>


     The following  table sets forth  information  concerning the composition of
our investment portfolio, at

      December 31, 1999:
<TABLE>

<CAPTION>
                                                                                    Percent of

                                                               Amount                Portfolio

Fixed maturities, at fair value:                                   (dollars in thousands)

<S>                                                          <C>                          <C>
U.S. government and government agencies                      $114,358                     54.7
AAA                                                            14,320                      6.9
AA                                                             43,145                     20.7
A                                                              13,395                      6.4
Less than A                                                     4,107                      2.0
                                                          -----------                  -------
     Total fixed maturities, at fair value                   $189,325                     90.7

Equity securities, at fair value                                3,486                      1.7
Mortgage loans receivable                                       9,375                      4.5
Real estate partnership                                         6,559                      3.1
                                                          -----------                  -------
     Total investments                                       $208,745                    100.0
                                                             ========                    =====
</TABLE>

     The following table sets forth the contractual maturity profile of our debt
and mortgage loan investments at December 31, 1999:

<TABLE>

<CAPTION>
                                                            Fair Value              Percent of
Maturity                                                        Amount               Portfolio
--------                                                        ------               ---------
                                                                   (dollars in thousands)

<S>                                                           <C>                         <C>
One year or less                                              $14,441                     7.3
More than one year, through five years                         51,085                    25.7
More than five years, through ten years                        15,112                     7.6
More than ten years, through fifteen years                     18,408                     9.3
More than fifteen years                                        99,654                    50.1
</TABLE>

Actual maturities may differ from contractual  maturities  because borrowers may
have the right to call or prepay obligations.


<PAGE>


Reinsurance

     Our insurance  subsidiaries purchase reinsurance to reduce our liability on
individual policies and claims and catastrophic losses. As of September 30, 2000
we had over $211  million of  reinsurance  receivables  from our  reinsurers.  A
single reinsurer accounts for approximately 87.6% of this amount.  Substantially
all of the receivables are due from reinsurers rated A+ by A.M. Best.

     Effective  July 1, 1998,  all claims with dates of injury  occurring  on or
after that date are reinsured  under a quota share and excess of loss  agreement
with one A+ rated  reinsurer,  referred to as "low level  reinsurance."  The low
level  reinsurance  provides quota share protection for 30% of the first $10,000
of each loss,  and excess of loss  protection of 75% of the next $40,000 of each
loss, and 100% of the next $450,000 on a per occurrence  basis.  The maximum net
loss  retained  on any one  claim  ceded  under  this  treaty is  $17,000.  This
agreement continued until June 30, 2000, when we executed an option for a twelve
month  extension  relating  to the  run-off of  policies in force as of June 30,
2000.

     In  addition to the  low-level  reinsurance,  effective  January 1, 2000 we
entered into a reinsurance contract that provides statutory (unlimited) coverage
for  workers'  compensation  claims in excess of $500,000  per  occurrence.  The
contract is in effect for claims  occurring on or after  January 1, 2000 through
December 31, 2003. The reinsurer has a limited  ability to cancel this treaty on
each anniversary of inception during that period.

     Effective  July 1,  2000,  we  entered  into a  reinsurance  contract  that
provides  $250,000 of coverage  for  workers'  compensation  claims in excess of
$250,000  per  occurrence.  The  contract is in effect for claims  occurring  on
policies incepting July 1, 2000 and thereafter. The reinsurer has the ability to
cancel  the  treaty  if  written  notice  is  provided  90  days  prior  to each
anniversary of inception.

Marketing

     Our insurance  policies are sold primarily  through  independent  insurance
agents and brokers, who may also represent other insurance companies. We believe
that  independent  insurance  agents and brokers  choose to market our insurance
policies  because of the quality of service that we provide,  the commissions we
pay and the price of the insurance  product.  We employ  full-time  employees as
marketing  representatives to make personal contacts with agents and brokers, to
maintain  regular  communication  with them,  to advise them of our services and
products,  and to recruit  additional  agents and  brokers.  We  currently  have
relationships  with  approximately 900 agents and brokers and pay our agents and
brokers  commissions based on a percentage of the gross written premium produced
by such agents and brokers.  In 2001, we anticipate a reduction in the number of
agents  resulting  from more  stringent  volume and  profitability  standards we
imposed.

     We maintain standard commission plans that vary by state for our agents and
brokers. In addition to the standard commission plans, agents and brokers may be
eligible to receive additional  commissions in certain  instances.  Commissions,
including additional  commissions if any, are negotiated on an individual policy
basis. No one agent or broker accounted for more than 1.7% of our total premiums
in force on September 30, 2000,  and no one policy  accounted for more than 0.6%
of our total  premiums in force on  September  30,  2000.  Our top 10 agents and
brokers  accounted for 12.2% of our total premiums in force  September 30, 2000.
From time to time, we advertise and participate in insurance  trade  association
functions to maintain existing relationships and develop new ones.


<PAGE>


Geographic Distribution of Premiums and Policy

     The following  tables set forth  information  concerning the percentages of
premiums and policies in force with us by  geographic  area as of September  30,
2000,  and as of December 31, 1999,  1998,  and 1997. In force  premiums are the
total estimated annual premiums of all policies in force at a point in time.

<TABLE>

<CAPTION>
                                                      September 30,                December 31,
                                                          2000            1999         1998         1997
                                                          ----            ----         ----         ----
Percent of premiums in force:
<S>                                                         <C>              <C>          <C>          <C>
    California                                              77%              80%          83%          83%
    Nevada                                                   8                4            0            0
    Colorado                                                 8                8            8           10
    Other States                                             7                8            9            7
                                                    ------------------ ------------ ------------ ------------
                                                    ------------------ ------------ ------------ ------------

            Total                                          100%             100%         100%         100%
                                                    ================== ============ ============ ============
                                                    ================== ============ ============ ============

Total premiums in force (in thousands):                $189,557        $154,963     $132,789     $128,840

Percent of policies in force:
    California                                              74%              79%          80%          84%
    Nevada                                                   7                3            0            0
    Colorado                                                 7                6            6            6
    Other States                                            12               12           14           10
                                                    ------------------ ------------ ------------ ------------
                                                    ------------------ ------------ ------------ ------------

            Total                                          100%             100%         100%         100%
                                                    ================== ============ ============ ============
                                                    ================== ============ ============ ============

Total policies in force                                 16,155           15,485       12,624       11,779
</TABLE>

-------------------------------------------------------------------------------

Government Regulation and Recent Legislation

     We are subject to extensive governmental regulation and supervision in each
state in which we conduct workers' compensation business. The primary purpose of
such regulation and supervision is to provide  safeguards for  policyholders and
injured  workers rather than protect the interests of shareholders or creditors.
The extent and form of the  regulation may vary, but generally has its source in
statutes  that  establish  regulatory  agencies and  delegate to the  regulatory
agencies broad regulatory,  supervisory and administrative authority. Typically,
state regulations extend to such matters as licensing companies; restricting the
types or quality of investments;  requiring triennial financial examinations and
market conduct  surveys of insurance  companies;  licensing  agents;  regulating
aspects of a company's  relationship  with its agents;  restricting  use of some
underwriting criteria; regulating premium rates, forms and advertising; limiting
the grounds  for  cancellation  or  nonrenewal  of  policies;  solicitation  and
replacement practices; and specifying what might constitute unfair practices.

     In the normal course of business,  we and the various  state  agencies that
regulate our activities may disagree on interpretations of laws and regulations,
policy wording and disclosures or other related issues. These disagreements,  if
left unresolved,  could result in administrative hearings and/or litigation.  We
attempt to resolve all issues with the regulatory  agencies,  but are willing to
litigate issues where we believe we have a strong position. The ultimate outcome
of these  disagreements  could result in sanctions  and/or  penalties  and fines
assessed against us. Currently, there are no litigation matters pending with any
department of insurance.

     State holding  company acts also  regulate  changes in control of insurance
holding  companies,  such as the transactions and dividends between an insurance
company and its parent or  affiliates.  Although the specific  provisions  vary,
holding  company acts  generally  prohibit a person from acquiring a controlling
interest in an insurer unless the insurance  authority has approved the proposed
acquisition  pursuant  to  applicable  regulations.  In many  states,  including
California,  where the insurance  subsidiaries  are  incorporated,  "control" is
presumed  to  exist if 10% or more of the  voting  securities  of the  insurance
holding  company are owned or controlled  by one person or entity.  In addition,
the insurance  authority may find that  "control" in fact does or does not exist
where one person or entity owns or controls either a lesser or greater amount of
securities.   The  holding  company  acts  also  impose   standards  on  certain
transactions with related  companies and individuals which include,  among other
requirements,  that  all  transactions  are to be fair and  reasonable  and that
transactions exceeding specified limits receive prior regulatory approval.

     Typically, states mandate participation in insurance guaranty associations,
which  assess   solvent   insurance   companies  in  order  to  fund  claims  of
policyholders of insolvent insurance companies. Under this arrangement, insurers
can be  assessed  up to 1%, or 2% in certain  states,  of  premiums  written for
workers' compensation insurance in that state each year to pay losses and LAE on
covered  claims of insolvent  insurers.  In California and certain other states,
insurance  companies are allowed to recoup such assessments  from  policyholders
while several  states allow an offset  against  premium  taxes.  The  California
Insurance  Guarantee  Association  has issued an  assessment  as a result of the
insolvency  of the insurers  owned by Superior  National  Insurance  Group.  The
assessment  is 1% of 1999  written  premium  to be paid in two  installments  on
December 31, 2000 and June 30, 2001. The payments of approximately  $1.2 million
will be recouped during 2001 and 2002 through  assessments to policyholders.  It
is likely  that  Guarantee  Fund  assessments  related to this  insolvency  will
continue.

     Besides  state  insurance  laws,  we are  subject to general  business  and
corporation laws, federal and state securities laws,  consumer  protection laws,
fair credit  reporting acts and other laws  regulating the conduct and operation
of our subsidiaries.

Dividends

     Our insurance  subsidiaries are restricted by state law as to the amount of
dividends that can be declared and paid to us.

     Moreover,  insurance  companies domiciled in California and Texas generally
may not pay  extraordinary  dividends  without  providing  the  state  insurance
commissioner  with 30 days' prior notice,  during which period the  commissioner
may disapprove the payment. An "extraordinary  dividend" is generally defined as
a dividend  whose fair market  value  together  with that of other  dividends or
distributions  made within the  preceding  12 months  exceeds the greater of ten
percent of the insurer's  surplus as of the preceding  December 31 or the income
of such insurer for the 12-month period ending on the preceding December 31.

     In addition,  our insurance subsidiaries may not pay a dividend without the
prior approval of the state insurance  commissioner to the extent the cumulative
amount of  dividends  or  distributions  paid or proposed to be paid in any year
exceeds the amount shown as unassigned  funds (reduced by any  unrealized  gains
included in such amount) on the insurer's statutory statement as of the previous
December 31. California Indemnity,  which is our only direct subsidiary,  cannot
currently pay any dividends to us without the prior  approval of the  California
Department  of Insurance.  We are not in a position to assess the  likelihood of
obtaining  future  approval  for the  payment  of  dividends  other  than  those
specifically allowed by law in each of our subsidiaries' state of domicile.

     No prediction can be made as to whether any legislative  proposals relating
to dividend rules in the domiciliary  states of our subsidiaries will be made or
adopted in the future,  whether the  insurance  departments  of such states will
impose either  additional  restrictions  in the future or a  prohibition  on the
ability of our regulated  subsidiaries to declare and pay dividends or as to the
effect of any such proposals or restrictions on our regulated subsidiaries.

Deposits and Other Requirements

     Our insurance  subsidiaries  are required by state  regulatory  agencies to
maintain certain deposits for the benefit of policyholders or claimants and must
also meet certain net worth and reserve requirements. Our insurance subsidiaries
have  assets on deposit  for the  benefit  of  policyholders  in various  states
totaling $152,356,000 at September 30, 2000.

Legal Proceedings

     We are  subject to  various  claims and other  litigation  in the  ordinary
course of our business. Such litigation includes workers' compensation claims by
injured  workers and by providers for payment for medical  services  rendered to
injured workers.  In the opinion of our management,  the ultimate  resolution of
pending legal  proceedings is not expected to have a material  adverse effect on
our financial condition.

Employees

     At  September  30,  2000,  we  had a  total  of  404  full-time  equivalent
employees,  which we refer  to as  FTE's,  grouped  into  underwriting,  claims,
marketing and  administrative  functions.  With the  completion of our 1997-1998
restructuring  and the  commencement of Nevada  operations in 1999, 157.5 of our
FTE's are  located at the  headquarters  in Las Vegas,  while  143.3 work at the
Pleasanton, California office, and 63 work at the Burbank, California office. In
addition,  we have full-service  branch offices in Denver,  Colorado and Dallas,
Texas,  which  employ 20 and 16 FTE's  respectively.  We have two FTE's in Reno,
Nevada and two FTE's in Gladstone, Missouri.

Facilities

     Our principal executive offices and the Las Vegas, Nevada branch office are
comprised  of 52,231  square feet of office space  leased  through  December 31,
2008. Our Northern California branch office,  comprised of approximately  34,975
square feet of office  space  leased  through  October 31,  2002,  is located in
Pleasanton,  California.  Our Southern  California  branch office,  comprised of
23,250 square feet of office space leased through September 30, 2003, is located
in Burbank,  California.  We also lease space in other  locations  where we have
operations and believe our facilities are adequate for our current needs.


<PAGE>

                                         SELECTED FINANCIAL AND OTHER DATA

     The table below presents our selected  consolidated  financial  information
for the periods  indicated  and at the end of these  periods.  The  consolidated
financial  statement  information  as of December  31, 1999 and 1998 and for the
years ended December 31, 1999,  1998 and 1997 was derived from our  consolidated
financial  statements  included  elsewhere in this  prospectus.  These financial
statements  were prepared in accordance  with  accounting  principles  generally
accepted in the United States of America,  and were audited by Deloitte & Touche
LLP. The  consolidated  financial  information  at December 31, 1997 and for the
year  ended  December  31,  1996 was  derived  from our  unaudited  consolidated
financial  statements for that year and the consolidated  financial  information
for the year ended  December 31, 1995 was derived from our audited  consolidated
financial  statements  for  that  year.  The  consolidated  financial  statement
information  at September  30, 2000 and for the nine months ended  September 30,
2000 and  1999  has been  derived  from  our  unaudited  consolidated  financial
statements  included  elsewhere in this prospectus.  The unaudited  consolidated
financial  statements  have been prepared by us on a basis  consistent  with the
audited  financial  statements  and  included all normal  recurring  adjustments
necessary  for a  fair  presentation  of  the  information  set  forth  therein.
Operating  results  for  the  nine  months  ended  September  30,  2000  are not
necessarily  indicative of the results that will be achieved for future periods,
including the entire year ending December 31, 2000.

<TABLE>
<CAPTION>
                                      Nine Months Ended
                                        September 30,                       Year Ended December 31,
                                         (dollars in                         (dollars in thousands)
                                         thousands)
<S>                                   <C>         <C>         <C>         <C>         <C>         <C>         <C>
                                      2000        1999        1999        1998        1997        1996        1995
Income Statement Data:
Direct written premiums              $153,034    $106,291    $148,824    $153,914    $135,580    $126,724     $94,953

Net written premiums                  $93,857     $60,833     $85,097    $134,147    $130,597    $121,555     $90,926

Net earned premiums                   $90,951     $58,254     $82,955    $134,274    $129,197    $120,951     $90,584
Net investment income and net
  realized gains and losses            10,757      11,901      15,395      20,229      17,361      18,689      14,454
Other revenue                                0          0           0           0           0           0       3,547

   Total revenues                     101,708      70,155      98,350     154,503     146,558     139,640     108,585
Total costs and expenses              115,715      58,301      91,255     136,625     135,745     129,010      99,502

(Loss)  income  from   continuing   operations   before  federal  income  taxes,
  discontinued operations, and extraordinary
  gain                               (14,007)      11,854       7,095      17,878      10,813      10,630       9,083
Federal income tax (benefit)
  expense                             (4,902)       4,815       3,602       4,166         272       (896)       (750)

(Loss) income from continuing
   operations before discontinued
   operations and extraordinary
   gain                               (9,105)       7,039       3,493      13,712      10,541      11,526       9,833
Net loss from discontinued
   operations                               0           0           0           0           0           0     (6,600)
Extraordinary gain from debt
   extinguishment, net of tax             654           0         111  48                   2          58           0

Net (loss) income                    ($8,451)      $7,039      $3,604     $13,760     $10,543     $11,584      $3,233

Combined Ratios:
GAAP Combined Ratio:
    Loss ratio                         92.38%      59.76%      74.08%      70.26%      72.24%      72.69%      59.72%
    Underwriting expense ratio(1)      28.59%      35.61%      31.45%      28.45%      29.67%      30.54%      44.75%
    Combined ratio                    120.97%      95.37%     105.53%      98.71%     101.91%     103.23%     104.47%

Statutory Combined Ratio:
    Loss ratio                         96.32%      61.07%      78.73%      71.03%      72.24%      72.69%      59.72%
    Underwriting expense ratio         30.10%      37.53%      32.48%      28.92%      29.56%      30.48%      40.89%
    Combined ratio                    126.42%      98.60%     111.21%      99.95%     101.80%     103.17%     100.61%

Balance Sheet Data:
Total cash, cash equivalents and     $231,604    $238,864    $226,572    $283,509    $278,479    $261,846    $244,396
  invested assets
Total assets                          492,852     380,766     404,338     379,880     343,022     315,895     303,151
Total debt                             47,059      51,196      50,498      51,251      54,467      54,497      56,800
Total liabilities                     434,338     309,669     338,285     305,933     285,452     270,975     260,977
Total stockholder's equity             58,514      71,097      66,053      73,947      57,570      44,920      42,174
</TABLE>

-----------------------------------

===============================================================================
(1)  Includes  policyholders'dividend  ratio of 1.83% for the nine months  ended
September 30, 2000.


<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS


----------------------------------------------------------------------------
You should read the following  discussion in conjunction  with the  consolidated
financial  statements  of CII  Financial  and the related  notes,  which  appear
elsewhere in this  prospectus  and Annex 1 to this  prospectus  which contains a
glossary of terms. Any forward-looking statements contained in this Management's
Discussion and Analysis of Financial Condition and Results of Operations and any
other sections of this  prospectus  need to be considered in connection with the
Risk Factors discussed earlier in this prospectus.
----------------------------------------------------------------------------

     Our   operating   results  are   primarily  the  results  of  our  workers'
compensation insurance subsidiaries and consist of underwriting profit/loss, net
investment income, net realized  gains/losses,  other  income/expense,  interest
expense on the old junior subordinated debentures, and income taxes.

Results of Operations for the Nine Months Ended September 30, 2000
Compared to the Nine Months Ended September 30, 1999

     Our income  before  taxes  decreased  by $25.9  million for the nine months
ended 2000 compared to 1999. The major components of the change were:

     o $32.7 million increase in net earned premiums; o $0.9 million decrease in
     investment  income;  o $49.2 million  increase in loss and loss  adjustment
     expenses; o $2.9 million increase in policy acquisition costs; and
     o  $2.4 million increase in general, administrative and other expenses.

Revenues:

     Our revenue is comprised of net earned premiums,  net investment income and
net realized  gains/losses.  Total revenue  increased by 45% for the nine months
ended  September  30, 2000  compared to 1999.  The increase was largely due to a
larger amount of written  premiums  resulting from production  growth and higher
premium rates.

     Net earned premiums are the end result of direct written premiums, plus the
change in unearned  premiums,  less  premiums  ceded to  reinsurers.  Our direct
written  premiums  increased by 44% due  primarily to growth in  California  and
Nevada.  Partially  offsetting  the  growth in direct  written  premiums  was an
increase in premiums ceded to reinsurers,  which increased by 30%. The growth in
ceded reinsurance  premiums was lower than the growth in direct written premiums
primarily due to the expiration of one of our reinsurance  agreements on July 1,
2000  and new  lower  cost  reinsurance  agreements,  all of which  reduced  the
percentage of premiums being ceded.

     The  following  table shows a comparison  of direct  written  premiums,  by
state, for the nine months ended September 30, 2000 and 1999:



                                    Nine Months Ended September 30,

                                2000      % of total      1999       % of total
                                            (dollars in millions)
California                      $117.6         76.9%     $  86.5         81.4%
Colorado                          12.4          8.1          9.1          8.6
Nevada                            11.3          7.4          0.8          0.7
Texas                              5.6          3.6          5.5          5.2
Other States                       6.1          4.0            4.4        4.1
   Total                        $153.0        100.0%      $106.3        100.0%


-------------------------------------------------------------------------------
As shown in the preceding table, our largest premium state, California,  had the
largest  increase in written  premiums.  For the nine months ended September 30,
2000, we have obtained an average premium rate increase on renewing  policies of
approximately 25%. The market-pricing  environment in California has become more
favorable  since  1999 in  reaction  to  industry-wide  losses  in the  workers'
compensation line, increased  reinsurance costs and competitors  retreating from
the market.  In Nevada, we began writing premiums on July 1, 1999, which was the
first date private carriers were allowed to issue workers' compensation policies
in the state.

     Premiums  in force are an  indicator  of  future  written  premium  trends.
Inforce  premiums  are the total  estimated  annual  premiums of all policies in
force  at  a  point  in  time.  Total  inforce  premiums  increased  by  36%  to
$189,557,000 at September 30, 2000. Total inforce premiums have dropped slightly
(.05%) from its  highest  point in the last  twelve  months  which was in August
2000. This indicates a potential slowing trend in premiums  written,  especially
in  California,  due largely to business lost because of the higher premium rate
increases  we have been  trying to obtain.  The number of  inforce  policies  at
September  30, 2000 has also dropped by 1.3% from its highest  point in the last
twelve months, which was also August 2000.

     Effective  July 1, 1998,  we entered into what we refer to as a "low level"
reinsurance agreement. See Losses and Loss Adjustment Expenses below for further
details on this  agreement.  The  favorable  terms of the low level  reinsurance
agreement  provided us with an improved loss ratio as we reinsured a significant
amount of losses  to the  reinsurer.  However,  the ceded  premiums  we paid the
reinsurer  reduced the cash  available for investment  and  temporarily  created
negative cash flow for us. The $900,000 or 7% reduction in net investment income
for the nine months ended September 30, 2000,  compared to the prior period,  is
due to a reduction in  investments  primarily  because of higher ceded  premiums
paid to reinsurers in 2000.

     We had net realized  losses of $460,000 for the nine months ended September
30, 2000 compared to net realized  losses of $174,000 for the prior  period.  We
have tried to manage our investment portfolio to minimize unplanned sales of our
available-for-sale investments.

Losses and Loss Adjustment Expenses:

     The $49.2 million increase in losses and loss adjustment expenses, which we
refer to as LAE, is attributable to the following reasons:

     o  Approximately  $19.5  million of the  increase is related to our premium
growth.

     o We recorded  $20.2  million of net  adverse  loss  development  for prior
accident  years.  The net  adverse  development  recorded  in 2000 for the prior
accident years was primarily  attributable  to higher costs per claim,  or claim
severity, in California.  Higher claim severity has had a negative impact on the
entire California workers' compensation industry.

     o We are  establishing  a higher  loss and LAE ratio for the 2000  accident
year,  which has  resulted in an increase of  approximately  $8.3  million.  The
higher loss and LAE ratio is due in part to the net adverse loss  development we
recorded in the fourth  quarter of 1999 of $9.9 million and to the lower premium
rates on policies written in 1999.

     o The  remaining  difference  is due to the  expiration  of the  low  level
reinsurance  policy on June 30, 2000. We have a higher risk exposure on policies
effective after that date, which results in a higher amount of net incurred loss
and LAE.

     Under our low level  reinsurance  agreement,  we reinsure  30% of the first
$10,000 of each claim,  75% of the next  $40,000 and 100% of the next  $450,000.
The maximum net loss  retained  on any one claim ceded under this  agreement  is
$17,000.  This  agreement  covered  all  policies  in force at July 1,  1998 and
continued  until June 30, 2000 when we executed an option to extend  coverage to
all policies in force as of June 30, 2000.  For policies  effective from July 1,
2000,  we  obtained  excess of loss  reinsurance  for 100% of the  losses  above
$250,000  and less than  $500,000.  We already  had an  existing  excess of loss
reinsurance agreement that covered 100% of the losses above $500,000.

     As a percentage of net earned premiums, the loss and LAE ratio for the nine
months ended  September 30, 2000 was 92.4%  compared to 59.8% for 1999. The 2000
loss  ratio  was  significantly  impacted  by  the  $20.2  million  net  adverse
development,  which represents 22.2% of net earned  premiums.  In addition,  the
expiration of the low level reinsurance  agreement is resulting in a higher loss
and LAE ratio on policies  effective  after June 30, 2000 as we are keeping more
of the losses.

Underwriting Expenses:

     Underwriting  expenses  consist  of  policy  acquisition  costs  and  other
underwriting  costs.  Policy  acquisition  costs  are  those  expenses  that are
directly  related  to,  and vary  with,  written  premiums.  Examples  of policy
acquisition  costs are  commissions  and allowances  paid to agents and brokers,
premium taxes,  boards and bureau fees and certain operating  expenses primarily
related to our  underwriting and marketing  departments.  The increase in policy
acquisition  costs of $2.9 million for the nine months ended  September 30, 2000
compared  to  1999 is  primarily  attributable  to the  increase  in net  earned
premiums.  Other  underwriting  expenses  increased by $0.7 million for the nine
months ended  September 30, 2000 compared to 1999 due to higher  personnel costs
to  service  the  increase  in premium  growth.  As a  percentage  of net earned
premiums,  the underwriting expense ratio was 28.6% in 2000 compared to 35.6% in
1999. The  improvement in the expense ratio was due in part to higher net earned
premiums, which provides a larger base to spread our fixed costs, smaller growth
in personnel expenses and lower agents' commissions and allowances.

General, Administrative and Other Expenses:

     Included in this income statement line item are other underwriting expenses
of $15.7  million for the nine months  ended  September  2000  compared to $15.0
million for the prior year period. Also included are policyholders' dividends of
$1.7 million for the nine months  ended  September  30, 2000  compared to nil in
1999.  The majority of the dividends are for Nevada  participating  policies and
represent  1.8% of net earned  premiums.  In  addition,  in 2000,  we  wrote-off
capitalized costs of $3.0 million on an information system software project that
was  cancelled  because  the  vendor  was  unable  to  fulfill  its  contractual
obligations.

Combined Ratio:

     The combined ratio is a measurement of  underwriting  profit or loss and is
the sum of the loss and LAE ratio, underwriting expense ratio and policyholders'
dividend  ratio. A combined  ratio of less than 100%  indicates an  underwriting
profit.  Our combined  ratio was 121.0% for the nine months ended  September 30,
2000  compared to 95.4% for the same period in 1999.  The increase was primarily
due to a higher loss and LAE ratio of 32.6 percentage points, offset slightly by
a decrease in the underwriting  expense ratio of 8.8 percentage points and a new
policyholders'  dividends  ratio of 1.8 percentage  points.  The increase in the
loss and LAE ratio was due to:

     o net adverse loss development of $20.2 million,  which represents 22.2% of
net earned  premiums,  on prior  accident  years recorded in 2000 compared to no
loss development for the nine months ended 1999; and

     o higher loss and LAE ratio on the 2000  accident  year,  which  represents
9.1% of net earned premiums. The higher loss and LAE ratio is due in part to the
net adverse loss  development  we recorded in the fourth quarter of 1999 of $9.9
million and to the lower premium rates on policies written in 1999.

Income Taxes:

     For the nine months ended  September 30, 2000, we recorded a tax benefit of
$4.9  million  compared  to a tax  provision  of $4.8  million in the prior year
period.  The effective tax rate was 35% for the 2000 period  compared to 41% for
the 1999  period.  The  decrease in the  effective  tax rate was due to deferred
income tax valuation allowances recorded in 1999.

Results of Operations  for the Year ended December 31, 1999 Compared to the Year
Ended December 31, 1998

     Our income  before  taxes  decreased  by $10.8  million  for the year ended
December 31, 1999 compared to 1998. The major components of the change were:

       $51.3 million decrease in net earned  premiums;  $2.5 million decrease in
       investment income; $2.4 million decrease in net realized gains;
       $32.9 million  decrease in loss and loss adjustment  expenses;  and $12.9
       million decrease in policy acquisition costs.

Revenues:

     Our revenue is comprised of net earned premiums,  net investment income and
net realized  gains/losses.  Total  revenue  decreased by 36% for the year ended
December 31, 1999 compared to 1998 and was due to a significant reduction in net
earned premiums.  In addition,  negative cash flows from operations  resulted in
lower net investment income.

     Net earned premiums are the end result of direct written premiums, plus the
change in unearned  premiums,  less  premiums  ceded to  reinsurers.  Our direct
written  premiums  decreased by $5.1 million or 3% due primarily to lower prices
for  workers'  compensation  insurance  in  California.  The  increase  in ceded
reinsurance  premiums  of  $44.0  million  was  primarily  due to the low  level
reinsurance agreement, which is discussed below.

     The  following  table shows a comparison  of direct  written  premiums,  by
state, for the year ended December 31, 1999 and 1998:

                                           Year Ended December 31,
                                1999      % of total      1998       % of total
                                            (dollars in millions)
California                       $120.5       80.9%       $129.3         84.0%
Colorado                           12.3        8.3          12.0          7.8
Texas                               7.2        4.8           8.1          5.3
Nevada                              2.6        1.8           0.0          0.0
Other States                        6.2        4.2           4.5          2.9
   Total                         $148.8      100.0%       $153.9        100.0%

     Our largest  premium state,  California,  also had the largest  decrease in
written  premiums  due in  large  part  to  increasing  price  competition.  The
market-pricing  environment  in California  became less  favorable at the end of
1998 due to some  competitors  using  reinsurance  as a way of reducing  premium
rates to gain market share. We began writing workers' compensation  insurance in
Nevada on July 1, 1999, the first date private  insurance  carriers were allowed
to issue workers' compensation policies in the state.
--------------------------------------------------------------------------------

     Premiums  in force are an  indicator  of  future  written  premium  trends.
Inforce  premiums  are the total  estimated  annual  premiums of all policies in
force at a point in time.  Although  direct premium  writings  decreased for the
year ended  December  31,  1999  compared  to 1998,  total  inforce  premiums at
December 31, 1999 increased by 17% to $155.0  million.  This indicates an upward
trend in premium growth,  especially in California,  in the latter part of 1999.
The number of inforce  policies at December  31, 1999 also  increased  by 23% to
15,485.

     Effective  July 1, 1998,  we entered into what we refer to as a "low level"
reinsurance agreement. See Losses and Loss Adjustment Expenses below for further
details on this  agreement.  The  favorable  terms of the low level  reinsurance
agreement  provided us with an improved loss ratio as we reinsured a significant
amount of losses  to the  reinsurer.  However,  the ceded  premiums  we paid the
reinsurer  reduced the cash  available for investment  and  temporarily  created
negative  cash flow for us.  The  negative  cash flow  created  by the low level
reinsurance agreement was the primary reason for the lower net investment income
of $2.5 million.

     We had net realized losses of $381,000 for the year ended December 31, 1999
compared to net  realized  gains of $2.0  million in 1998.  We try to manage our
investment  portfolio  to  minimize  unplanned  sales of our  available-for-sale
investments.  In 1998, we sold some of our  investments  in debt  securities and
realized some gains.

Losses and Loss Adjustment Expenses:

     The $32.9  million  decrease in the losses and LAE is  attributable  to the
following reasons:

     o Due to the low level reinsurance agreement,  our reinsurer is at risk for
more of our losses and LAE on policies in force at July 1, 1998.  This agreement
reduced the dollar amount of losses and LAE for the year ended December 31, 1999
by approximately $70 million.

     o We  recorded  $9.9  million of net  adverse  loss  development  for prior
accident  years in the fourth  quarter of 1999  compared to net  favorable  loss
development  of $9.6 million in 1998.  The net adverse  development  recorded in
1999 was primarily attributable to higher costs per claim, or claim severity, in
California.  Higher  claim  severity  has had a  negative  impact on the  entire
California  workers'  compensation  industry.  However,  the number of  reported
claims  per  $1  million  of  earned  premium,  or  claims  frequency,  did  not
significantly change when compared to our historical patterns. The net favorable
loss  development  recorded in 1998 was due to lower than  expected loss and LAE
payments.

     o The amount of direct  losses and LAE  reserves  (i.e.,  before  deducting
reinsurance  recoveries)  recorded  in 1999  were  higher by  approximately  $22
million due to the trend in higher claim severity.  This was partially offset by
an increase in excess  reinsurance  recoverable  of $4.5  million.  In 1998,  we
recorded  favorable loss  development  and this trend was factored into the loss
ratio to record the 1999 accident year reserves.

     Under our low level  reinsurance  agreement,  we reinsure  30% of the first
$10,000 of each claim,  75% of the next  $40,000 and 100% of the next  $450,000.
The maximum net loss  retained  on any one claim ceded under this  agreement  is
$17,000.  This agreement  covered all policies in force at July 1, 1998. We also
had excess of loss reinsurance  agreements that covered 100% of the losses above
$500,000 to $100 million.

     As a  percentage  of net earned  premiums,  the loss and LAE ratio for year
ended  December 31, 1999 was 74.1%  compared to 70.3% for 1998.  The increase is
due to the following:

     o The $9.9 million of net adverse loss development for prior accident years
recorded in the fourth quarter of 1999 compared to favorable loss development of
$9.6  million  in 1998  accounts  for an  increase  in the loss and LAE ratio of
approximately 19 percentage points.

     o The  additional  amounts  of ceded  losses  and LAE due to the low  level
reinsurance  agreement have reduced the net loss and LAE ratio by  approximately
11 percentage points.

     o The remainder of the difference is due to the lower direct  reserves that
were established on the 1999 accident year.

Underwriting Expenses:

     Underwriting  expenses  consist  of  policy  acquisition  costs  and  other
underwriting  costs.  Policy  acquisition  costs  are  those  expenses  that are
directly  related  to,  and vary  with,  written  premiums.  Examples  of policy
acquisition  costs are  commissions  and allowances  paid to agents and brokers,
premium taxes,  boards and bureau fees and certain operating  expenses primarily
related to underwriting  and marketing  departments.  Policy  acquisition  costs
decreased by $12.9 million or 67% for the year ended  December 31, 1999 compared
to 1998.  The  decrease  was all due to a  ceding  commission  of $14.7  million
received on the low level  reinsurance  agreement as a partial  reimbursement of
our  expenses.   Partially   offsetting  the  ceding   commissions  were  higher
commissions  paid to agents and  brokers in order to remain  competitive  in the
market  place.  Other  underwriting  expenses  increased  by $.6 million in 1999
compared  to 1998 due to higher  personnel  costs to  service  the  increase  in
premium growth. As a percentage of net earned premiums, the underwriting expense
ratio  was  31.5% in 1999  compared  to 28.4% in 1998.  The  improvement  in the
expense ratio was largely due to the ceding commissions.

General, Administrative and Other Expenses:

     The increase in this income  statement line item was primarily due to other
underwriting  expenses  of $19.6  million for the year ended  December  31, 1999
compared to $19.0 million for 1998.

Combined Ratio:

     The combined ratio is a measurement of  underwriting  profit or loss and is
the sum of the loss and LAE ratio, underwriting expense ratio and policyholders'
dividend  ratio. A combined  ratio of less than 100%  indicates an  underwriting
profit.  Our  combined  ratio was 105.5% for the year ended  December  31,  1999
compared to 98.7% for 1998.  The increase was due to a higher loss and LAE ratio
of  3.8  percentage  points  and a  higher  underwriting  expense  ratio  of 3.1
percentage  points.  The  increase  in the  1999  year  loss and LAE  ratio  was
primarily due to net adverse loss development of $9.9 million,  which represents
11.9% of 1999 net earned  premiums,  whereas  the 1998 year had  favorable  loss
development of $9.6 million, which represented 7.1% of 1998 net earned premiums.
The change in loss  development  was partially  offset by additional  amounts of
ceded losses and LAE under the low level reinsurance agreement.  The increase in
the underwriting expense ratio was primarily due to the lower net earned premium
base in 1999.

Income Taxes:

     For the year ended  December 31, 1999,  we recorded a tax provision of $3.6
million  compared to a tax provision of $4.2 million in 1998.  The effective tax
rate was 50% for 1999  compared to 23% for 1998.  The increase in the  effective
tax rate for 1999 was due to deferred income tax valuation  allowances  recorded
in 1999 for CII Financial  whereas the 1998 rate  benefited  from a reduction in
the deferred  income tax valuation  allowance from the use of net operating loss
carryforwards of California  Indemnity.  The California  Indemnity net operating
loss carryforwards were completely used in 1998.

Results of Operations  for the Year Ended December 31, 1998 Compared to the Year
Ended December 31, 1997

     Our  income  before  taxes  increased  by $7.1  million  for the year ended
December 31, 1998 compared to 1997. The major components of the change were:

       $5.1 million  increase in net earned  premiums;  $1.5 million increase in
       investment income;  $1.4 million increase in net realized gains; and $1.0
       million increase in loss and loss adjustment expenses.

Revenues:

     Our revenue is comprised of net earned premiums,  net investment income and
net realized gains/losses. Total revenue increased by $7.9 million or 5% for the
year ended  December 31, 1998 compared to 1997.  The increase was largely due to
higher net earned premiums of $5.1 million.

     Net earned premiums are the end result of direct written premiums, plus the
change in unearned  premiums,  less  premiums  ceded to  reinsurers.  Our direct
written  premiums  increased by $18.3  million  or14% due primarily to increased
premium growth in California. Ceded reinsurance premiums also increased by $14.8
million and were primarily due to the low level reinsurance agreement,  which is
discussed below.

     The  following  table shows a comparison  of direct  written  premiums,  by
state, for the year ended December 31, 1998 and 1997:

                                           Year Ended December 31,
                                1998      % of total      1997       % of total
                                            (dollars in millions)
California                      $129.3         84.0%      $113.1         83.4%
Colorado                          12.0          7.8         12.8          9.4
Texas                              8.1          5.3          6.3          4.6
Other States                       4.5          2.9          3.4          2.6
   Total                        $153.9        100.0%      $135.6        100.0%

================================================================================

     Our largest premium state, California,  had the largest increase in written
premiums due in large part to premium  growth from writing  more  policies  that
occurred in the first half of 1998. The market-pricing environment in California
became  less  favorable  at  the  end of  1998  due to  some  competitors  using
reinsurance as a way of reducing premium rates to gain market share.

     Premiums  in force are an  indicator  of  future  written  premium  trends.
Inforce  premiums  are the total  estimated  annual  premiums of all policies in
force at a point in time.  Although total inforce  premiums at December 31, 1998
increased by 3% to $132.8  million from December 31, 1997,  there was a downward
trend in the last half of 1998.  Total inforce  premiums  increased in the first
half of 1998 from $128.8  million at January 1, 1998 to a high of $142.8 million
in July  1998 and  declined  in the last  half of 1998 due to  escalating  price
competition in California.

     Effective  July 1, 1998,  we entered into what we refer to as a "low level"
reinsurance agreement. See Losses and Loss Adjustment Expenses below for further
details on this  agreement.  The  favorable  terms of the low level  reinsurance
agreement  provided us with an improved loss ratio as we reinsured a significant
amount of losses  to the  reinsurer.  However,  the ceded  premiums  we paid the
reinsurer  reduced the cash  available for investment  and  temporarily  created
negative cash flow for us. Our first payment to the reinsurer was not made until
the end of December  1998.  Thus,  the timing of this payment did not reduce our
net investment  income in 1998 the increase in our investment income was related
to the increase in our investment portfolio throughout most of 1998.

     In 1998,  we had net  realized  gains of $2.0  million  for the year  ended
December 31, 1998 compared to net realized  gains of $.6 million in 1997. We try
to  manage  our  investment   portfolio  to  minimize  unplanned  sales  of  our
available-for-sale   investments.  In  1998  and  1997,  we  sold  some  of  our
investments in debt securities and realized some gains.

Losses and Loss Adjustment Expenses:

     The  $1.0  million  net  increase  in the  losses  and  LAE  was  primarily
attributable to premium growth, which increased losses and LAE by $16.2 million.
This  increase  was  substantially  reduced  by the  effects  of the  low  level
reinsurance  agreement which reduced the dollar amount of losses and LAE in 1998
by approximately  $21.0 million.  Changes in excess  reinsurance  resulted in an
increase in losses and LAE of $5.9 million.

     Under our low level  reinsurance  agreement,  we reinsure  30% of the first
$10,000 of each claim,  75% of the next  $40,000 and 100% of the next  $450,000.
The maximum net loss  retained  on any one claim ceded under this  agreement  is
$17,000.  This agreement  covered all policies in force at July 1, 1998. We also
had excess of loss reinsurance  agreements that covered 100% of the losses above
$500,000 to $100 million.

     As a  percentage  of net earned  premiums,  the loss and LAE ratio for year
ended  December 31, 1998 was 70.3% compared to 72.2% for 1997. The reduction was
primarily  due to the  effects  of  the  low  level  reinsurance  agreement.  In
addition,  we also had net favorable loss development on prior accident years of
$9.6 million compared to net favorable loss development of $9.0 million in 1997.
The net favorable loss  developments  were primarily  attributable to lower than
expected loss and LAE payments.

Underwriting Expenses:

     Underwriting  expenses  consist  of  policy  acquisition  costs  and  other
underwriting  costs.  Policy  acquisition  costs  are  those  expenses  that are
directly  related  to,  and vary  with,  written  premiums.  Examples  of policy
acquisition  costs are  commissions  and allowances  paid to agents and brokers,
premium taxes,  boards and bureau fees and certain operating  expenses primarily
related to underwriting  and marketing  departments.  Policy  acquisition  costs
decreased by $.6 million.  The increase in policy  acquisition  costs that would
normally  accompany an increase in related  premium  revenues was  substantially
offset by a ceding  commission  of  approximately  $3.9  million.  We received a
ceding  commission  on  the  low  level  reinsurance   agreement  as  a  partial
reimbursement of our expenses.  Other  underwriting  expenses  increased by $0.5
million  or 3% for the year ended  December  31,  1998  compared  to 1997.  As a
percentage of net earned premiums,  the underwriting  expense ratio was 28.4% in
1998  compared to 29.7% in 1997.  The decrease in the expense  ratio was largely
due to the ceding commission received on the low level reinsurance agreement.

General, Administrative and Other Expenses:

     The increase in this income  statement line item was primarily due to other
underwriting  expenses  of $19.0  million for the year ended  December  31, 1998
compared to $18.5 million for 1997.

Combined Ratio:

     The combined ratio is a measurement of  underwriting  profit or loss and is
the sum of the loss and LAE ratio, underwriting expense ratio and policyholders'
dividend  ratio. A combined  ratio of less than 100%  indicates an  underwriting
profit.  Our  combined  ratio was 98.7% for the year  ended  December  31,  1998
compared to 101.9% for 1997.  The decrease was primarily due to a lower loss and
LAE ratio of 2.0 percentage points and a lower underwriting expense ratio of 1.2
percentage  points.  The  decrease  in the  1998  year  loss and LAE  ratio  was
primarily due to the low level  reinsurance  agreement  and net  favorable  loss
development of $9.6 million,  which represents 7.1% of 1998 net earned premiums.
The  1997  year  had net  favorable  loss  development  of $9.0  million,  which
represented 7.0% of 1997 net earned  premiums.  The decrease in the underwriting
expense  ratio was primarily  due to the ceding  commission  received on the low
level reinsurance agreement of $3.9 million.

Income Taxes:

     For the year ended  December 31, 1998,  we recorded a tax provision of $4.2
million  compared to a tax provision of $0.3 million in 1997.  The effective tax
rate was 23% for 1998 compared to 2% for 1997.  Both the 1998 and 1997 effective
tax rates were less than the statutory  rate  primarily due to reductions in the
deferred  income tax  valuation  allowance  from the use of net  operating  loss
carryforwards of California Indemnity.

Liquidity and Capital Resources

     We had negative  cash flows from  operating  activities of $2.3 million for
the nine months ended  September  30, 2000 and $29.5  million for the year ended
December 31, 1999. Our negative cash flow for the 2000 period was largely due to
a net loss of $8.5 million and an increase in  reinsurance  recoverable  on paid
and unpaid losses of $79.7 million,  which were partially  offset by an increase
in loss and LAE reserves of $97.5  million.  Our negative cash flow for the 1999
year was primarily due to a net increase in reinsurance  recoverable on paid and
unpaid losses of $73.4 million offset by an increase in loss and LAE reserves of
$32.1  million,  an increase in deferred  income  taxes of $5.9  million and net
income of $3.6 million. The increases in reinsurance  recoverable were primarily
due to the low level  reinsurance  agreement.  The increases in the loss and LAE
reserves  were due to  premium  growth  as well as  adjustments  related  to net
adverse  development  on prior  accident years recorded in 2000 of $20.2 million
and $9.9 million in 1999.

     Our net cash provided by investing activities was $9.9 million for the nine
month  2000  period  and  $24.8  million  for  the  year  ended  1999.   Capital
expenditures  in 2000 were $0.8 million and $4.2 million in the year ended 1999.
Due to the  negative  cash  flows  from  operations,  we had to sell some of our
investments.

     Our net cash flows from financing  activities  were a negative $5.1 million
for the nine month 2000 period and negative $0.6 million for the year 1999.  The
negative cash flows from financing  activities for both periods were a result of
our repurchase of old junior subordinated debentures in the open market.

     In September 1991, we issued the old junior  subordinated  debentures.  The
old junior  subordinated  debentures bear interest at 7 1/2% per annum, which is
due  semi-annually  on March 15 and  September  15. Each $1,000 in  principal is
convertible  into 25.382 shares of common stock of our ultimate  parent company,
Sierra Health Services, at a conversion price of $39.398 per share.  Unamortized
issuance costs of $362,000 are included in other assets on the balance sheet and
are being amortized over the life of the old junior subordinated debentures. The
old junior subordinated  debentures are junior  subordinated  obligations of CII
Financial, Inc. only and are not guaranteed by Sierra.

     Sierra has a bank  credit  facility  with  outstanding  borrowings  of $185
million at  September  30,  2000.  Sierra  was in  default of certain  financial
covenants at June 30, 2000. In  consideration  of the banks granting a waiver of
compliance,  in August  2000,  CII  Financial,  the  holding  company,  became a
guarantor  of the Sierra  credit  facility  debt.  The guaranty of the bank debt
ranks senior to the old junior subordinated  debentures.  The waivers expired on
October  31,  2000 and Sierra  received  a notice of  default  from the banks on
November 8, 2000.  The credit  facility was amended and restated on December 15,
2000.

     CII Financial is a holding company and its only significant  assets are its
investment  in  California  Indemnity  Insurance  Company.  Of the cash and cash
equivalents  held  at  September  30,  2000,  approximately  $231  million  were
designated for use only by the regulated insurance companies.  Funds can only be
transferred by the insurance  subsidiaries  to CII Financial in accordance  with
applicable  regulations.  CII  Financial  has a  limited  source  of cash and is
dependent  upon  dividends  paid  by  California   Indemnity.   The  payment  of
stockholders'   dividends  is  regulated  by  the  California   Insurance  Code.
Currently,  California Indemnity is prohibited from making any dividend payments
to CII  Financial  without  prior  approval  of  the  California  Department  of
Insurance.

     Sierra advanced  $365,000 to us in order to enable us to make our September
15, 2001 interest payment on the old junior  subordinated  debentures.  Sierra's
amended and restated bank credit  facility will restrict  Sierra from making any
future advances to us.  Therefore,  we have no readily  available source of cash
with which to pay the old junior  subordinated  debentures  when they  mature on
September 15, 2001.

     Since our  acquisition by Sierra in October 1995, we have paid dividends to
Sierra totaling $2.6 million.  Sierra has also contributed $3.7 million to us by
purchasing  in  the  open  market  old  junior   subordinated   debentures   and
contributing them to us.

Inflation

     Inflation can be expected to affect our operating performance and financial
condition  in several  aspects.  Inflation  can  reduce the market  value of our
investment  portfolio;  however,  we try to manage our  investment  portfolio to
minimize unplanned sales. Inflation can adversely affect the portion of loss and
LAE reserves that relate to hospital and medical expenses, although some medical
expenses are established by statute. Loss reserves related to indemnity benefits
for lost wages are not  directly  affected  by  inflation  as these  amounts are
established  by statute.  We do not believe  that  inflation  has had a material
effect on our results of operations.

Recent Accounting Pronouncements

     In December  1999,  the  Securities  and Exchange  Commission  issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101").  SAB 101  clarifies  existing  accounting  principles  related to revenue
recognition  in  financial  statements.  We are  required  to  comply  with  the
provisions of SAB 101 in the quarter  ending  December 31, 2000.  Based upon the
current nature of our  operations,  we do not believe that SAB 101 will have any
impact on our results of operations.

     In June 1998, the Financial  Accounting Standards Board (the "FASB") issued
Statement of Financial  Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), as amended, which is effective
for fiscal years beginning after June 15, 2000. SFAS 133 establishes  additional
accounting  and  reporting  standards  for  derivative  instruments  and hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or  liabilities  in the statement of financial  position.  This statement
also defines and allows  companies to apply hedge  accounting to its  designated
derivatives  under certain  instances.  It also requires that all derivatives be
marked to market on an ongoing basis.  This applies  whether the derivatives are
stand-alone  instruments,  such as warrants or interest rate swaps,  or embedded
derivatives,  such as call options  contained in convertible  debt  investments.
Along with derivatives,  in the case of qualifying  hedges, the underlying hedge
items are also to be marked to market.  These market value adjustments are to be
included either in the income statement or other comprehensive income, depending
on the nature of the hedged transaction. The fair value of financial instruments
is generally  determined by reference to market values resulting from trading on
a national  securities exchange or in an over the counter market. In cases where
derivatives relate to financial  instruments of non-public  companies,  or where
quoted  market  prices  are  otherwise  not  available,  such as for  derivative
financial  instruments,  fair value is based on estimates using present value or
other valuation  techniques.  Based on our  understanding of SFAS 133, we do not
believe  that we have any  derivative  instruments  and do not have any  hedging
activities.   The  majority  of  our  investments  are  held  by  our  insurance
subsidiaries, which are regulated as to the types of investments they may hold.

Quantitative and Qualitative Disclosures About Market Risk

     At December 31, 1999, we had $226.6 million in cash,  cash  equivalents and
invested  assets.  Our  invested  assets  consist of debt  securities  of $190.3
million, of which $165.3 million were classified as available-for-sale and $25.0
million was classified as held-to-maturity.  These investments are substantially
investment  grade  securities.  Our  investment  policies  emphasize  return  of
principal and  liquidity and are focused on fixed returns that limit  volatility
and risk of principal.  Our primary market risk  associated  with our investment
portfolio is interest rate risk.

     Assuming  interest  rates  were to  increase  by a factor  of 1.1,  the net
hypothetical  loss in fair value of  shareholder's  equity  related to financial
instruments would  approximately be $6.1 million after tax. This would represent
approximately 9% of shareholder's equity. We believe that if interest rates were
to increase by this  amount,  it would not have a material  impact on our future
earnings  or cash  flows as it is  unlikely  that we  would  need or  choose  to
substantially liquidate our investment portfolio.

     The effect of interest rate risk on potential  near-term  net income,  cash
flow and fair value was determined based on commonly used sensitivity  analyses.
The  models  project  the  impact of  interest  rate  changes on a wide range of
factors,  including  duration and prepayment.  Fair value was estimated based on
the net present value of cash flows or duration estimates, assuming an immediate
10% increase in interest rates.




<PAGE>



                                                    MANAGEMENT

Directors and Executive Officers

     The following  table sets forth  information  concerning  our directors and
executive officers.

-------------------------------------------------------------------------------

Name                    Position                                         Age

-------------------------------------------------------------------------------
Paul H. Palmer          Director                                         39
Frank E. Collins        Director                                         46
Kathleen M. Marlon      President, Chief Executive Officer,              42
                        Chairman and Director
John F. Okita           Chief Financial Officer                          52
Robert G. Riordan       Vice President, Region II                        48
Robert L. Selli         Vice President, Region I                         59
David M. Sonenstein     General Counsel and Secretary                    53
-------------------------------------------------------------------------------

     Paul H.  Palmer,  Director.  Mr.  Palmer is the vice  president of finance,
chief  financial  officer  and  treasurer  of Sierra.  He was  promoted to these
offices in 1998.  Prior to this, he was assistant  vice president of Sierra from
May 1996,  corporate  controller from November 1994 and director of finance when
he joined  Sierra in 1993.  Prior to  joining  Sierra,  Mr.  Palmer was an audit
manager  at  Deloitte  & Touche  LLP  (formerly  Touche  Ross) in Las  Vegas and
California from 1988 to 1993. Mr. Palmer is a certified  public  accountant with
an MBA and masters in accounting from Brigham Young  University.  He is a member
of the  American  Institute of Certified  Public  Accountants,  the Nevada State
Society of Certified  Public  Accountants  and the  California  State Society of
Certified Public Accountants.

     Frank E. Collins,  Director.  Mr.  Collins joined Sierra in 1986 as general
counsel and secretary.  In 1997 he was appointed executive vice president.  From
1981 to 1986,  Mr.  Collins was employed by Blue Cross and Blue Shield of Kansas
City,  originally as staff legal counsel and in early 1986 as associate  general
counsel.  Mr.  Collins  also  served as counsel  for the  Missouri  Division  of
Insurance from 1979 to 1981, where he was responsible for providing legal advice
on insurance- and HMO-related  regulatory issues. Mr. Collins received his Juris
Doctor in 1979 from the  University of Missouri at Kansas City school of law and
is a member of the Missouri Bar Association.

     Kathleen M.  Marlon,  President,  Chief  Executive  Officer,  Chairman  and
Director.  Ms. Marlon joined Sierra in March 1986. In 1990, she became president
and chief  operating  officer of Sierra  Healthcare  Options,  Inc.,  a start-up
subsidiary  of Sierra.  In February  1996,  Ms.  Marlon became our president and
chief executive officer. In December 2000, Ms. Marlon became our chairman. Prior
to joining  Sierra,  Ms. Marlon held technical and management  positions for six
years with Delphi Systems and Quality Systems.  Ms. Marlon received her Bachelor
of Science in Accounting from the University of Southern California in 1980. Ms.
Marlon has  successfully  completed  the CPA exam and  Property  & Casualty  and
Health licensing exams and holds a F.L.M.I.  designation.  Ms. Marlon is married
to Anthony M.  Marlon's  nephew.  Anthony M.  Marlon is the  chairman  and chief
executive officer of Sierra.

     John F.  Okita,  Chief  Financial  Officer.  Mr.  Okita has  served in this
capacity since he started his employment  with us in April 1992 until  September
1999 and from June 2000 to present.  In  September  1999,  Mr.  Okita left us to
become the corporate  controller of Sierra,  a position he still holds.  In June
2000 he returned to us as our chief financial officer.  Mr. Okita is a certified
public  accountant  and a  licensed  attorney  and  has  over  twenty  years  of
property-casualty insurance industry experience.  Prior to joining us, Mr. Okita
was in private  tax and  financial  consulting  practice.  Mr.  Okita  served in
several financial  executive  capacities at Fremont Insurance Group between 1980
and 1990.  Prior to that,  Mr. Okita was employed by Coopers & Lybrand from 1975
and audited  both  property-casualty  and life  insurance  companies.  Mr. Okita
received  his  Bachelor of Science in Business  Administration  from  California
State University at Los Angeles and his Juris Doctor from Loyola Law School.

     Robert G. Riordan, Senior Vice President, Field Operations. Mr. Riordan was
promoted to this  position in May 1997 after having  served as director of field
operations  since November  1993. He was vice  president of Northern  California
operations  for USA Casualty  Company from November 1991 until joining Sierra in
1993.  Prior  to USA  Casualty,  Mr.  Riordan  had  held  various  underwriting,
marketing  and financial  reporting  positions  with  Fireman's  Fund  Insurance
Companies  since  1976.  Mr.  Riordan  attended  Steubenville  College  where he
received a Bachelor of Science degree in business administration.

     Robert L. Selli,  Vice President,  Underwriting.  Mr. Selli was promoted in
November 1997 after serving as director of underwriting since December 1996. Mr.
Selli has served as Northern California  Underwriting  Manager and key member of
our California Open Rating Task Force since he joined us in January 1994.  Prior
to that time,  Mr.  Selli held various  underwriting  management  and  marketing
positions  with  Fireman's  Fund  Insurance  Company and Zurich  American  since
entering the industry in 1967. Mr. Selli attended San Francisco State University
where he received a Bachelor of Arts degree in economics.

     David M.  Sonenstein,  General  Counsel and Secretary.  Mr.  Sonenstein has
served as general counsel since joining us in August 1997 and as secretary since
early 1999.  Mr.  Sonenstein  served as vice  president  and  associate  general
counsel of Fireman's Fund Insurance  Company,  from 1991 to 1997. He started his
employment with Fireman's Fund as Associate  Counsel in 1979. Mr. Sonenstein was
in private practice from 1972 to 1979. Mr.  Sonenstein  graduated from Claremont
Men's  College  with a Bachelor of Arts degree and  received his Juris Doctor in
1972 from Hastings College of Law.






<PAGE>



Executive Compensation

     The following table sets forth information with respect to the compensation
paid by us for the year ended December 31, 1999 to our chief  executive  officer
and to each of our four next most highly compensated executive officers:

<TABLE>
<CAPTION>

                                            SUMMARY COMPENSATION TABLE

Name of Individual
Or Number Of Persons In     Capacities in            Cash Compensation                              All Other
Group                       Which Served                                         Bonus             Compensation
<S>                                                       <C>                   <C>                  <C>     <C>
Kathleen M. Marlon          President, Chief              $214,291              $78,733              $25,457 (1)
                            Executive Officer

Richard E. Dobson           Chief Legal Officer           225,715               47,800                13,115

John F. Okita               Chief Financial               126,912               66,698                21,487
                            Officer

Robert G. Riordan           Senior Vice                   139,445               30,047                10,907
                            President, Field
                            Operations

David M. Sonenstein         General Counsel               124,214               27,583                13,342
</TABLE>
     ______________   (1)  Includes  $15,451  of  compensation   resulting  from
split-dollar   insurance  policies  purchased  in  1997,   calculated  based  on
regulations of the SEC. The regulations require compensation to be calculated on
the  assumption  that most of the  premiums  paid by us  represent a  long-term,
no-interest loan to the executive.  This assumption results in high compensation
expense being shown in early years of the expected life of each policy and lower
expense in later years,  while in fact the cash surrender value of such a policy
to the  executive  is very low in the early  years and  higher  only in the late
years.


Compensation of Directors

     The  directors  are our  employees  or  employees  of Sierra and receive no
additional compensation for their service on our board.


Employment Agreements

     Our subsidiary,  California Indemnity Insurance Company, has entered into a
three-year  employment  agreement with Kathleen M. Marlon,  its chief  executive
officer.  Under the agreement,  Ms. Marlon may voluntarily  terminate employment
upon 60 days' notice. California Indemnity may terminate her employment, with or
without cause,  in accordance  with  California  Indemnity's  usual policies and
procedures.   The  employment  agreement  provides  that,  in  the  event  of  a
termination by California  Indemnity  without cause, a severance payment will be
paid in the  amount of 12  months'  salary to Ms.  Marlon.  The  agreement  also
provides  that,  a  disability  must  continue  for at least six  months  before
California  Indemnity may terminate her employment.  In the event of a change in
control not approved by the board of directors of California Indemnity,  or if a
change in control is approved by the board but within two years  thereafter  Ms.
Marlon is terminated without cause,  demoted,  provided reduced  compensation or
required to relocate,  Ms. Marlon will be entitled to receive a payment equal to
a multiple of two times her salary and target annual incentive.  In addition, if
"golden  parachute"  excise  taxes  apply  to  compensation  paid by  California
Indemnity,  California  Indemnity will provide a gross-up payment  sufficient to
cause the after-tax value of the  compensation  and the gross-up  payment to Ms.
Marlon to be the same as if no such excise had applied. The employment agreement
contemplates annual adjustments in compensation based on job duties, performance
goals and  objectives  and other  reasonable  standards  deemed  appropriate  by
California Indemnity. The agreement restricts Ms. Marlon's use and disclosure of
confidential  information,  interference  with California  Indemnity's  business
relationships,   and  competition   with  California   Indemnity,   including  a
prohibition,  for a one-year period following any termination of employment,  on
her working for a competitor which operates in California, Nevada, or Texas.


Stock Options

     Our  executive  officers  participate  in Sierra's  stock option plan.  The
following  table contains  information  concerning the grants by Sierra of stock
options to acquire  Sierra  common stock to the named  executives  during fiscal
year 1999:

<TABLE>

<CAPTION>
                                            OPTION/SAR GRANTS IN FISCAL YEAR 1999
                                                     Individual Grants (1)
                                    Number of       % of Total                                   Potential Realizable
                                   Securities      Options/SARs                                    Value at Assumed
                                   Underlying       Granted to      Exercise or                  Annual Rates of Stock
                                  Options/SARs     Employees in      Base Price    Expiration   Price Appreciation for
                                   Granted (#)         1999          ($/Share)        Date           Option Terms

                                                                                                  5% ($)      10% ($)
<S>                                <C>    <C>           <C>              <C>        <C>   <C>    <C>         <C>
Kathleen M. Marlon                 75,000 (2)(3)        47%              8.00       10/12/05     $204,057    $462,937
Richard E. Dobson                      -0-              N/A               N/A          N/A         N/A          N/A
John F. Okita                      10,000 (2)(3)        6%               8.00       10/12/05      27,208      61,725
Robert G. Riordan                   7,500 (3)(4)        5%               6.6875     12/30/05      31,543      79,936
David M. Sonenstein                 7,500 (3)(4)        5%               6.6875     12/30/05      31,543      79,936
</TABLE>
-------------
-------------------------------------------------------------------------------

     (1) All options were granted at an exercise  price equal to the fair market
value of Sierra common stock on the option grant date. The exercise price may be
paid by the  optionee  in cash or by check,  except  that  Sierra's  stock  plan
committee  may, in its  discretion,  allow such  payment to be by  surrender  of
unrestricted  shares of Sierra  common  stock (at their fair market value on the
date of exercise),  or by a combination of cash, check and unrestricted  shares.
(2) These options were granted on October 13, 1999 and vest and are  exercisable
at the rate of 20% per year  starting  with the  first  anniversary  date of the
grant and will expire not later than six years after grant.  (3) All awards were
non-qualified   stock  options  granted  pursuant  to  Sierra's  1995  long-term
incentive plan. No stock appreciation rights were granted with the above awards.
Upon a change of control of Sierra,  as defined in the 1995 Plan, the vesting of
the options will be automatically accelerated,  provided, however, that Sierra's
stock  plan  committee  may  exclude a change of  control  transaction  from the
foregoing  provisions  and permit the option to continue  to vest in  accordance
with its original terms. In addition, the options shown above will terminate and
may no longer be exercised if the respective  optionee  ceases to be an employee
or director of Sierra or one of its affiliates,  except certain post-termination
exercise  periods  are  permitted  in the case of  death,  disability,  or other
involuntary  termination  except for a  termination  for  "cause."  The  options
together  with certain  gains  realized  upon  exercise of the options  during a
specified  period  will be  subject to  forfeiture  if the  optionee  engages in
certain  acts in  competition  with  Sierra  or one of its  affiliates,  misuses
proprietary  information of Sierra or one of its affiliates,  or fails to assist
Sierra or one of its affiliates in litigation.  Cashless  withholding to satisfy
tax  obligations  may be permitted by Sierra's stock plan  committee.  (4) These
options were granted on December  31, 1999 and vest and are  exercisable  at the
rate of 20% per year starting with the first  anniversary  date of the grant and
will expire not later than six years after grant.


<PAGE>


Option Exercises and Holdings

     The  following  table  provides  information  with  respect  to  the  named
executives  concerning  the exercise of Sierra stock  options  during the fiscal
year ended  December 31, 1999 and  unexercised  Sierra stock  options held as of
December 31, 1999:


<TABLE>

                   Aggregated Option/SAR Exercises in Fiscal 1999 and Year-End Option Values
<CAPTION>
                                                                                  Number of
                                                                                  Securities           Value of
                                                                                  Underlying         Unexercised
                                                                                 Unexercised         In-the-Money
                                                                               Options/SARs at     Options/SARs at
                                             Shares                               FY-End (#)          FY-End ($)
                                          Acquired on            Value           Exercisable/        Exercisable/
                                          Exercise (#)       Realized ($)       Unexercisable     Unexercisable (1)
<S>                                            <C>                 <C>         <C>      <C>            <C>   <C>
Kathleen M. Marlon                            -0-                 -0-          46,963 / 105,537       -0- / -0-
Richard E. Dobson (2)                         -0-                 -0-           36,825 / 5,675        -0- / -0-
John F. Okita                                 -0-                 -0-          43,215 / 15,625        -0- / -0-
Robert G. Riordan                             -0-                 -0-          11,671 / 21,234        -0- / -0-
David M. Sonenstein                           -0-                 -0-           1,700 / 10,550        -0- / -0-
</TABLE>
--------------
-------------------------------------------------------------------------------

     (1) Based on the closing price of Sierra common stock on December 31, 1999,
which was $6.6875,  minus the  exercise  price of the option.  (2) Mr.  Dobson's
right to acquire stock pursuant to his options terminated on August 28, 2000.

CII Financial's Supplemental Executive Retirement Plans

     Certain of our executive  officers were  participants in the CII Financial,
Inc.  Supplemental  Executive  Retirement  Plan,  or the SERP Plan,  and the CII
Financial,  Inc.  Supplemental  Senior Executive  Retirement Plan, or the Senior
SERP Plan.  These plans were  effective  as of January 1, 1990 and the SERP Plan
was amended and  restated  April 24,  1993.  When we were  acquired by Sierra in
October 1995, both plans were frozen as to any new contributions,  participants,
and accrued benefits. The Senior SERP Plan had only one participant,  Mr. Joseph
G.  Havlick,  who at that time was our  chief  executive  officer.  Of the eight
participants  in the SERP  Plan,  only  Mr.  Okita  remains  an  officer  of CII
Financial.

     Our Board of  Directors  appoints a  committee  to  administer  both plans.
Participation  in  both  plans  was  limited  to the  executives,  officers  and
employees  selected by our chief executive  officer and approved by our board of
directors.  The criteria used to determine  participation in either plan was the
participant's position, past contributions and anticipated  contributions to our
future success.

     The  committee  determined  the  benefit  amount  that would be paid at the
participant's   normal   retirement   age.  The  initial   benefit   amount  was
discretionary  and was adjusted based on the  participant's  employment  service
years  from  the date of  participation.  Participants  were  given  credit  for
employment prior to the plans' effective date of January 1, 1990. Under the SERP
Plan,  the  benefit  amount was also  adjusted  based on  whether a  participant
retired at, prior to, or after,  normal  retirement  age.  Benefit amounts under
both plans are paid in equal monthly  installments  over a 10-year period.  Both
plans also provide for a benefit  payable over a 10-year period if a participant
dies while still employed by us. Mr. Okita's annual benefits under the SERP Plan
are $300.



<PAGE>



Sierra's Supplemental Executive Retirement Plan

     Ms.Kathleen  Marlon   participates  in  Sierra's   Supplemental   Executive
Retirement  Plan II (the  "Supplemental  Plan II"),  which  provides  retirement
benefits for selected executive  officers.  Under the Supplemental Plan II, each
executive  selected  for  participation  generally  will be  entitled to receive
annual   payments,   following   retirement,   disability,   and  certain  other
terminations of employment,  for a 15-year period, equal to 2.5% of their "final
average  compensation"  (as  defined)  for each year of service  credited to the
executive up to 20 years,  reduced by an amount equal to the  annualized  payout
over a 15-year  period  that would be payable  to the  executive  as a result of
Company  contributions under the 401(k) Plan and the Deferred  Compensation Plan
(but not reduced for social security payments or other offsets).  An executive's
right to  benefits  under the  Supplemental  Plan II vests  when  five  years of
service have been credited or earlier upon the  executive's  death or disability
or upon  occurrence  of a change in  control  (defined  in the same way as under
other  compensatory  plans).  Upon the death of the executive,  benefits will be
payable for the 15-year  period to the  executive's  beneficiary.  Benefits will
begin after  retirement at or after age 65, a termination at or after age 55 and
ten years of credited service, or a termination due to disability,  and benefits
will begin, in the case of other terminations (except a termination for "cause,"
as defined)  prior to a change in control,  at the later of  termination  or the
date the  executive  would  have  completed  ten  years of  service  but for the
termination.

     The  following  table shows the  approximate  amounts of annual  retirement
income  that  would be  payable  under the  Supplemental  Plan II to  executives
covered by it based on various assumptions as to final average  compensation and
years of service, assuming benefits are paid out over 15 years:

<TABLE>

          Estimated Annual Benefits Based on Credited Years of Service
<CAPTION>
               Final Average
                Compensation          5 Years        10 Years        15 Years        20 Years        30 Years
<S>                 <C>               <C>             <C>             <C>             <C>             <C>
                    $200,000          $23,366         $46,732         $70,099         $92,465         $93,465
                     400,000           45,225          90,450         135,675         180,900         180,900
                     600,000           67,837         135,675         203,512         271,350         271,350
</TABLE>


--------------------------------------------------------------------------------
Final  average  compensation  generally  means the average of the three  highest
years of  compensation  out of the last  five  years,  with  compensation  being
generally the amounts  reported as salary and bonus in the Summary  Compensation
Table.

     Ms. Marlon has 14 years of credited service under the Supplemental Plan II.
An  additional  year of service  will be credited in the event of a  termination
within six years after a change in control, and the year of service for the year
of the change in control  will be deemed  completed at the time of the change in
control.  An executive's or beneficiary's  benefits are payable in a lump sum in
certain circumstances, including following a change in control.

     No other executives of CII Financial  participate in Sierra's  Supplemental
Executive Retirement Plan II.



<PAGE>



                              CERTAIN TRANSACTIONS

     We intend to  finance  all or a portion  of the cash  consideration  in the
exchange offer, together with interest and expenses, with a loan from one of our
affiliates. We will not be able to determine the amount of cash needed until the
expiration of the exchange  offer.  Our affiliates have no obligation to advance
these funds to us. However, in the event the loan is made, the indebtedness will
be  represented  by a demand  promissory  note issued to the  affiliate  bearing
interest at a rate equal to the then current  interest  rate on Sierra's  credit
facility.  This  affiliate  note  will  rank  senior  to  both  the  old  junior
subordinated debentures and the new senior subordinated debentures.

     In August  2000,  we,  and some  other  subsidiaries  of  Sierra,  became a
guarantor of Sierra's  obligations  under its $185 million senior secured credit
facility.  For more  information  concerning this guaranty,  see "Description of
Other Indebtedness."

     Effective  January  1, 1999,  Sierra  entered  into  separate  but  similar
investment  services  agreements with California  Indemnity  Insurance  Company,
Commercial Casualty Insurance Company, Sierra Insurance Company of Texas and CII
Insurance Company.  Under these agreements Sierra manages the investments of the
insurers.  The  management  is,  however,  subject to the  insurers'  investment
guidelines and the ultimate  control of each insurer's  board of directors.  The
management fee is a percentage of the total amount under management.  The annual
investment  fees paid by the  insurance  companies  in 1999  were  approximately
$335,000 and in 2000 were approximately $400,000.

     Effective  January  1,  1999,  Sierra and  California  Indemnity  Insurance
Company  agreed that Sierra  would  furnish it services,  including  accounting,
human  resources,  systems and other  administrative  services.  The fee for the
services is based on the lower of actual cost or fair market value. The services
are subject to the ultimate control of California  Indemnity Insurance Company's
board of  directors.  The  annual  fees for these  services  were  approximately
$1,003,000 in 1999 and $1,200,000 in 2000.

     On March 31,  2000,  California  Indemnity  Insurance  Company  loaned $7.4
million to Sierra,  our sole stockholder.  The loan was secured by a first trust
deed mortgage on property at 4475 South Eastern Avenue in Las Vegas, Nevada. The
loan is due April 1, 2005 with a right to  accelerate  on the part of the lender
on or after April 1, 2001.  The  interest  rate for the loan is 8% per annum and
the loan to  value  was  approximately  60%.  Sierra  Health  Services  has paid
$441,000 as of November  30, 2000 in interest  from the date of the loan. A sale
of the 4475 South  Eastern  property to a real estate  partnership  is currently
pending  and  expected  to close  in the near  future.  Under  the  terms of the
purchase and sale agreement, the purchaser will be assuming the first trust deed
mortgage  with  amended  terms.  The  interest  rate  will  be  increased,   the
acceleration  clause will be eliminated in consideration of additional fees, and
the loan  will be  extendable  up to two  years  under  certain  conditions  for
additional fees.

     Sierra,  California  Indemnity  Insurance  Company and Commercial  Casualty
Insurance Company are partners in a limited partnership called 2716 North Tenaya
Way Limited  Partnership.  This  partnership  owns the building  located at that
address in Las Vegas,  Nevada.  The two  insurers  are  limited  partners in the
partnership  whereas  Sierra  Health  Services is the general  partner.  The two
limited  partners own  approximately  13.5% of the  partnership  each. They also
lease a portion of the building from the partnership.  The lease payments during
1999  for  both  companies  were  $1,168,000  and for  this  year  to date  were
$1,160,000 as of November 30, 2000. A sale of the  partnership  to a third party
is currently pending and expected to close in the near future.  At closing,  the
net proceeds to the two limited partners will be approximately $8 million.

     Effective January 1, 1996, federal income taxes are calculated  pursuant to
a tax allocation  agreement  between Sierra and CII Financial.  Income taxes are
allocated  on a separate  return  basis for each  company and tax  benefits  are
recorded  only to the extent  that an entity  could  recoup  taxes paid in prior
years.

     All of our directors are also executive officers of Sierra.


<PAGE>


                             PRINCIPAL STOCKHOLDERS

     Sierra owns 100% of our issued and outstanding capital stock.


                        DESCRIPTION OF OTHER INDEBTEDNESS

     Sierra's  credit  facility is governed  by an Amended and  Restated  Credit
Agreement  entered into by Sierra on December 15, 2000 with a syndicate of banks
for which Bank of America,  N.A., is the Administrative  Agent and Issuing Bank.
Other lenders  include First Union  National  Bank,  Deutsche  Bank,  AG, Credit
Lyonnais,  Bank One, N.A., Wells Fargo Bank, N.A., and Union Bank of California,
N.A. Bank of America,  N.A. is an affiliate of Banc of America  Securities  LLC,
the dealer  manager for the exchange  offer.  The new credit  agreement  amended
Sierra's  preceding credit agreement,  which Sierra entered into in 1998. Sierra
was not in compliance with the terms of the financial covenants in the preceding
credit  agreement  and received a notice of default from its lenders on November
8, 2000 with respect to this non-compliance.  As of December 15, 2000 Sierra was
in  compliance  with  the  covenants  under  the  Amended  and  Restated  Credit
Agreement.

     We have irrevocably and  unconditionally  guaranteed all obligations  under
this credit facility.

Revolving Loans

     The new credit  agreement  provides Sierra with a revolving credit facility
of $185 million.  The proceeds from revolving  loans under the revolving  credit
facility may be used for general working capital and general corporate purposes.
As of December 15, 2000 the facility was fully drawn.

     The  available  amounts  which Sierra can borrow under the credit  facility
will be reduced by specified  amounts,  on certain dates. If the total amount of
outstanding  loans  exceeds  the  availability  under the  credit  facility,  as
reduced,  Sierra  will be  required  to  immediately  prepay  100% of the excess
amount.

     Under certain  additional  circumstances,  Sierra would be required to make
prepayments of the loans, and the amount available to Sierra under the revolving
credit facility would be reduced.  For example, 80% of any excess cash flow that
Sierra  has in each  year  must be  applied  to a  repayment  of the loans and a
reduction  of the amount  available  under the  revolving  credit  facility.  In
addition,  if Sierra or a subsidiary of Sierra (other than an HMO subsidiary and
certain  other  subsidiaries)  engages in an asset sale or a sale and  leaseback
transaction  (with the exception of certain  assets  specified in the new credit
agreement),  80% of the cash proceeds (net of certain  expenses) must be applied
to a repayment  of the loans and a reduction of the amount  available  under the
revolving credit facility.  Similarly,  80% of the cash proceeds (net of certain
expenses) of certain equity  issuances by us or any of our subsidiaries and 100%
of the cash  proceeds  (net of certain  expenses)  of a debt  issuance by Sierra
(excluding  us) must be applied to a repayment  of the loans and a reduction  in
the amount available under the revolving credit facility.

     The credit facility  terminates on September 30, 2003. On that date, Sierra
will be required to repay the aggregate  principal amount of the revolving loans
outstanding.


Interest

     Under the credit facility,  revolving loans bear interest at the applicable
margin plus the greater of:

o        0.5% per annum above the latest federal funds rate; or

o        the per annum prime lending rate of Bank of America, N.A.

     The applicable  margin is initially 1.75%.  However,  the applicable margin
may be increased or decreased in certain circumstances.

Fees

     In connection with the credit facility,  Sierra will pay certain  customary
fees, including agents' fees, commitment fees, and amendment fees.

Covenants

     Subject  to  normal  qualifications  and  exceptions,  Sierra  has  certain
covenants that, among other things,  will restrict the ability of Sierra and its
subsidiaries, including CII Financial, to dispose of assets, incur indebtedness,
pay dividends, make investments, loans or advances, make acquisitions, engage in
mergers or  consolidations,  or make capital  expenditures  and which  otherwise
restrict  certain  corporate  activities.  In addition,  under the senior credit
facility Sierra will be required to comply with specified  financial  ratios, as
defined in the credit agreement,  including minimum interest coverage ratios and
leverage ratios.

Events of Default

     The credit  facility may be terminated  before  September 30, 2003 upon the
occurrence of any event of default.  Upon the occurrence of an event of default,
with certain  limitations,  Sierra's  obligations under the new credit agreement
which are at that time  outstanding  may become  accelerated.  Events of default
under the credit facility  consist of customary  specified  events. A default in
payment on our  debentures  would  constitute an event of default.  A bankruptcy
proceeding or other similar event involving us would also constitute an event of
default.

Security

     The  payment  and  performance  of  Sierra's  obligations  under the credit
facility are secured by:

     o liens on substantially  all of Sierra's assets and the assets of Sierra's
subsidiaries,   other  than  CII   Financial   and  Sierra's   other   regulated
subsidiaries;

     o a  guaranty  of  Sierra's  obligations  thereunder  by each  of  Sierra's
subsidiaries,  including CII Financial, but excluding our insurance subsidiaries
and Sierra's other regulated subsidiaries; and

     o other collateral arrangements, subject to pledge agreements, the security
agreements,  deeds of trust, and similar arrangements  between Sierra,  Sierra's
subsidiaries, and the lending banks.


<PAGE>


              UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

     We have set out  below  our  unaudited  pro  forma  consolidated  financial
statements.

     The unaudited pro forma consolidated balance sheet as of September 30, 2000
has been  prepared on the basis that the exchange  offer as described  below had
occurred on September 30, 2000. The unaudited pro forma  consolidated  statement
of operations for the nine months ended September 30, 2000 have been prepared as
if the exchange offer had occurred on January 1, 2000.

     We have assumed the  exchange of  $47,059,000  in  principal  amount of old
junior  subordinated  debentures  for  $10,237,500  in cash and  $27,559,000  in
principal amount of new 9% senior subordinated debentures.

     You  should  read  this  information  with the  accompanying  notes and our
consolidated  financial statements,  which are included in this prospectus.  The
accompanying  pro forma  consolidated  financial  statements  do not  purport to
represent what our results of operations  would have been had such  transactions
and  events  occurred  on the dates  specified,  or to  project  our  results of
operations for any future period or date. The pro forma adjustments are based on
available  information and certain  adjustments that our management believes are
reasonable.  In the opinion of our management,  all  adjustments  have been made
that are necessary to present fairly the unaudited pro forma consolidated data.


<PAGE>


             NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET



                               SEPTEMBER 30, 2000



     The accompanying  unaudited pro forma  consolidated  balance sheet reflects
the following adjustments:

     (a)  Payment  of  the  outstanding  accrued  interest  on  the  old  junior
subordinated debentures as of September 30, 2000 of $145,000.

     (b)  Payment of  $1,600,000  in  capitalizable  debt  issuance  costs to be
amortized over the term of the new senior subordinated debentures.

     (c) A  $5,000,000  loan from Sierra to the CII  Financial  evidenced by the
affiliate note.

     (d) An exchange of $27,559,000 aggregate principal amount of the old junior
subordinated  debentures for new senior subordinated debentures in the aggregate
principal  amount  of  $27,559,000  with a  deferred  gain of  $9,262,500  to be
amortized over the term of the new senior subordinated debentures.

     (e)  $19,500,000  aggregate  principal  amount of old  junior  subordinated
debentures retired in exchange for a $10,238,000 cash payment.


<PAGE>




                      CII FINANCIAL, INC. AND SUBSIDIARIES

                 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

                               SEPTEMBER 30, 2000

                      (In thousands, except for share data)

<TABLE>

<CAPTION>
                                                            Historical      Adjustments                    Pro forma
ASSETS
Cash, cash equivalents and invested assets:
<S>                                                           <C>              <C>                           <C>
Cash and cash equivalents                                     $19,408          $(6,982)     (a),(b),(c),(e)  $12,426
    Debt securities, available for sale, at fair value        164,660                                        164,660
    Debt securities, held-to-maturity, at amortized cost       22,154                                         22,154
    Preferred stock, at fair value                              1,732                                          1,732
    Mortgage loans on affiliated real estate                   10,261                                         10,261
    Mortgage loans on non-affiliated real estate                6,281                                          6,281
    Real estate limited partnership                             7,108                                          7,108
Total cash, cash equivalents and invested assets           -------------  ----------------                ------------
                                                              231,604           (6,982)                      224,622

Reinsurance recoverable                                       211,594                                        211,594
Premiums receivable (net of allowance of $1,134)               13,402                                         13,402
Investment income receivable                                    2,406                                          2,406
Deferred policy acquisition costs                               2,732                                          2,732
Federal income taxes receivable                                 9,478                                          9,478
Deferred income taxes                                          15,984                                         15,984
Property and equipment, net                                     5,097                                          5,097
Other assets                                                      555            1,600            (b)          2,155
     TOTAL ASSETS                                          -------------  ----------------                ------------
                                                             $492,852          $(5,382)                     $487,470

LIABILITIES
Reserve for losses and loss adjustment expenses              $341,902                                       $341,902
Unearned premiums                                              16,206                                         16,206
Ceded reinsurance premiums payable                              7,424                                          7,424
Old junior subordinated debentures                             47,059         $(47,059)       (d),(e)              0
New senior subordinated debentures                                              36,822            (d)         36,822
Accounts payable and other accrued expenses                    15,969             (145)           (a)         15,824
Affiliate note                                                                   5,000            (c)          5,000
Payable to affiliates                                           2,487                                          2,487
Deferred tax liability                                          3,291                                          3,291
      TOTAL LIABILITIES                                    -------------  ----------------                ------------
                                                              434,338           (5,382)                      428,956

COMMITMENTS AND CONTINGENCIES

STOCKHOLDER'S EQUITY
Common Stock, no par value, 1,000 shares
    authorized; shares issued and outstanding - 100             3,604                                          3,604
Additional paid - in capital                                   64,450                                         64,450
Accumulated other comprehensive loss:
    Unrealized holding loss on available-for                   (8,651)                                        (8,651)
sale-investments
Accumulated deficit                                              (889)                                          (889)
      TOTAL STOCKHOLDER'S EQUITY                           -------------  ----------------                ------------
                                                               58,514                0                        58,514
      TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY             $492,852          $(5,382)                     $487,470
</TABLE>

===============================================================================


<PAGE>


        NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS



                      NINE MONTHS ENDED SEPTEMBER 30, 2000



     The accompanying  unaudited pro forma consolidated  statement of operations
reflects the following adjustments:

     (a) The  elimination  of the  extraordinary  gain from debt  extinguishment
assuming the exchange was consummated  prior to our debt repurchases  during the
period.

     (b) Reduction of interest expense for the amortization of the deferred gain
on the restructuring of the old junior subordinated  debentures over the life of
the new senior subordinated debentures.

     (c) A reduction of income taxes as a result of the pro forma adjustments at
an assumed effective tax rate of 35%.


<PAGE>




                      CII FINANCIAL, INC. AND SUBSIDIARIES



            UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS



                      NINE MONTHS ENDED SEPTEMBER 30, 2000

                                 (In thousands)

<TABLE>

<CAPTION>
                                                              Historical         Adjustments          Pro forma
REVENUES
<S>                                                           <C>                                     <C>
  Direct written premiums                                     $153,034                                $153,034
  Changes in direct unearned premiums                           (2,906)                                 (2,906)

  Direct earned premiums                                       150,128                                 150,128
  Less:  premiums ceded                                         59,177                                  59,177

  Net earned premiums                                           90,951                                  90,951
  Net investment income                                         11,217                                  11,217
  Net realized investment losses                                  (460)                                   (460)

  Total revenues                                               101,708                                 101,708

COSTS AND EXPENSES
  Losses and loss adjustment expenses                          207,323                                 207,323
  Reinsurance recoveries                                      (123,303)                               (123,303)

  Net loss and loss adjustment expenses                         84,020                                  84,020
  Policy acquisition costs                                       8,606                                   8,606
  General and administrative and other                          17,372                                  17,372
  Asset impairment                                               3,000                                   3,000
  Interest expense                                               2,717               $(884) (b)          1,833

     Total costs and expenses                                  115,715                (884)            114,831

LOSS BEFORE FEDERAL INCOME TAX BENEFIT AND
EXTRAORDINARY GAIN                                             (14,007)                884             (13,123)

Federal income tax benefit                                      (4,902)                310 (c)          (4,592)

LOSS BEFORE EXTRAORDINARY GAIN                                  (9,105)                574              (8,531)

Extraordinary gain from debt extinguishments (net of
income taxes of $353)                                              654                (654) (a)              0

NET LOSS                                                       $(8,451)               $(80)            $(8,531)
</TABLE>

===============================================================================


<PAGE>


                                             DESCRIPTION OF DEBENTURES

     Principal  Differences Between Old Junior  Subordinated  Debentures and New
Senior Subordinated Debentures

     The  terms  of the new  senior  subordinated  debentures  and  the  related
indenture are identical in all material  respects to the terms of the old junior
subordinated debentures and the related indenture, except for:

o         The new senior  subordinated  debentures  will rank senior in right of
          payment  to any  old  junior  subordinated  debentures  which  are not
          tendered.

o         You  will  receive  a  higher  rate  of  interest  on the  new  senior
          subordinated debentures,  which will pay 9% per annum, than on the old
          junior subordinated debentures, which pay 7 1/2% per annum.

o         The scheduled maturity date of the new senior subordinated  debentures
          is September  15, 2006,  which is five years later than  September 15,
          2001,  the  scheduled  maturity  date of the old  junior  subordinated
          debentures.

o         The new senior  subordinated  debentures will not be convertible  into
          Sierra  common  stock.  The old  junior  subordinated  debentures  are
          convertible into Sierra common stock at $39.398 per share.

New Senior Subordinated Debentures

     We will issue the new senior  subordinated  debentures  under an  indenture
between us and Wells  Fargo Bank  Minnesota,  N.A.,  as  trustee.  A copy of the
indenture substantially in the form in which it is to be executed is filed as an
exhibit to the registration statement of which this prospectus is a part.

     The following  description  is a summary of the material  provisions of the
indenture  relating  to the new  senior  subordinated  debentures  and  does not
describe the indenture in its entirety. This summary is subject to and qualified
by reference to all of the provisions in the indenture, including definitions of
certain terms used in the indenture.  We urge you to read the indenture  because
it, and not the summary  description below,  defines your rights.  Copies of the
indenture will be available for inspection at the Corporate Trust Offices of the
trustee in Minneapolis, Minnesota.

     General.  The  new  senior  subordinated  debentures  will  be  limited  to
$47,059,000  aggregate principal amount. The new senior subordinated  debentures
will be subordinated  obligations of CII Financial and will not be guaranteed by
Sierra.  The new senior  subordinated  debentures will be subordinate to all our
senior indebtedness,  including our guaranty of Sierra's credit facility and the
affiliate note. However, the new senior subordinated debentures will rank senior
to the  old  junior  subordinated  debentures.  We are  required  to  repay  the
principal amount of the new senior subordinated  debentures in full on September
15, 2006.

     The new senior subordinated  debentures will bear interest from the date of
issuance,  at the rate per annum of 9%. We will pay  interest  on the new senior
subordinated debentures on March 15 and September 15 of each year, commencing on
March  15,  2001,  to the  person  in  whose  name  the  new  debenture  (or any
predecessor  debenture) is  registered,  subject to certain  exceptions,  at the
close of business  on March 1 or  September  1, as the case may be,  before each
interest payment date.  Principal of and interest on the new senior subordinated
debentures  will be payable and transfers will be  registrable,  at an office of
the trustee or our office or agency  maintained for such purpose in Minneapolis,
Minnesota,  provided  that,  at our option,  payment of interest  may be made by
check mailed to the address of the person entitled  thereto as it appears in the
debenture register.

     Subordination  of  Debentures.  The payment of  principal,  any premium and
interest on the new senior subordinated debentures, including amounts payable on
any redemption or repurchase,  will be subordinated to the prior payment in full
of all our senior debt. The new senior subordinated  debentures will rank senior
to the  old  junior  subordinated  debentures.  Senior  debt is  defined  in the
indenture as the principal of, and interest on all our debt, whether outstanding
on the date of the  indenture or  thereafter  created,  incurred,  guaranteed or
assumed, other than

o        the new senior subordinated debentures;

o        the old junior subordinated debentures; and

o         any  debt  which  provides,  or in  respect  of which  any  instrument
          creating  or  evidencing  such debt or  pursuant  to which the same is
          outstanding  provides,  that  such  debt is not  superior  in right of
          payment to the new senior subordinated debentures.

     Debt is defined in the indenture to mean:

o         all debt which is (a) for money  borrowed,  (b)  evidenced  by a note,
          bond or similar instrument given in connection with the acquisition of
          any  businesses,  properties or assets of any kind,  but excluding any
          other trade  accounts  payable or accrued  liabilities  arising in the
          ordinary  course of business or (c) purchase money  indebtedness  with
          respect  to the  purchase  of any  real or  personal  property  or any
          interest therein;

o        obligations under certain leases;

     o amendments,  renewals,  extensions,  modifications  and refundings of any
debt or obligations referred to above; and

o         any debt or  obligations  referred to above in respect of which we are
          liable, contingently or otherwise, to pay or advance money or property
          as a guarantor, endorser or otherwise.

     In  August  2000,  we  became a  guarantor  of  Sierra's  revolving  credit
facility,  which at December  15,  2000 was fully  drawn and had an  outstanding
balance of $185 million. The new senior subordinated debentures are subordinated
to this guaranty of the credit  facility debt. Our senior debt will also include
the  affiliate  note.  The terms of our  debentures  do not limit our ability to
incur additional senior debt.

     Upon any payment or  distribution  of assets to  creditors as a result of a
liquidation,   dissolution,  winding  up,  reorganization  for  the  benefit  of
creditors,  marshalling  of  assets or any  bankruptcy,  insolvency  or  similar
proceedings  involving us, the holders of all senior debt will first be entitled
to receive payment in full before you will be entitled to receive any payment on
the new senior  subordinated  debentures.  No such payment in respect of the new
senior  subordinated  debentures may be made if there shall have occurred and be
continuing a default in any payment with respect to any senior debt, or an event
of  default  in respect to any senior  debt  resulting  in  acceleration  of the
maturity thereof, or if any judicial proceeding shall be pending with respect to
any such default. If the new senior subordinated debentures are declared due and
payable before their stated  maturity,  no payment may be made in respect of the
new senior  subordinated  debentures unless and until all senior debt shall have
been paid in full.

     By reason of such subordination,  in the event of insolvency, our creditors
who are holders of senior debt may recover more  ratably than you will.  The new
senior  subordinated  debentures  will be senior to the old junior  subordinated
debentures.

     The indenture will permit the trustee to become our creditor and to enforce
its rights as a creditor, including rights as a holder of senior debt.

     Redemption.  The new senior subordinated debentures will be redeemable upon
not less than 25 nor more than 60 days' notice by mail at any time,  in whole or
in part,  at our  election,  on or prior to  September  15, 2001 at a redemption
price equal to 100.75% of the principal amount together with accrued interest to
the redemption  date, or after September 15, 2001 at a redemption price equal to
100% of the principal  amount  together with accrued  interest to the redemption
date,  subject  to the right of holders  of record on  regular  record  dates to
receive interest due on an interest payment date.

     Repurchase  at Option of Holders  Upon  Change in  Control.  If a change in
control as defined below  occurs,  you will have the right,  at your option,  to
require us to  repurchase  all of your new senior  subordinated  debentures  not
previously  called  for  redemption,  or any  portion  of the  principal  amount
thereof, that is equal to $1,000 or an integral multiple of $1,000. The price we
are  required  to pay is  100%  of  the  principal  amount  of  the  new  senior
subordinated debentures to be repurchased, together with accrued interest to the
repurchase date. Such right may not be waived by our board of directors.

     Within  30 days  after  the  occurrence  of a  change  in  control,  we are
obligated to mail to you notice of such change in control and of the  repurchase
right arising as a result thereof. We must also deliver a copy of this notice to
the trustee and cause a copy of such notice to be  published  in a newspaper  of
general circulation in Los Angeles,  California and in the Borough of Manhattan,
The City of New York. To exercise the repurchase  right, you must deliver to the
trustee  the new  senior  subordinated  debentures  with  respect  to which  the
repurchase  right is being  exercised,  duly endorsed for transfer to us. We are
required to repurchase the new senior  subordinated  debentures on the date that
is 45 days  after the date of our  notice,  which we refer to as the  repurchase
date.

     A change in control  will be deemed to have  occurred at the time after the
new senior  subordinated  debentures  are issued that any person,  including any
syndicate  or group  deemed  to be a  "Person"  under  Section  13(d)(3)  of the
Exchange  Act,  is or becomes the  beneficial  owner,  directly  or  indirectly,
through  a  purchase,  merger  or other  acquisition  transaction  or  series of
transactions,  of shares of our capital stock  entitling such person to exercise
50% or more of the total  voting  power of all shares of our capital  stock that
are  entitled  to  vote  in  elections  of  directors.  For  purposes  of  these
provisions,  whether a person is a  "beneficial  owner"  will be  determined  in
accordance  with Rule l3d-3  promulgated by the SEC under the Exchange Act as in
effect on the date of execution of the indenture.

     Merger  and   Consolidation.   The  indenture  will  provide  that  we  may
consolidate  with or merge into any other  corporation,  or convey,  transfer or
lease its  properties  and assets  substantially  as an  entirety to any person,
provided that in any such case:

     o  the  successor  corporation  assumes  by a  supplemental  indenture  our
obligations under the indenture;

     o immediately after giving effect to such transaction, no default will have
occurred and be continuing; and

o         we deliver to the trustee an officer's  certificate  and an opinion of
          counsel  stating that the terms of the indenture  with respect to such
          event have been complied with.

     Upon  compliance  with these  provisions  by a successor  corporation,  we,
except in the case of a lease,  would be relieved of our  obligations  under the
indenture and the new senior subordinated debentures.

     Modification  of  the  Indenture.   Modifications  and  amendments  of  the
indenture may be made by us and the trustee with the consent of the holders of a
majority in principal amount of the outstanding debentures. However, none of the
following modifications or amendments may be made without your consent:

     o change the stated  maturity date of the principal of, or any  installment
of interest on, the new senior subordinated debentures;

o        reduce the principal amount of, or interest on, any new debenture;

     o change the place or  currency  of payment on the new senior  subordinated
debentures;

     o impair your right to institute suit for the enforcement of any payment on
the new senior subordinated debentures when due;

     o modify the provisions of the indenture with respect to the  subordination
of the new senior subordinated debentures in a manner adverse to you; or

o         reduce the percentage in principal  amount of new senior  subordinated
          debentures  the consent of whose holders is required for  modification
          or amendment of the indenture or for waiver of compliance with certain
          provisions of the indenture or for waiver of certain defaults.

     Events of Default,  Notice and Waiver.  The following are events of default
under the indenture:

     o we fail to make a payment  of  interest  on the new  senior  subordinated
debentures when due, and this failure continues for 30 days;

     o we fail to make the payment of principal  on the new senior  subordinated
debentures, when due;

     o we fail  in the  performance  of any  other  covenant  and  this  failure
continues for 60 days after written notice, as provided in the indenture;

o         we default in respect of our  indebtedness  for money  borrowed  which
          results in  acceleration  of the  maturity  of  $1,000,000  or more of
          indebtedness,  if such  acceleration  is not rescinded or indebtedness
          discharged  within 10 days after written  notice to us, as provided in
          the indenture; and

     o certain events in bankruptcy, insolvency or reorganization involving us.

If any event of default  shall  happen  and be  continuing,  the  trustee or the
holders of 25% in principal  amount of the outstanding  new senior  subordinated
debentures  may  declare  the  debentures  due  and  payable.  However,  after a
declaration  of  acceleration  has been  made  with  respect  to the new  senior
subordinated  debentures,  but before a judgment or decree based on acceleration
has been  obtained,  the  holders  of a  majority  in  principal  amount  of the
outstanding debentures may, under certain circumstances,  rescind and annul such
acceleration.

     The  indenture  will provide that the trustee will be under no  obligation,
subject  to the duty of the  trustee  during  default  to act with the  required
standard of care, to exercise any of its rights or powers under the indenture at
the request or direction of any of the holders,  unless such holders  shall have
offered to the  trustee  reasonable  security  or  indemnity  against the costs,
expenses and  liabilities  which might be incurred by it in compliance with such
request or direction.  Subject to certain conditions,  the holders of a majority
in principal amount of the outstanding  debentures will have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the trustee or exercising any trust or power conferred on the trustee.

     The holders of a majority in principal amount of the outstanding debentures
may on behalf of the  holders of all new senior  subordinated  debentures  waive
compliance  by us with certain  restrictive  provisions  of the  indenture.  The
holders of a majority in principal  amount of the outstanding  debentures may on
behalf of the holders of new senior  subordinated  debentures waive certain past
defaults except a default in payment of the principal of, or premium, if any, or
interest  on any new  debenture  or in respect of a  provision  which  under the
indenture  cannot be  modified  or amended  without the consent of the holder of
each outstanding debenture affected thereby.

     We will be required to furnish the trustee  annually a statement  as to any
default by it in the performance of certain covenants in the indenture.

     Concerning  the Trustee.  The trustee may act as a depository for funds of,
make loans,  which may constitute  senior debt, to and perform other  commercial
banking services for us in the ordinary course of business.  Neither the trustee
nor any of its affiliates currently performs any commercial banking services for
us.

Old Junior Subordinated Debentures

     The old junior subordinated debentures were issued under an indenture dated
September 15, 1991. The indenture is a contract  between us and Chase  Manhattan
Bank and Trust  Company,  National  Association  (as successor to  Manufacturers
Hanover Trust Company) as trustee.

     The following  description  is a summary of the material  provisions of the
indenture  relating  to the old  junior  subordinated  debentures  and  does not
describe the indenture in its entirety. This summary is subject to and qualified
by reference to all of the provisions in the indenture, including definitions of
certain terms used in the indenture.  We urge you to read the indenture  because
it, and not the summary  description below,  defines your rights.  Copies of the
indenture will be available for inspection at the Corporate Trust Offices of the
trustee in San Francisco, California.

     General.   The  old  junior   subordinated   debentures  are   subordinated
obligations  of CII Financial and are not  guaranteed by Sierra.  The old junior
subordinated   debentures  are  subordinate  to  all  our  senior  indebtedness,
including  the new senior  subordinated  debentures,  our  guaranty  of Sierra's
credit  facility and the affiliate  note. We are required to repay the principal
amount of the old junior subordinated debentures in full to you on September 15,
2001.

     The old junior subordinated debentures bear interest, at the rate per annum
of 7 1/2%. We pay interest on the old junior subordinated debentures on March 15
and  September  15 of each  year,  to the  person in whose  name the old  junior
subordinated debenture (or any predecessor debenture) is registered,  subject to
certain  exceptions,  at the close of business on March 1 or September 1, as the
case may be, before each interest  payment date.  Principal of, and premium,  if
any, and interest on the old junior subordinated  debentures are payable and the
old  junior  subordinated   debentures  are  convertible  and  exchangeable  and
transfers are  registrable,  at an office of the trustee or our office or agency
maintained for such purpose in San Francisco,  California, provided that, at our
option,  payment of interest  may be made by check  mailed to the address of the
person entitled thereto as it appears in the debenture register.

     Conversion  Rights.  You may,  at your  option,  convert any portion of the
principal  amount of any old junior  subordinated  debenture that is an integral
multiple  of $1,000  into  shares of Sierra  common  stock at any time  prior to
redemption, repurchase or maturity of the old junior subordinated debentures, at
the conversion price of $39.398 per share.  Your right to convert any old junior
subordinated  debentures  called  for  redemption  or  to  be  repurchased  will
terminate  at the close of business  on the  redemption  date or the  repurchase
date, as the case may be, and will be lost if not exercised prior to that time.

     The conversion price is subject to adjustment in certain events, including:

     o dividends,  and other  distributions,  payable in Sierra  common stock on
shares of Sierra capital stock;

o         the  issuance to all  stockholders  of Sierra  common stock of certain
          rights,  options  or  warrants  entitling  them  to  subscribe  for or
          purchase  Sierra  common  stock at less than the then  current  market
          price per share;

o        subdivisions and combinations of Sierra common stock;

o         the distribution to all holders of Sierra common stock of evidences of
          debt securities of Sierra or of CII Financial,  shares of any class of
          capital stock, cash or assets, including securities, but excluding any
          rights,  options or warrants referred to above, excluding any dividend
          or distribution  paid  exclusively in cash, and excluding any dividend
          or distribution in Sierra common stock;

o         distributions to all holders of Sierra common stock of cash, excluding
          any cash that is  distributed  as part of a  distribution  referred to
          above, in an aggregate  amount that together with the aggregate amount
          of   certain   other   distributions,   exceeds   10%  of  our  market
          capitalization,  being the  product of the  current  market  price per
          share of the Sierra  common  stock on the date fixed for  shareholders
          entitled  to  receive  such  distribution  and the number of shares of
          Sierra common stock outstanding on such date; and

o         tender  offers  made by us or any of our  subsidiaries  for all or any
          portion of Sierra  common stock  involving an aggregate  consideration
          having a fair market value on the last time,  which we refer to as the
          expiration  time,  tenders may be made  pursuant to such tender  offer
          that,   together   with  the   aggregate   amount  of  certain   other
          distributions,  exceeds  5% of  Sierra  market  capitalization  on the
          expiration  time,  being the product of the current  market  price per
          share of the Sierra common stock on the expiration time and the number
          of shares of Sierra common stock  outstanding,  including any tendered
          shares, on the expiration time.

     In addition to the  foregoing  adjustments,  we are  permitted to make such
reductions in the conversion  price as we consider to be advisable in order that
any event treated for United States federal income tax purposes as a dividend of
stock or stock  rights  will not be  taxable to the  recipients.  We will not be
required to make  adjustments  in the  conversion  price of less than 1% of such
price,  but any adjustment  that would  otherwise be required to be made will be
taken into account in the computation of any subsequent adjustment.

     In the case of certain consolidations or mergers to which we are a party or
the transfer of substantially  all of our assets,  each old junior  subordinated
debenture then outstanding would, without your consent,  become convertible only
into the kind and amount of securities,  cash and other property receivable upon
such  consolidation,  merger or  transfer by a holder of the number of shares of
Sierra  common  stock  into which such old  junior  subordinated  debenture  was
convertible  immediately  prior  to  such  consolidation,  merger  or  transfer,
assuming  such holder of Sierra  common  stock  failed to exercise any rights of
election  and  received  per share the kind and amount  received  per share by a
plurality of the non-electing shares.

     Other  than as set forth  above,  the  conversion  price is not  subject to
adjustment  in the event of the sale of Sierra  common stock at less than market
value.  If any such sale  negatively  affects the market price for Sierra common
stock, the value of the old junior subordinated debentures may also be adversely
affected.

     Fractional   shares  of  Sierra  common  stock  will  not  be  issued  upon
conversion,  and, in lieu thereof, we will pay cash to you based upon the market
price of the Sierra common stock.  At the close of business on a record date you
will be entitled to receive the interest payable on the old junior  subordinated
debentures  on the  corresponding  interest  payment  date  notwithstanding  the
subsequent  conversion  thereof or our default in payment of the interest due on
such  interest  payment  date,  subject  to  certain  provisions  applicable  to
defaulted  interest.  No payment or adjustment  will be made upon conversion for
interest accrued on the old junior  subordinated  debentures or for dividends on
Sierra common stock issued on  conversion.  Therefore,  old junior  subordinated
debentures  surrendered  for  conversion  during  the  period  from the close of
business on any record  date to the  opening of  business  on the  corresponding
interest  payment date,  except old junior  subordinated  debentures  called for
redemption,  or to  be  repurchased,  on  such  interest  payment  date  or on a
redemption date or a repurchase date within such period,  must be accompanied by
payment of an amount equal to the interest payable on the interest payment date.
The holder of old junior  subordinated  debentures on a record date who converts
old junior subordinated  debentures on an interest payment date will receive the
interest and need not include a payment for any such interest upon  surrender of
old junior subordinated debentures for conversion.

     Subordination  of  Debentures.  The payment of  principal,  any premium and
interest on the old junior subordinated debentures, including amounts payable on
any redemption or repurchase,  will be subordinated to the prior payment in full
of all our senior debt. Senior debt is defined in the indenture as the principal
of, and premium,  if any, and interest on all our debt,  whether  outstanding on
the  date of the  indenture  or  thereafter  created,  incurred,  guaranteed  or
assumed, other than:

o        the old junior subordinated debentures; and

o         any  debt  which  provides,  or in  respect  of which  any  instrument
          creating  or  evidencing  such debt or  pursuant  to which the same is
          outstanding  provides,  that  such  debt is not  superior  in right of
          payment to the new debentures.

     Debt is defined in the indenture to mean:

o         all debt which is (a) for money  borrowed,  (b)  evidenced  by a note,
          bond or similar instrument given in connection with the acquisition of
          any  businesses,  properties or assets of any kind,  but excluding any
          other trade  accounts  payable or accrued  liabilities  arising in the
          ordinary  course of business or (c) purchase money  indebtedness  with
          respect  to the  purchase  of any  real or  personal  property  or any
          interest therein;

o        obligations under certain leases;

     o amendments,  renewals,  extensions,  modifications  and refundings of any
debt or obligations referred to above; and

o         any debt or  obligations  referred to above in respect of which we are
          liable, contingently or otherwise, to pay or advance money or property
          as a guarantor, endorser or otherwise.

     In  August  2000,  we  became a  guarantor  of  Sierra's  revolving  credit
facility,  which at December  15,  2000 was fully  drawn and had an  outstanding
balance of $185 million. The old junior subordinated debentures are subordinated
to this guaranty of the credit  facility debt. Our senior debt will also include
the new senior  subordinated  debentures to be issued in the exchange  offer and
the  affiliate  note.  The terms of our  debentures  do not limit our ability to
incur additional senior debt.

     Upon any payment or  distribution  of assets to  creditors as a result of a
liquidation,   dissolution,  winding  up,  reorganization  for  the  benefit  of
creditors,  marshalling  of  assets or any  bankruptcy,  insolvency  or  similar
proceedings  involving us, the holders of all senior debt will first be entitled
to receive payment in full before you will be entitled to receive any payment on
the old junior  subordinated  debentures.  No such payment in respect of the old
junior  subordinated  debentures may be made if there shall have occurred and be
continuing a default in any payment with respect to any senior debt, or an event
of  default  in respect to any senior  debt  resulting  in  acceleration  of the
maturity thereof, or if any judicial proceeding shall be pending with respect to
any such default. If the old junior subordinated debentures are declared due and
payable before their stated  maturity,  no payment may be made in respect of the
old junior  subordinated  debentures unless and until all senior debt shall have
been paid in full. For purposes of the  subordination  provisions,  the payment,
issuance or delivery of cash,  property or securities,  other than our stock and
certain subordinated  securities,  upon conversion of an old junior subordinated
debenture,  will be deemed to constitute  payment on account of the principal of
such old junior subordinated debentures.

     By reason of such subordination,  in the event of insolvency, our creditors
who are holders of senior debt may recover more  ratably than you will.  The old
junior  subordinated  debentures are subordinate to the new senior  subordinated
debentures.

     The indenture permits the trustee to become our creditor and to enforce its
rights as a creditor, including rights as a holder of senior debt.

     Redemption. The old junior subordinated debentures are currently redeemable
upon not less  than 25 nor more than 60 days'  notice  by mail at any  time,  in
whole or in part, at our election,  are currently at a redemption price equal to
100.75% of the principal amount together with accrued interest to the redemption
date,  subject  to the right of holders  of record on  regular  record  dates to
receive interest due on an interest payment date.

     Repurchase  at Option of Holders  Upon  Change in  Control.  If a change in
control as defined below  occurs,  you will have the right,  at your option,  to
require us to  repurchase  all of your old junior  subordinated  debentures  not
previously  called  for  redemption,  or any  portion  of the  principal  amount
thereof, that is equal to $1,000 or an integral multiple of $1,000. The price we
are  required  to pay is  100%  of  the  principal  amount  of  the  old  junior
subordinated debentures to be repurchased, together with accrued interest to the
repurchase  date.  Such right may not be waived by our board of  directors or by
the board of directors of Sierra.

     At our option,  instead of paying the repurchase  price in cash, we may pay
the repurchase  price in Sierra common stock valued at 95% of the average of the
closing  prices of Sierra  common  stock for the five trading days ending on the
third trading day preceding the repurchase  date. We may only pay the repurchase
price in Sierra common stock if such Sierra common stock is listed on a national
securities  exchange or quoted on the NASDAQ  National Market System at the time
of payment. Sierra has no obligation to issue shares in this event.

     Within  30 days  after  the  occurrence  of a  change  in  control,  we are
obligated to mail to you notice of such change in control and of the  repurchase
right arising as a result thereof. We must also deliver a copy of this notice to
the trustee and cause a copy of such notice to be  published  in a newspaper  of
general circulation in Los Angeles,  California and in the Borough of Manhattan,
The City of New York. To exercise the repurchase  right, you must deliver to the
trustee  the old  junior  subordinated  debentures  with  respect  to which  the
repurchase  right is being  exercised,  duly endorsed for transfer to us. We are
required to repurchase the old junior  subordinated  debentures on the date that
is 45 days  after the date of our  notice,  which we refer to as the  repurchase
date. At least two trading days prior to the repurchase  date, we must publish a
notice  in the  manner  described  above  specifying  whether  we  will  pay the
repurchase price in cash or in Sierra common stock.

     A change in control  will be deemed to have  occurred at the time after the
old junior  subordinated  debentures  are issued that any person,  including any
syndicate  or group  deemed  to be a  "Person"  under  Section  13(d)(3)  of the
Exchange  Act,  is or becomes the  beneficial  owner,  directly  or  indirectly,
through  a  purchase,  merger  or other  acquisition  transaction  or  series of
transactions,  of shares of our capital stock  entitling such person to exercise
50% or more of the total  voting  power of all shares of our capital  stock that
are  entitled  to  vote  in  elections  of  directors.  For  purposes  of  these
provisions,  whether a person is a  "beneficial  owner"  will be  determined  in
accordance  with Rule l3d-3  promulgated by the SEC under the Exchange Act as in
effect on the date of execution of the indenture.

     However,  a change in control will not be deemed to have occurred if either
(a) the closing price per share of Sierra common stock for any five trading days
within a period of 10  consecutive  trading days ending  immediately  before the
change in control shall equal or exceed 105% of the  conversion  price in effect
on each of those trading days, or (b) all of the  consideration  (excluding cash
payments for fractional  shares) in the transaction or transactions
constituting
the change in control  consists of shares of common  stock  traded on a national
securities  exchange  or quoted on the NASDAQ  National  Market  System and as a
result  of  such  transaction  or  transactions  the  old  junior   subordinated
debentures become convertible solely into such common stock.

     Rule 13e-4 under the Exchange Act  requires  the  dissemination  of certain
information  to security  holders in the event of an issuer tender offer and may
apply in the event that the repurchase  option becomes available to you. We will
comply with this rule to the extent it applies at that time.

     Merger and  Consolidation.  The indenture  provides that we may consolidate
with or merge  into any other  corporation,  or  convey,  transfer  or lease its
properties and assets substantially as an entirety to any person,  provided that
in any such case:

     o the successor  corporation  assumes by a  supplemental  indenture our and
Sierra's obligations under the indenture,

     o immediately after giving effect to such transaction, no default will have
occurred and be continuing, and

o         we deliver to the trustee an officer's  certificate  and an opinion of
          counsel  stating that the terms of the indenture  with respect to such
          event have been complied with.

     Upon  compliance  with these  provisions  by a successor  corporation,  we,
except in the case of a lease,  would be relieved of our  obligations  under the
indenture and the old junior subordinated debentures.

     Modification  of  the  Indenture.   Modifications  and  amendments  of  the
indenture may be made by us and the trustee with the consent of the holders of a
majority in principal amount of the outstanding debentures. However, none of the
following modifications or amendments may be made without your consent:

     o change the stated  maturity date of the principal of, or any  installment
of interest on, the old junior subordinated debentures;

     o reduce the  principal  amount of, or any premium or interest  on, any old
junior subordinated debenture;

     o change the place or  currency  of payment on the old junior  subordinated
debentures;

     o impair your right to institute suit for the enforcement of any payment on
the old junior subordinated debentures when due;

     o  adversely  affect  your  right to convert  the old  junior  subordinated
debentures into Sierra common stock;

     o modify the provisions of the indenture with respect to the  subordination
of the old junior subordinated debentures in a manner adverse to you; or

     o reduce the  percentage  in  principal  amount of old junior  subordinated
debentures  the  consent  of whose  holders  is  required  for  modification  or
amendment of the indenture or for waiver of compliance  with certain  provisions
of the indenture or for waiver of certain defaults.

     Events of Default,  Notice and Waiver.  The following are events of default
under the indenture:

     o we fail to make a payment  of  interest  on the old  junior  subordinated
debentures due, and this failure continues for 30 days;

     o we fail to make the payment of principal  or premium,  if any, on the old
junior subordinated debentures, when due;

     o we fail  in the  performance  of any  other  covenant  and  this  failure
continues for 60 days after written notice, as provided in the indenture;

o         we default in respect of our  indebtedness  for money  borrowed  which
          results in  acceleration  of the  maturity  of  $1,000,000  or more of
          indebtedness,  if such  acceleration  is not rescinded or indebtedness
          discharged  within 10 days after written  notice to us, as provided in
          the indenture; and

     o certain events in bankruptcy, insolvency or reorganization involving us.

If any event of default  shall  happen  and be  continuing,  the  trustee or the
holders of 25% in principal amount of the outstanding debentures may declare the
old junior subordinated debentures due and payable. However, after a declaration
of  acceleration  has been  made with  respect  to the old  junior  subordinated
debentures,  but  before a judgment  or decree  based on  acceleration  has been
obtained,  the  holders of a majority  in  principal  amount of the  outstanding
debentures   may,   under   certain   circumstances,   rescind  and  annul  such
acceleration.

     The  indenture  will provide that the trustee will be under no  obligation,
subject  to the duty of the  trustee  during  default  to act with the  required
standard of care, to exercise any of its rights or powers under the indenture at
the request or direction of any of the holders,  unless such holders  shall have
offered to the  trustee  reasonable  security  or  indemnity  against the costs,
expenses and  liabilities  which might be incurred by it in compliance with such
request or direction.  Subject to certain conditions,  the holders of a majority
in principal amount of the outstanding  debentures will have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the trustee or exercising any trust or power conferred on the trustee.

     The holders of a majority in principal amount of the outstanding debentures
may on behalf of the  holders of all old junior  subordinated  debentures  waive
compliance  by us with certain  restrictive  provisions  of the  indenture.  The
holders of a majority in principal  amount of the outstanding  debentures may on
behalf of the holders of old junior  subordinated  debentures waive certain past
defaults except a default in payment of the principal of, or premium, if any, or
interest on any old junior  subordinated  debenture or in respect of a provision
which under the indenture  cannot be modified or amended  without the consent of
the holder of each outstanding debenture affected thereby.

     We will be required to furnish the trustee  annually a statement  as to any
default by it in the performance of certain covenants in the indenture.

     Concerning  the Trustee.  The trustee may act as a depository for funds of,
make loans,  which may constitute  senior debt, to and perform other  commercial
banking  services  for us or for us in the  ordinary  course  of  business.  The
trustee is one of the lenders under Sierra's credit facility.

                BOOK-ENTRY SYSTEM-- THE DEPOSITORY TRUST COMPANY

     The new  senior  subordinated  debentures  will be  evidenced  by a  global
security  initially  deposited  with The Depository  Trust Company,  or DTC, and
registered  in the name of Cede & Co.,  as DTC's  nominee.  Except  as set forth
below,  the global security may be transferred only to another nominee of DTC or
to a successor of DTC or its nominee.

     Holders of the new senior subordinated  debentures may hold their interests
in the global security directly through DTC or indirectly through  organizations
which  are  participants  in  DTC,  called  "participants".   Transfers  between
participants  will be affected in the ordinary way in accordance  with DTC rules
and will be settled in clearinghouse funds. The laws of some states require that
some persons take  physical  delivery of  securities  in  definitive  form. As a
result,  holders may be unable to transfer  beneficial  interests  in the global
security to those persons.

     Holders that are not  participants  may  beneficially  own interests in the
global security held by DTC only through participants or indirect  participants,
including banks, brokers,  dealers, trust companies and other parties that clear
through or maintain a custodial relationship with a participant. So long as Cede
& Co., as the nominee of DTC, is the  registered  owner of the global  security,
Cede & Co. will be  considered  the sole holder of the global  security  for all
purposes. Except as provided below, owners of beneficial interests in the global
security will not:

o        be entitled to have certificates registered in their names;

     o be entitled to receive  physical  delivery of  certificates in definitive
form; and

o        be considered registered holders.

     We will make payments of interest on and principal of and the redemption or
repurchase  price of the global  security to Cede & Co., the nominee for DTC, as
the  registered  holder of the global  security.  We will make these payments by
wire transfer of immediately  available  funds.  Neither we, the trustee nor any
paying agent will have any responsibility or liability for:

     o records or  payments  on  beneficial  ownership  interests  in the global
security; or

     o  maintaining,  supervising  or  reviewing  any records  relating to those
beneficial ownership interests.

     We have been  informed  that  DTC's  practice  is to  credit  participants'
accounts  on  the  payment  date.   These  payments  will  be  made  in  amounts
proportionate   to  participants'   beneficial   interests  in  the  new  senior
subordinated  debentures.  Payments  by  participants  to owners  of  beneficial
interests in the new senior  subordinated  debentures  represented by the global
security  held  through   participants  will  be  the  responsibility  of  those
participants.

     We will send any  redemption  notices to Cede & Co. We  understand  that if
less than all of the new  senior  subordinated  debentures  are being  redeemed,
DTC's  practice  is to  determine  by lot the  amount  of the  holdings  of each
participant to be redeemed.  We also  understand that neither DTC nor Cede & Co.
will consent or vote with respect to the new senior subordinated debentures.  We
have been  advised  that under its usual  procedures,  DTC will mail an "omnibus
proxy" to us as soon as  possible  after the  record  date.  The  omnibus  proxy
assigns Cede & Co.'s consenting or voting rights to those  participants to whose
accounts the  exchange  notes are  credited on the record date  identified  in a
listing attached to the omnibus proxy.

     A person having a beneficial interest in new senior subordinated debentures
represented  by the global  security  may be unable to pledge  that  interest to
persons or entities that do not participate in the DTC system,  or to take other
actions in respect of that interest, because that interest is not represented by
a physical certificate.

     DTC has advised us that it is:

     o a limited purpose trust company  organized under the laws of the State of
New York;

o        a member of the Federal Reserve System;

     o a "clearing  corporation"  within the  meaning of the Uniform  Commercial
Code, and

     o a "clearing agency" registered  pursuant to the provisions of Section 17A
of the Exchange Act.

     DTC was created to hold securities for its  participants  and to facilitate
the clearance and  settlement of securities  transactions  between  participants
through electronic  book-entry changes to accounts of its participants.  Some of
the participants,  together with other entities, own DTC. Indirect access to the
DTC system is  available  to others  such as banks,  brokers,  dealers and trust
companies  that clear  through,  or  maintain a  custodial  relationship  with a
participant, either directly or indirectly.

     DTC is under no  obligation  to perform or  continue  to perform  the above
procedures.  DTC  may  discontinue  these  at any  time.  If DTC is at any  time
unwilling or unable to continue as depository and a successor  depository is not
appointed by us within 90 days, we will cause new senior subordinated debentures
to be issued in definitive form in exchange for the global security.

                                   UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

     The following  discussion  summarizes  the material  United States  federal
income tax consequences to us and to United States holders of the exchange offer
and of the acquisition, ownership and disposition of the new senior subordinated
debentures.  A United States holder is (1) an individual  citizen or resident of
the United States or (2) a corporation created or organized in or under the laws
of the United States or any political subdivision thereof.

     This discussion does not purport to describe all of the tax  considerations
that may be  relevant  to a holder of old junior  subordinated  debentures.  The
following summary deals only with old junior  subordinated  debentures that are,
and new senior  subordinated  debentures that will be, held as capital assets by
United  States  holders,  and does not deal with  persons  that are  subject  to
special tax rules, such as:

o        dealers or traders in securities or currencies;

o         financial  institutions  or other  United  States  holders  that treat
          income in  respect of the old junior  subordinated  debentures  or new
          senior subordinated debentures as financial services income;

o        insurance companies;

o        tax-exempt entities;

o         persons  holding  old  junior  subordinated  debentures  or new senior
          subordinated   debentures  as  a  part  of  a  straddles,   conversion
          transaction or other arrangement involving more than one position;

     o persons that have a principal place of business or "tax home" outside the
United States; or

o        persons whose "functional currency" is not the U.S. dollar.

     The  discussion  below is based upon the  provisions  of the United  States
Internal Revenue Code of 1986, as amended, and regulations, rulings and judicial
decisions thereunder as of the date of this prospectus; any of these authorities
may be repealed,  revoked or modified, perhaps with retroactive effect, so as to
result in United States  federal  income tax  consequences  different from those
discussed below.

     Because  United States tax  consequences  may differ from one holder to the
next,  the  discussion set out below does not purport to describe all of the tax
considerations  that  may be  relevant  to you and  your  particular  situation.
Accordingly,  you are  advised to consult  your own tax advisor as to the United
States federal,  state,  local and other tax  consequences of the exchange offer
and of the  acquisition,  ownership and  disposition of new senior  subordinated
debentures.  The  statements of United States tax law set out below are based on
the laws and interpretations in force as of the date of this prospectus, and are
subject to any changes occurring after that date.

Tax Consequences to Us

     A corporation will recognize  cancellation of indebtedness  income upon the
satisfaction of its  indebtedness  for an amount that is less than the amount of
the  indebtedness.  If the exchange offer is  consummated,  then we will realize
ordinary  income from (1) the payment of cash in  satisfaction of the old junior
subordinated  debentures to the extent that the adjusted  issue price,  which is
the  stated  principal  amount,  of  the  old  junior  subordinated   debentures
extinguished  exceeds the amount of cash paid and (2) the exchange of new senior
subordinated  debentures  for old junior  subordinated  debentures to the extent
that the adjusted issue price of the old junior subordinated  debentures exceeds
the issue price of the new senior subordinated debentures exchanged therefor. As
discussed  more  fully  below,  the  issue  price of a new  senior  subordinated
debenture  probably  will  equal the stated  principal  amount of the new senior
subordinated  debenture,  in which case no cancellation  of indebtedness  income
will arise from the exchange of new senior  subordinated  debenture  for the old
junior  subordinated  debenture.  No  assurance  can be given  in this  respect,
however,  and it is  possible  that the issue  price will equal the fair  market
value of the new senior subordinated debenture or of the old junior subordinated
debenture  exchanged  therefor,  in  which  case  we  would  probably  recognize
cancellation of  indebtedness  income with respect to the exchange of new senior
subordinated debentures for old junior subordinated debentures (See paragraph 3.
under   --Tax   Consequences   to  United   States   Holders  of  the   Exchange
Offer--Exchange   of  New  Senior   Subordinated   Debentures   for  Old  Junior
Subordinated Debentures--The Exchange).

Tax Consequences to United States Holders of the Exchange Offer

     Your tax  consequences  will  depend on the  option  that you  select.  The
discussion  under each of the  headings  below  describes  the tax  consequences
applicable  to  each  option  under  the  exchange  offer:   receiving  cash  in
satisfaction  of your old junior  subordinated  debentures,  exchanging your old
junior  subordinated  debentures  for  new  senior  subordinated  debentures  or
continuing to hold your old junior subordinated debentures.

Receipt of Cash for Old Junior Subordinated Debentures

     A United States  holder that  receives  cash under the exchange  offer will
recognize  gain or loss in an amount  equal to the  difference  between  (1) the
amount  of cash  received  and (2) the  adjusted  tax  basis  of the old  junior
subordinated  debentures  in the hands of the United  States  holder.  Except as
discussed  below,  the gain or loss recognized by a United States holder will be
treated as capital  gain or loss and will be  long-term  capital gain or loss if
the old junior  subordinated  debentures  have been held for more than one year.
Gain recognized by a United States holder will be treated as ordinary income, to
the extent of any market discount on the old junior subordinated debentures that
has accrued  during the period that the United States holder held the old junior
subordinated  debentures and that has not previously  been included in income by
the United States holder.  A United States holder also will  recognize  ordinary
income  in an amount  equal to the cash  payments  received  as  payment  of the
interest that has accrued on the old junior subordinated debentures.

     Exchange of New Senior Subordinated  Debentures for Old Junior Subordinated
Debentures

     The Exchange

     The  exchange  of  new  senior  subordinated   debentures  for  old  junior
subordinated  debentures  pursuant  to the  exchange  offer may be  treated as a
taxable exchange or as a reorganization and recapitalization, within the meaning
of Section  368(a)(1)(E) of the Internal Revenue Code. An exchange of new senior
subordinated  debentures for old junior subordinated  debentures will be treated
as a recapitalization  only if both the old junior  subordinated  debentures and
the new senior subordinated  debentures are treated as "securities" for purposes
of the  reorganization  provisions  of  the  Internal  Revenue  Code.  The  term
"securities"  is not defined in the Internal  Revenue Code or in the regulations
promulgated  thereunder.  Under  applicable  administrative  pronouncements  and
judicial  decisions,  as a  general  proposition,  the  original  term of a debt
instrument  is the  most  important  factor  in  determining  whether  the  debt
instrument is a security: debt instruments with an original term of at least ten
years usually being  considered  securities and debt  instruments with a term of
five years or less usually not being  considered  securities.  However,  (1) the
term of a debt  instrument is not necessarily  determinative,  and other factors
such as the degree of participation and continuing  interest associated with the
debt instrument may be relevant,  (2) even under this  simplified  original-term
test, the status of debt  instruments  with an original term of between five and
ten years, such as the new senior subordinated debentures, is not clear, and (3)
in any event,  the applicable  judicial  decisions are not entirely  consistent.
Accordingly,  there can be no assurance that the Internal  Revenue Service (IRS)
or a court will agree that the new senior  subordinated  debentures properly are
treated as securities.  If the new senior subordinated  debentures that a United
States Holder  receives are not treated as securities  then the exchange will be
treated as a taxable  transaction,  rather than as a  recapitalization.  You are
encouraged  to consult  your own tax  advisor as to whether an  exchange  of new
senior subordinated  debentures for old junior  subordinated  debentures will be
treated as a recapitalization.

     The exchange  should have the following  United States  federal  income tax
consequences:

     1.  An  exchanging   United  States  holder  of  old  junior   subordinated
         debentures  should  realize  gain  or loss in an  amount  equal  to the
         difference  between (1) the issue price of the new senior  subordinated
         debentures  received  and (2) the  adjusted tax basis of the old junior
         subordinated  debentures in the hands of the United States holder.  The
         amount of gain or loss  realized,  as  opposed to the amount of gain or
         loss recognized,  does not depend on whether the exchange is treated as
         a taxable  exchange or as a  recapitalization.  A United  States holder
         also will  recognize  ordinary  income  in an amount  equal to the cash
         payments  received in  satisfaction of interest that has accrued on the
         old junior subordinated debentures.

     2.  The issue price of the new senior  subordinated  debentures will depend
         upon whether the new senior  subordinated  debentures or the old junior
         subordinated  debentures are "traded on an  established  market" at any
         time  within the 60-day  period  ending 30 days after the issue date of
         the new  senior  subordinated  debentures.  For  this  purpose,  a debt
         instrument is considered to be traded on an established  market, if (1)
         the debt  instrument is listed on a national  securities  exchange,  an
         interdealer   quotation  system  sponsored  by  a  national  securities
         association or a designated foreign exchange or board of trade, (2) the
         debt  instrument is traded  either on a board of trade  designated as a
         contract market by the Commodities  Futures Trading Commission or on an
         interbank  market,  (3) the debt  instrument  appears  on a  "quotation
         medium, "which  is a system of  general  circulation  that  provides  a
         reasonable basis to determine fair market value by disseminating either
         recent price quotations of one or more identified  brokers,  dealers or
         traders or actual  prices of recent  sales  transactions,  or (4) price
         quotations for the debt instrument otherwise are readily available from
         dealers,  brokers or  traders.  We do not  believe  that the old junior
         subordinated  debentures have been traded on an established  securities
         market. We will not list the new senior subordinated  debentures on the
         New York Stock Exchange until after 30 days following the issue date of
         the new senior subordinated debentures,  and we do not otherwise expect
         that the new senior  subordinated  debentures will be treated as traded
         on an  established  securities  market within 30 days after their issue
         date, although no assurances can be made in this respect.

     3.  If neither the new senior  subordinated  debentures  nor the old junior
         subordinated  debentures are traded on an established  market, then the
         issue price of the new senior subordinated  debentures will be equal to
         their  stated  principal  amount  ($1000  per new  senior  subordinated
         debenture).  If the new senior subordinated debentures are traded on an
         established market, then the issue price of the new senior subordinated
         debentures  will be their fair market  value on the issue date.  If the
         old junior subordinated debentures are, and the new senior subordinated
         debentures  are not,  traded on an established  market,  then the issue
         price of the new senior subordinated debentures will be the fair market
         value  on the  issue  date of the old  junior  subordinated  debentures
         surrendered in exchange therefor.

     4.  If the exchange made by an  exchanging  United States holder is treated
         as a  recapitalization,  then  gain or loss,  if any,  realized  by the
         United States holder will not be recognized.

     5.  If the exchange made by an  exchanging  United States holder is treated
         as a taxable exchange, then gain, if any, realized by the United States
         holder will be  recognized.  Loss, if any,  realized by the  exchanging
         United States holder will be  recognized  only to the extent  permitted
         under the wash sale rules of Section 1091 of the Internal Revenue Code.
         You are  advised to consult  your own tax  advisor as to the  potential
         application of the wash sale rules.

     6.  Except as discussed  below,  gain or loss  recognized  by an exchanging
         United  States  holder of old junior  subordinated  debentures  will be
         treated as  capital  gain or loss.  Gain  recognized  by an  exchanging
         United States holder will be treated as ordinary income,  to the extent
         of any market discount on the old junior  subordinated  debentures that
         has accrued during the period that the exchanging  United States holder
         held the old junior subordinated debentures and that has not previously
         been  included  in income by the United  States  holder.  An old junior
         subordinated  debenture  generally  will be  considered  to  have  been
         acquired  with  market  discount  if the issue  price of the old junior
         subordinated  debenture at the time of acquisition exceeded the initial
         tax basis of the old junior subordinated  debenture in the hands of the
         United States holder by more than a specified de minimis amount. Market
         discount  accrues on ratable  basis,  unless the United  States  holder
         elects to accrue the market discount using a constant-yield  method. If
         the exchange made by an exchanging United States holder is treated as a
         recapitalization,  then any accrued  market  discount on the old junior
         subordinated  debentures that is not recognized on the exchange will be
         transferred to the new senior subordinated debentures received.

     7.  If the exchange made by an  exchanging  United States holder is treated
         as  a   recapitalization,   then  the  tax  basis  of  the  new  senior
         subordinated  debentures  received  in the hands of the  United  States
         holder  will be  equal to the  adjusted  tax  basis  of the old  junior
         subordinated debentures transferred in the exchange. The holding period
         of the new senior  subordinated  debentures  will  include  the holding
         period of the old junior  subordinated  debentures  surrendered  in the
         exchange.

     8.  If the exchange made by an  exchanging  United States holder is treated
         as  a  taxable  exchange,   then  the  tax  basis  of  the  new  senior
         subordinated  debentures  received  in the hands of the  United  States
         holder will be equal to their issue  price.  The holding  period of the
         new senior subordinated  debentures will not include the holding period
         of the old junior subordinated debentures surrendered in the exchange.

     Tax Treatment of the New Senior Subordinated Debentures

     Stated Interest

     Interest on a new senior subordinated  debenture,  other than interest that
is not "qualified stated interest," will be taxable to a United States holder as
ordinary  interest  income  at the time  that the  interest  is  received  or is
accrued,  in accordance with the United States holder's method of accounting for
federal income tax purposes.  In general,  qualified  stated  interest is stated
interest  that is  unconditionally  payable at least  annually at a single fixed
rate during the entire term of a debt obligation.

     Original Issue Discount

     General. The new senior subordinated debentures probably will not be issued
with  original  issue  discount  (OID).  The  amount  of  OID  on a  new  senior
subordinated  debenture will be equal to the excess of (1) the stated redemption
price at maturity of the new senior  subordinated  debenture  over (2) the issue
price  of the  new  senior  subordinated  debenture,  determined  in the  manner
described  above.  The  stated  redemption  price at  maturity  of a new  senior
subordinated debenture is the sum of all payments on the new senior subordinated
debenture  other than payments of qualified  stated  interest.  If, as discussed
above,  the issue price of the new senior  subordinated  debentures  is equal to
their principal amount, then the new senior subordinated debentures would not be
treated as issued  with OID and the rest of the  discussion  under this  heading
"--Original   Issue  Discount"  would  not  be  applicable  to  the  new  senior
subordinated  debentures.  If, on the  other  hand,  the issue  price of the new
senior  subordinated  debentures  is based on the fair  market  value of the new
senior subordinated debentures or the old junior subordinated  debentures,  then
the new senior subordinated  debentures probably would be treated as issued with
OID.

     Subject to the  discussion  below  under  "-Acquisition  Premium," a United
States  holder  of a new  senior  subordinated  debenture  issued  with OID must
include  OID in  income,  as  ordinary  interest  income,  as it  accrues,  on a
constant-yield  basis,  before the receipt of cash  attributable to this income,
and will be required to include in income  increasingly  greater  amounts of OID
over  the life of the new  senior  subordinated  debenture.  The  amount  of OID
includible in income by a United States holder is the sum of the daily  portions
of OID with respect to the new senior subordinated debenture for each day during
the  taxable  year or portion  of the  taxable  year on which the United  States
holder holds the new senior  subordinated  debenture,  known as accrued OID. The
daily portion is determined by allocating to each day in any "accrual  period" a
pro rata portion of the OID allocable to that accrual  period.  Accrual  periods
with  respect  to a new  senior  subordinated  debenture  may be of  any  length
selected by the United States holder and may vary in length over the term of the
new senior  subordinated  debenture,  so long as (1) no accrual period is longer
than one year and (2) each scheduled payment of interest or principal on the new
senior  subordinated  debenture  occurs on  either  the final or first day of an
accrual period. The amount of OID allocable to an accrual period is equal to the
excess  of (1) the  product  of the  adjusted  issue  price  of the  new  senior
subordinated  debenture at the beginning of the accrual  period and the yield to
maturity of the new senior  subordinated  debenture,  determined on the basis of
compounding  at the close of each accrual  period and properly  adjusted for the
length of the accrual  period,  over (2) the sum of the  payments  of  qualified
stated interest on the new senior  subordinated  debenture that are allocable to
the accrual  period.  The  "adjusted  issue price" of a new senior  subordinated
debenture at the  beginning of any accrual  period is the issue price of the new
senior  subordinated  debenture,  increased by the amount of accrued OID for all
prior  accrual  periods and  decreased by the amount of any payments  previously
made on the new senior  subordinated  debenture other than payments of qualified
stated interest.  The amount of OID allocable to an initial short accrual period
may be computed using any reasonable  method, if all other accrual periods other
than a final  short  accrual  period  are of equal  length.  The  amount  of OID
allocable  to the final  accrual  period is the  difference  between  the amount
payable at the  maturity of the new senior  subordinated  debenture  and the new
senior subordinated  debenture's adjusted issue price as of the beginning of the
final accrual period.

     In general, the effect of the OID provisions described above is that United
States  holders  will  realize  interest  income on the new senior  subordinated
debentures  on  a  constant-yield   basis  over  the  term  of  the  new  senior
subordinated  debentures;  United  States  holders  generally  will not  realize
additional  income on the receipt of payments,  other than payments of qualified
stated  interest,  on the new  senior  subordinated  debentures,  even if  those
payments are denominated as interest.

     Acquisition  Premium.  A United  States  holder that  acquires a new senior
subordinated  debenture  for an  amount  less  than or  equal  to the sum of all
amounts payable on the new senior  subordinated  debenture after the acquisition
date,  other than payments of qualified  stated  interest,  but in excess of its
adjusted issue price (this excess being "acquisition premium") and that does not
make the  election  described  below under  "Election  To Treat All  Interest As
Original  Issue  Discount,"  is  permitted  to reduce the daily  portions of OID
includible  in its  income.  The  amount  of this  reduction  is  calculated  by
multiplying  the daily  portion of OID by a fraction,  the numerator of which is
the excess of the United  States  holder's  adjusted tax basis in the new senior
subordinated debenture immediately after its acquisition over the adjusted issue
price of the new senior subordinated debenture,  and the denominator of which is
the excess of the sum of all  amounts  payable  on the new  senior  subordinated
debenture after the acquisition  date,  other than payments of qualified  stated
interest,  over  the  adjusted  issue  price  of  the  new  senior  subordinated
debenture.  The ability to reduce OID inclusions to reflect  acquisition premium
in the manner  described  above is  specifically  available  to a United  States
holder (1) that acquires new senior subordinated debentures with OID pursuant to
the exchange offer in a transaction  treated as a recapitalization  and (2) that
realizes a loss on the exchange that it is not permitted to recognize  under the
recapitalization  rules,  with the consequence that its initial tax basis in the
new senior  subordinated  debentures  exceeds the adjusted  issue price of those
debentures.

     Election To Treat All Interest as Original Issue Discount.  A United States
holder may elect to include in gross income all  interest  that accrues on a new
senior  subordinated  debenture using the constant-yield  method described above
under the heading  "Original Issue Discount  -General,"  with the  modifications
described  below.  For  purposes  of this  election,  interest  includes  stated
interest,  OID, market discount and de minimis market  discount,  as adjusted by
any acquisition premium.

     In  applying  the  constant-yield  method  to  a  new  senior  subordinated
debenture  with respect to which this election has been made, the issue price of
the new senior  subordinated  debenture  will equal the electing  United  States
holder's  adjusted basis in the new senior  subordinated  debenture  immediately
after its acquisition,  the issue date of the new senior subordinated  debenture
will be the date of its  acquisition by the electing United States holder and no
payments on the new senior subordinated debenture will be treated as payments of
qualified  stated interest.  This election  generally will apply only to the new
senior  subordinated  debenture  with respect to which it is made and may not be
revoked  without  the  consent  of  the  IRS.  If  the  election  to  apply  the
constant-yield method to all interest on a new senior subordinated  debenture is
made with  respect to a market  discount  debenture,  then the  electing  United
States holder will be treated as having made the election  discussed below under
"Market  Discount" to include market discount in income  currently over the life
of all debt instruments held or thereafter acquired by the United States holder.

     Market Discount

     A new  senior  subordinated  debenture  will be  considered  to be a market
discount  debenture if the adjusted  issue price of the new senior  subordinated
debenture  at the time of  acquisition  exceeds the initial tax basis of the new
senior  subordinated  debenture in the hands of the United States holder by more
than a specified de minimis  amount.  If this excess is not  sufficient to cause
the new senior subordinated  debenture to be a market discount  debenture,  this
excess constitutes "de minimis market discount." In addition, as discussed above
under   "Exchange  of  New  Senior   Subordinated   Debentures  for  Old  Junior
Subordinated  Debentures-The  Exchange," if a United States holder  acquires new
senior  subordinated  debentures  pursuant to the exchange  offer in an exchange
treated as a  recapitalization,  then accrued  market  discount on an old junior
subordinated  debenture  that is not taken into account in  connection  with the
exchange will carry over to the new senior  subordinated  debenture  received in
exchange.

     Any gain  recognized  on the  receipt of payments  on or  disposition  of a
market discount  debenture will be treated as ordinary income to the extent that
this  gain  does not  exceed  the  accrued  market  discount  on the new  senior
subordinated  debenture.  Alternatively,  a  United  States  holder  of a market
discount debenture may elect to include market discount in income currently over
the life of the new senior subordinated debenture.  This election shall apply to
all debt instruments with market discount acquired by the electing United States
holder on or after the first day of the first taxable year to which the election
applies.  This  election  may not be revoked  without  the consent of the IRS. A
United States holder that makes the election  described  under  "Original  Issue
Discount-Election  To Treat All  Interest as Original  Issue  Discount"  will be
deemed to have elected to include market discount in income currently.

     Market  discount on a market  discount  debenture  will accrue on a ratable
basis  unless the United  States  holder  elects to accrue this market  discount
using a constant-yield  method. This election shall apply only to the new senior
subordinated  debenture  with respect to which it is made and may not be revoked
without  the  consent of the IRS. A United  States  holder of a market  discount
debenture  that does not elect,  and is not deemed to have  elected,  to include
market  discount  in  income  currently  generally  will be  required  to  defer
deductions  for net  direct  interest  expense  with  respect  to the new senior
subordinated  debenture (defined for each taxable year as the excess of interest
expense  allocable  to the new  senior  subordinated  debenture  over  interest,
including  OID,  includible in income in respect of the new senior  subordinated
debenture)  in an amount not exceeding  the accrued  market  discount on the new
senior  subordinated  debenture  until the  maturity or  disposition  of the new
senior subordinated debenture.

     Purchase, Sale and Retirement of New Senior Subordinated Debentures

     A United  States  holder's  initial tax basis in a new senior  subordinated
debenture,  determined  in the manner  described  above under  "Exchange  of New
Senior  Subordinated  Debentures  for  Old  Junior  Subordinated  Debentures-The
Exchange,"  will  be  increased  by the  amount  of any OID or  market  discount
included in the United  States  holder's  income with  respect to the new senior
subordinated  debenture  and  reduced by the amount of any  payments  on the new
senior subordinated  debenture other than payments of qualified stated interest.
A United  States holder  generally  will  recognize  gain or loss on the sale or
retirement  of a new senior  subordinated  debenture  in an amount  equal to the
difference  between the amount  realized on the sale or  retirement,  other than
amounts  attributable to accrued but unpaid  interest,  which will be taxable as
ordinary  income,  and the tax basis of the new senior  subordinated  debenture.
Except to the extent  described  above under  "-Market  Discount,"  gain or loss
recognized on the sale or retirement of a new senior subordinated debenture will
be capital  gain or loss and will be  long-term  capital gain or loss if the new
senior subordinated debenture has been held for more than one year.

Nonparticipation in the Exchange Offer

     A United States holder that does not  participate in the exchange offer and
instead  retains its old junior  subordinated  debentures will not recognize any
gain or loss as a result of the consummation of the exchange offer.

                                                   LEGAL MATTERS

     The  validity  of our new senior  subordinated  debentures  offered by this
prospectus will be passed upon for us by Morgan,  Lewis & Bockius LLP, New York,
New York.

                                                      EXPERTS

     The financial  statements and related financial  statement  schedule of CII
Financial,  Inc. and subsidiaries as of December 31, 1999 and 1998, and for each
of the three  years in the period  ended  December  31,  1999,  included in this
prospectus have been audited by Deloitte & Touche LLP, independent  auditors, as
stated in their report appearing  herein,  and have been so included in reliance
upon the  reports  of such  firm  given  upon  their  authority  as  experts  in
accounting and auditing.



<PAGE>



                                                        A-2


                                                         A-1


                                                      ANNEX I


GLOSSARY OF SELECTED INSURANCE TERMS

The following terms when used in this Prospectus have the following meanings:

Assume..............................To receive from a ceding company,  all or a
                                    portion of a risk in  consideration
                                    of a premium.
Cede.................................To transfer to a reinsurer,  all or a
                                      portion of a risk in  consideration  of a
                                        premium.
Combined ratio.....................  The  sum  of the
                                    loss ratio, the  underwriting  expense ratio
                                    and  the   policyholders'   dividend  ratio,
                                    expressed as a percentage.  A combined ratio
                                    less than  100%  indicates  an  underwriting
                                    profit.
Direct written premiums.........    Premiums   written  by  an  insurer
                                    before  the  assumption  and  cession  of
                                    reinsurance.
Loss                                ratio...........................  The  ratio
                                    arrived at by dividing  the amount of losses
                                    and loss  adjustment  expenses by net earned
                                    premiums.
Losses                              ...........................   For   workers'
                                    compensation    insurance,    payments   and
                                    reserves   needed  to   provide   indemnity,
                                    medical and rehabilitation  costs to injured
                                    workers.
Loss                                adjustment  expenses......  The  expenses of
                                    settling claims, including legal, other fees
                                    and general expenses.
Net                                 earned  premiums............  The portion of
                                    premiums applicable to the expired period of
                                    policies after the assumption and cession of
                                    reinsurance.
Net written premiums............          Premiums   retained  by  an  insurer
                                    after  the   assumption  and  cession  of
                                    reinsurance.
Participating                       policy...............  An  insurance  policy
                                    where  the   policyholders   may  receive  a
                                    "dividend"  which  is a  partial  return  of
                                    premium,  after the policy  period if, among
                                    other   factors,   the  insured  has  had  a
                                    favorable  claims history during the period;
                                    that is, the policyholder  "participates" in
                                    the  savings   resulting  from  a  favorable
                                    claims history, among other factors.
Policy                              acquisition   costs.........   Agents'   and
                                    brokers' commissions,  premium taxes, boards
                                    and bureau fees, marketing, underwriting and
                                    other  direct   expenses   associated   with
                                    acquiring and retaining business.
Policyholders'                      dividend  ratio...  The ratio  arrived at by
                                    dividing   the   amount  of   policyholders'
                                    dividends incurred by net earned premiums.
Policyholders'                      surplus............  The sum remaining after
                                    all  liabilities  are  subtracted  from  all
                                    assets,    applying   statutory   accounting
                                    principles.   This   sum  is   regarded   as
                                    financial protection to policyholders in the
                                    event   an   insurance    company    suffers
                                    unexpected or catastrophic losses.
Quota                               share   reinsurance.........   A   form   of
                                    reinsurance  in which the reinsurer  assumes
                                    an  agreed   percentage   of  certain  risks
                                    insured  by  the  ceding  insurer  up  to  a
                                    specified  amount,  and shares  premiums and
                                    losses proportionately.
Reinsurance........................ An agreement  whereby an original  insurer
                                     remits a portion of the premium to a
                                    reinsurer as payment for the  reinsurers
                                     assumption  of a portion of the risk.
                                    Reinsurance  can  be  effected  by
                                    "treaties,"  where  a  reinsurance   treaty
                                    automatically  covers all risks of a defined
                                    category,  amount and type, or by
                                    "facultative  reinsurance."  Facultative
                                  reinsurance is negotiated  between an
                                    original  insurer  and the  reinsurer  on an
                                        individual,  contract-by-contract
                                    basis.
Reserves or loss  reserves.........  A balance  sheet
                                    liability  for  unpaid  losses  representing
                                    estimates of amounts  needed to pay reported
                                    and  unreported   claims  and  related  loss
                                    adjustment expenses.
Statutory accounting...............  Recording
                                    transactions    and   preparing    financial
                                    statements in accordance  with the rules and
                                    procedures     adopted     by     regulatory
                                    authorities,    generally    reflecting    a
                                    liquidating,  rather  than a going  concern,
                                    concept of accounting.
Treaty..............................                  See Reinsurance.
Unassigned funds.....................   The  cumulative
                                    amount  of   retained   net   profits   from
                                    insurance  operations,   or  earned  surplus
                                    including  investment  income, as determined
                                    under statutory accounting principles.
Underwriting.....................   The  process   whereby  an  insurer  reviews
                                    applications    submitted    for   insurance
                                    coverage  and  determines  whether  it  will
                                    accept all or part, and at what premium,  of
                                    the coverage being requested.
Underwriting                        expenses............ The aggregate of policy
                                    acquisition   costs  and  the   portion   of
                                    administrative,  general and other  expenses
                                    attributable to insurance operations.
Underwriting                        expense  ratio......  For generally accepted
                                    accounting  principles  ("GAAP"),  the ratio
                                    arrived  at by  dividing  the amount of GAAP
                                    underwriting    expenses   by   net   earned
                                    premiums.  For statutory  accounting  basis,
                                    the ratio  arrived at by dividing the amount
                                    of  statutory  underwriting  expenses by net
                                    written premiums.
Underwriting                        profit (loss)...... The amount of net income
                                    (loss) from insurance operations,  exclusive
                                    of net investment or other income.



<PAGE>


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>

<CAPTION>

CII Financial, Inc. and Subsidiaries                                                                     Page

<S>                                                                                                          <C>
Management Report on Consolidated Financial Statements                                                     F-2

Report of Independent Auditors                                                                             F-3

     Consolidated  Financial  Statements for the Nine Months Ended September 30,
2000 and 1999 (unaudited), and the Years Ended December 31, 1999, 1998 and 1997:

Consolidated Balance Sheets                                                                                F-4

Consolidated Statements of Operations                                                                      F-5

Consolidated Statements of Stockholder's Equity                                                            F-6

Consolidated Statements of Cash Flows                                                                      F-7

Notes to Consolidated Financial Statements                                                                 F-8

Supplemental Financial Statement Schedule                                                                  F-22
</TABLE>


<PAGE>


             MANAGEMENT REPORT ON CONSOLIDATED FINANCIAL STATEMENTS

The  management  of CII  Financial,  Inc. is  responsible  for the integrity and
objectivity  of  the  accompanying   consolidated   financial  statements.   The
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America  applied on a consistent  basis and are
not  misstated  due to fraud or material  error.  The  statements  include  some
amounts that are based upon the Company's best estimates and judgment.

The  accounting  systems and  controls  of the  Company are  designed to provide
reasonable   assurance  that   transactions  are  executed  in  accordance  with
management's  authorization,   that  the  financial  records  are  reliable  for
preparing  financial  statements and maintaining  accountability for assets, and
that assets are safeguarded against losses from unauthorized use or disposition.
Management  believes that for the year ended December 31, 1999, such systems and
controls were adequate to meet the objectives discussed herein.

The  accompanying   consolidated  financial  statements  have  been  audited  by
independent  certified  public  accountants,  whose audits  thereof were made in
accordance with auditing  standards  generally  accepted in the United States of
America  and  included a review of  internal  accounting  controls to the extent
necessary to design audit procedures aimed at gathering  sufficient  evidence to
provide a reasonable  basis for their opinion on the fairness of presentation of
the consolidated financial statements taken as a whole.

Kathleen M. Marlon,
Chairman and

Chief Executive Officer

John F. Okita
Chief Financial Officer


<PAGE>


Report of Independent Auditors

To the Board of Directors and Stockholder
CII Financial, Inc.
Las Vegas, Nevada

                  We have audited the accompanying  consolidated  balance sheets
of CII Financial, Inc. and Subsidiaries as of December 31, 1999 and 1998 and the
related consolidated  statements of operations,  stockholder's  equity, and cash
flows for each of the three years in the period ended  December 31, 1999.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

                  We conducted our audits in accordance with auditing  standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

                  In our opinion, the consolidated financial statements referred
to above present fairly, in all material  respects,  the consolidated  financial
position of CII Financial,  Inc. and  Subsidiaries at December 31, 1999 and 1998
and the  consolidated  results of their operations and their cash flows for each
of the three years in the period  ended  December  31, 1999 in  conformity  with
accounting principles generally accepted in the United States of America.

                  Our  audits  were  conducted  for the  purpose  of  forming an
opinion on the basic  consolidated  financial  statements  taken as a whole. The
supplemental  schedule  listed  in  the  index  to  the  consolidated  financial
statements  is  presented  for the purpose of  additional  analysis and is not a
required part of the basic consolidated  financial statements.  This schedule is
the  responsibility  of the management of CII Financial,  Inc. Such schedule has
been  subjected  to the auditing  procedures  applied in our audits of the basic
consolidated  financial  statements and, in our opinion, is fairly stated in all
material  respects  when  considered  in  relation  to  the  basic  consolidated
financial statements taken as a whole.

/s/ DELOITTE & TOUCHE, LLP
Las Vegas, Nevada
December 21, 2000


<PAGE>





                      CII FINANCIAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                      (In thousands except for share data)

<TABLE>

<CAPTION>

                                                                      September 30,                  December 31,
                                                                          2000                1999                1998
                                                                          ----                ----                ----
                                                                       (Unaudited)

ASSETS

Cash, cash equivalents and invested assets:

<S>                                                                     <C>                 <C>                  <C>
    Cash and cash equivalents                                           $ 19,408            $ 16,833             $  22,114
    Debt securities, available-for-sale, at fair value                   164,660             165,296               185,644
    Debt securities, held-to-maturity, at amortized cost                  22,154              25,023                53,967
    Preferred stock, at fair value                                         1,732               3,486                   882
    Mortgage loans on affiliated real estate                              10,261               2,959                 3,082
    Mortgage loans on non-affiliated real estate                           6,281               6,416                11,635
    Real estate limited partnership                                        7,108               6,559                 6,185
                                                                      ----------          ----------            ----------
Total cash, cash equivalents and invested assets                         231,604             226,572               283,509
                                                                        --------            --------              --------

Reinsurance recoverable                                                  211,594             131,862                58,424
Premiums receivable (net of allowances of $1,134 (unaudited),
    $1,134 and $1,278)                                                    13,402               9,391               10,612
Investment income receivable                                               2,406               2,786                 2,782
Deferred policy acquisition costs                                          2,732               2,378                 1,804
Federal income taxes receivable                                            9,478               4,896                   492
Deferred income taxes                                                     15,984              17,344                15,929
Property and equipment, net                                                5,097               8,354                 5,253
Other assets                                                                 555                 755                 1,075
                                                                    ------------        ------------           -----------
           TOTAL ASSETS                                                 $492,852            $404,338              $379,880
                                                                        ========            ========              ========

LIABILITIES

Reserve for loss and loss adjustment expenses                           $341,902            $244,394              $212,264
Unearned premiums                                                         16,206              13,300                11,158
Ceded reinsurance premiums payable                                         7,424               9,321                 8,739
Convertible subordinated debentures                                       47,059              50,498                51,251
Accounts payable and other accrued expenses                               15,969              15,265                18,788
Payable to affiliates                                                      2,487               2,768                 2,105
Deferred tax liability                                                     3,291               2,739                 1,628
                                                                      ----------          ----------            ----------
            TOTAL LIABILITIES                                            434,338             338,285               305,933
                                                                        --------            --------              --------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDER'S EQUITY
Common stock, no par value, 1,000 shares
    authorized; shares issued and outstanding - 100                        3,604               3,604                 3,604
Additional paid-in capital                                                64,450              64,450                64,450
Accumulated other comprehensive loss:
      Unrealized holding loss on available-for-sale investments           (8,651)            (12,200)                 (702)
(Accumulated deficit) retained earnings                                     (889)             10,199                 6,595
                                                                     -----------          ----------            ----------
            TOTAL STOCKHOLDER'S EQUITY                                    58,514              66,053                73,947
                                                                      ----------          ----------             ---------

            TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                  $492,852            $404,338              $379,880
                                                                        ========            ========              ========
</TABLE>

        See the accompanying notes to consolidated financial statements.


<PAGE>


                      CII FINANCIAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                 (In thousands)

<TABLE>

<CAPTION>

                                Nine Months Ended

                                                           September 30,                     Year Ended December 31,
                                                       2000            1999            1999           1998           1997
                                                       ----            ----            ----           ----           ----
                                                     (Unaudited) (Unaudited)

REVENUES

<S>                                                  <C>             <C>              <C>            <C>           <C>
  Direct written premiums, gross                     $153,034        $106,291         $148,824       $153,914      $135,580
  Changes in direct unearned premiums                  (2,906)         (2,579)          (2,142)           127        (1,400)
                                                   ----------      ----------       ----------    -----------    ----------

  Direct earned premiums, gross                       150,128         103,712          146,682        154,041       134,180
  Less:  premiums ceded                                59,177          45,458           63,727         19,767         4,983
                                                    ---------       ---------        ---------      ---------    ----------

  Net earned premiums                                  90,951          58,254           82,955        134,274       129,197
  Net investment income                                11,217          12,075           15,776         18,241        16,781
  Net realized investment (losses) gains                 (460)           (174)            (381)         1,988           580
                                                   ----------      ----------       ----------     ----------   -----------

      Total revenues                                  101,708          70,155           98,350        154,503       146,558
                                                      -------        --------         --------       --------      --------

COSTS AND EXPENSES
  Loss and loss adjustment expenses                   207,323          94,815          157,424        115,759        99,553
  Reinsurance recoveries                             (123,303)        (60,002)         (95,963)       (21,412)       (6,221)
                                                     --------        --------        ---------      ---------    ----------

  Net loss and loss adjustment expenses                84,020          34,813           61,461         94,347        93,332
  Policy acquisition costs                              8,606           5,737            6,339         19,216        19,860
  General and administrative and other                 17,372          15,000           19,749         18,761        18,462
  Asset impairment                                      3,000
  Interest expense                                      2,717           2,751            3,706          4,301         4,091
                                                    ---------       ---------       ----------     ----------    ----------

     Total costs and expenses                         115,715          58,301           91,255        136,625       135,745
                                                     --------        --------        ---------       --------      --------

(LOSS) INCOME BEFORE FEDERAL INCOME TAX
(BENEFIT) EXPENSE AND EXTRAORDINARY GAIN              (14,007)         11,854            7,095         17,878        10,813

Federal income tax (benefit) expense                   (4,902)          4,815            3,602          4,166           272
                                                    ---------       ---------        ---------     ----------   -----------

(LOSS) INCOME BEFORE EXTRAORDINARY GAIN                (9,105)          7,039            3,493         13,712        10,541
                                                    ---------        --------        ---------      ---------     ---------

Extraordinary gain from debt extinguishments
(net of income taxes of
$353 and $0 (unaudited), $59, $25, and $1)                654                              111              48              2
                                                   ----------     -------------     ----------    ------------  -------------

NET (LOSS) INCOME                                    $ (8,451)        $ 7,039         $  3,604       $ 13,760      $ 10,543
                                                     ========         =======         ========       ========      ========
</TABLE>

        See the accompanying notes to consolidated financial statements.


<PAGE>


                      CII FINANCIAL, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

                                 (In thousands)

<TABLE>

<CAPTION>

                                                                          Accumulated                   (Accumulated
                                        Common     Stock     Additional      Other                        Deficit)        Total
                                       Number of    Amount   Paid-in     Comprehensive  Comprehensive     Retained    Stockholder's
                                        Shares                Capital    Income (Loss)  Income (Loss)     Earnings       Equity
                                      ------------ --------- ----------- -------------- --------------- ------------- --------------

<S>              <C>                        <C>       <C>      <C>         <C>                           <C>             <C>
BALANCE, JANUARY 1, 1997                    100       $3,604   $58,630     $   303                       $ (17,708)      $44,829
Comprehensive income:
  Net income                                                                                $10,543         10,543        10,543
  Unrealized gain on
  available-for-sale
     investments, net of tax                                                   949              949                          949
  Reclassification adjustment for

     gains included in net income                                                (580)         (580)                        (580)
                                                                                         ----------
Comprehensive income                                                                        $10,912
                                                                                            =======
Stock option activity                                            1,737                                                     1,737
                                      ------------ -------------------   ------------                   ------------    --------

BALANCE, DECEMBER 31, 1997                  100        3,604    60,367         672                          (7,165)       57,478

Comprehensive income:
  Net income                                                                                $13,760         13,760        13,760
  Unrealized gain on
  available-for-sale
     investments, net of tax                                                   614              614                          614
  Reclassification adjustment for

     gains included in net income                                           (1,988)          (1,988)                      (1,988)
                                                                                          ---------
Comprehensive income                                                                        $12,386
                                                                                            =======
Capital contribution from parent                                 3,665                                                     3,665
Stock option activity                                               418                                                      418
                                      ------------ --------------------  ------------                   ------------   ---------

BALANCE, DECEMBER 31, 1998                  100        3,604    64,450        (702)                          6,595        73,947

Comprehensive income:
  Net income                                                                                 $3,604          3,604         3,604
  Unrealized loss on
  available-for-sale
     investments, net of tax                                               (11,879)         (11,879)                     (11,879)
  Reclassification adjustment for

     losses included in net income                                             381              381                          381
                                                                                          ---------
Comprehensive income                                                                      $  (7,894)
                                      ------------ ----------------------------------     =========     ------------

BALANCE, DECEMBER 31, 1999                  100        3,604    64,450     (12,200)                         10,199        66,053

Comprehensive income:
  Net loss (unaudited)                                                                      $(8,451)        (8,451)       (8,451)
  Unrealized gain on
  available-for-sale
     investments, net of tax
  (unaudited)                                                                3,089            3,089                        3,089
  Reclassification adjustment for
     losses included in net income
     (unaudited)                                                               460              460                          460
                                                                                          ---------
Comprehensive income (unaudited)                                                          $  (4,902)
                                                                                          =========
Dividend paid to parent (unaudited)                                                                         (2,637)       (2,637)

BALANCE, SEPTEMBER 30, 2000
(unaudited)                                 100       $3,604   $64,450    $ (8,651)                        $  (889)      $58,514
                                            ===       ======   =======    ========                         =======       =======
</TABLE>

        See the accompanying notes to consolidated financial statements.


<PAGE>


                      CII FINANCIAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)

<TABLE>

<CAPTION>

                                                                       Nine Months Ended

                                                                         September 30,                Year Ended December 31,
                                                                       2000           1999         1999         1998         1997
                                                                       ----           ----         ----         ----         ----
                                                                  (Unaudited)     (Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income                                                  $(8,451)         $7,039        $3,604     $13,760      $10,543
  Adjustments to reconcile net (loss) income to net
       cash provided by operating activities:
<S>                                                                   <C>                             <C>          <C>           <C>
    Extraordinary gain                                                (1,007)                         (170)        (73)          (3)
    Depreciation and amortization                                      1,197             950         1,220       1,550          928
    Provision for asset impairment                                     3,000
    Provision for losses on premiums                                                    (144)         (144)
    Change in assets and liabilities:
       Premiums receivable                                            (4,011)          1,303         1,365       1,078          504
       Investment income receivable                                      380             238            (3)      1,768         (820)
       Deferred policy acquisition costs                                (354)           (773)         (574)         (3)          31
       Payable to affiliates                                            (281)          3,555           662      10,213          834
       Reinsurance recoverable                                       (79,732)        (39,471)      (73,438)    (37,011)      (5,634)
       Federal income taxes receivable                                (4,582)          2,650        (4,404)       (697)      (3,022)
       Deferred income taxes                                                                         5,887      (1,637)      (2,044)
       Reserve for loss and loss adjustment expense                   97,508             879        32,130       9,565       14,923
       Unearned premiums                                               2,906           2,579         2,142        (127)       1,400
       Accounts payable and other accrued expenses                       704          (2,130)       (3,523)      4,889          589
       Ceded reinsurance premiums payable                             (1,897)         (3,241)
                                                                                                       582       7,843          (42)
       Other assets                                                   (7,633)          4,366         5,142     (13,988)        (807)
                                                                   ---------       ---------     ---------    --------     ---------
    Net cash (used in) provided by operating activities               (2,253)        (22,200)      (29,522)     (2,870)      17,380
                                                                   ---------        --------      --------   ---------      --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                                  (820)         (4,011)       (4,176)     (4,395)     (10,419)
  Purchase of available-for-sale investments                        (111,727)       (159,576)     (291,863)   (682,334)    (512,653)
  Proceeds from sales/maturities of available-for-sale
      investments                                                    119,577         148,251       291,919     687,415      478,203
  Purchase of held-to-maturity investments                            (1,499)         (7,086)       (7,133)    (38,056)      (7,776)
  Proceeds from maturities of held-to-maturity
      investments                                                      4,366          30,980        36,077      18,087        4,872
                                                                       -----         -------       -------     -------       ------
    Net cash provided by (used in) investing activities                9,897           8,558        24,824     (19,283)     (47,773)
                                                                      ------           -----        ------     -------      -------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repurchase of convertible subordinated debentures                   (2,432)            (55)         (583)     (3,143)
                                                                                                                                (27)

  Dividend to Sierra                                                  (2,637)
  Capital contribution                                                                                           3,665

  Stock option activity                                                                                            418        1,737
                                                                 --------------           --   -----------------------     ---------
    Net cash (used in) provided by financing activities               (5,069)             (55)        (583)        940        1,710
                                                                  ----------     ------------  -----------  ----------     ---------

NET CHANGE IN CASH AND CASH EQUIVALENTS                                2,575         (13,697)       (5,281)    (21,213)     (28,683)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                      16,833          22,114        22,114      43,327       72,010
                                                                    --------        --------      --------    --------      --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                           $19,408        $  8,417       $16,833     $22,114      $43,327
                                                                     =======        ========       =======     =======       =======

SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
  Cash paid during the year for interest (net of amount               $3,713          $3,712        $3,724      $4,380       $4,088
capitalized)
  Cash paid during the year for income taxes                               7           1,834         1,834       7,220        4,303
</TABLE>

        See the accompanying notes to consolidated financial statements.


<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       Business

CII  Financial,  Inc.  ("CII  Financial")  was  incorporated  in  the  State  of
California on September  15, 1988.  On October 31, 1995 Sierra Health  Services,
Inc. ("Sierra") acquired CII Financial for approximately $76.3 million of common
stock in a transaction accounted for as a pooling of interests. CII Financial is
a holding company primarily engaging in writing workers' compensation  insurance
through its wholly-owned  subsidiaries,  California  Indemnity Insurance Company
("California  Indemnity"),  Commercial  Casualty Insurance Company  ("Commercial
Casualty"), CII Insurance Company ("CII Insurance") and Sierra Insurance Company
of Texas ("Sierra Texas").

     As used herein,  the term "the Company" means CII  Financial,  Inc. and its
subsidiaries, and the term "CII Financial" means CII
Financial, Inc., exclusive of such subsidiaries.

2.       Summary of Significant Accounting Policies

     Principles of Consolidation.  All significant intercompany transactions and
balances have been  eliminated.  The  consolidated  financial  statements of CII
Financial  include  the  accounts  of  all  of  its  wholly-owned  subsidiaries,
California Indemnity,  Commercial Casualty, Sierra Texas, CII Insurance,  Sierra
Insurance Agency, CII Leasing,  Inc., Financial Assurance Company,  Ltd. and CII
Premium Finance Company.  CII Leasing,  Inc. and CII Premium Finance Company are
both inactive subsidiaries.

Unaudited Financial Statements.  The accompanying unaudited balance sheet, as of
September 30, 2000 and the  consolidated  statements  of operations  and of cash
flows for the nine month  periods ended  September 30, 2000 and 1999,  have been
prepared in conformity  with  accounting  principles  generally  accepted in the
United  States  of  America  but do not  contain  all  of  the  information  and
disclosures  that  would be  required  in a complete  set of  audited  financial
statements.  They should,  therefore,  be read in  conjunction  with the audited
consolidated  financial statements and related notes thereto for the years ended
December 31, 1999, 1998 and 1997. In the opinion of management, the accompanying
unaudited consolidated financial statements reflect all adjustments,  consisting
only of normal recurring  adjustments,  necessary for a fair presentation of the
financial results for the interim periods presented.

Premium Revenues.  Revenue from workers' compensation premiums are calculated by
formula  such that the  premium  written is earned pro rata over the term of the
policy.  Premiums  written in excess of premiums earned are recorded as unearned
premium  revenue.  Direct  premiums  earned  but not  billed  at the end of each
accounting  period are  estimated  and  accrued,  and  differences  between such
estimates and final billings are included in current operations.  Accrued earned
but unbilled  premiums are included with premiums  receivable.  Revenue is shown
net of premiums ceded to reinsurers.

     General  and   Administrative   Expenses.   Policyholder's   dividends  and
management fees are included in general and administrative expenses.

Deferred  Policy  Acquisition   Costs.   Policy  acquisition  costs  consist  of
commissions,  premium  taxes and other  underwriting  costs,  which are directly
related to the  production  and  retention  of new and renewal  business and are
deferred  and  amortized  as the  related  premiums  are  earned.  Should  it be
determined  that future policy  revenues and earnings on invested funds relating
to existing insurance  contracts will not be adequate to cover related costs and
expenses, deferred costs are expensed.

Cash and Cash  Equivalents.  The Company  considers cash and cash equivalents as
all highly liquid  instruments with an original maturity of three months or less
at the time of  purchase.  The  carrying  amount  of cash  and cash  equivalents
approximates fair value because of the short maturity of these instruments.

Investments.  Available-for-sale debt securities and preferred stocks are stated
at fair value with unrealized gains and losses recorded as a separate  component
of  other   comprehensive   income  (loss),   net  of  deferred   income  taxes.
Held-to-maturity debt securities are carried at amortized cost.

The insurance subsidiaries are required by state regulatory agencies to maintain
certain deposits and must also meet certain net worth and reserve  requirements.
The Company, and its subsidiaries, are in compliance with the applicable minimum
regulatory and capital requirements.

Investment income is recognized when earned. Gains and losses on disposition are
based on net proceeds and the adjusted  carrying amount of the securities  sold,
using the specific identification method.

The  Company has an  investment  in a real estate  limited  partnership  that is
accounted  for under  the  equity  method.  Under the  equity  method,  original
investments  are  recorded  at cost  and  adjusted  by the  Company's  share  of
earnings, losses and distributions.

Property and  Equipment.  Property and  equipment,  consisting  of buildings and
leasehold  improvements,  furniture and fixtures,  data processing equipment and
vehicles,  is stated  at cost less  accumulated  depreciation.  Depreciation  is
computed on a  straight-line  basis over periods ranging from 5 to 10 years with
leasehold improvements depreciated over the term of the lease.

Reinsurance.  In the normal  course of  business,  insurance  companies  seek to
reduce the effects of events that may cause unfavorable  underwriting results by
reinsuring certain levels of risk in various levels of exposure with reinsurers.
Amounts  recoverable  from the reinsurers  are estimated in a manner  consistent
with the claim  liability  associated  with the  reinsured  policy.  Reinsurance
receivables,  including amounts related to paid and unpaid losses,  are reported
as assets rather than a reduction of the related liabilities.

Reserve  for  Loss  and Loss  Adjustment  Expenses.  The  reserve  for  workers'
compensation  loss and loss  adjustment  expense  ("loss and LAE")  consists  of
estimated  costs of each unpaid claim reported to the Company prior to the close
of the  accounting  period as well as those  incurred but not yet reported.  The
methods for establishing and reviewing such liabilities are continually reviewed
and  adjustments  are  reflected  in current  operations.  The Company  does not
discount its loss and LAE reserves.

Income Taxes. The Company accounts for income taxes using the liability  method.
Deferred  income tax assets and  liabilities  result from temporary  differences
between the tax basis of assets and liabilities and the reported  amounts in the
consolidated  financial  statements  that will  result in taxable or  deductible
amounts in future years. The Company's  temporary  differences arise principally
from certain net operating losses,  accrued expenses,  reserves for loss and LAE
and  depreciation.  Federal  income  taxes  are  calculated  pursuant  to a  tax
allocation agreement between Sierra and the Company.  Income taxes are allocated
on a separate  return basis for each company and tax benefits are recorded  only
to the extent that an entity could recoup taxes paid in prior years.

Concentration  of Credit Risk.  The  Company's  financial  instruments  that are
exposed to credit risk consist primarily of investments and accounts receivable.
The Company  maintains cash and cash  equivalents and  investments  with various
financial  institutions.  These  financial  institutions  are  located  in  many
different regions, and Company policy is designed to limit exposure with any one
institution.

Credit risk with respect to accounts receivable is generally  diversified due to
the large number of entities  comprising  the Company's  customer base and their
dispersion  across many  different  industries.  These  customers  are primarily
located  in the states in which the  Company  operates  principally  California,
Colorado,  Nevada and Texas.  However, the Company is licensed and does business
in  several  other  states.  The  Company  also  has  receivables  from  certain
reinsurers.   Reinsurance   contracts  do  not  relieve  the  Company  from  its
obligations to  policyholders.  Failure of reinsurers to honor their obligations
could  result in losses to the  Company.  The Company  evaluates  the  financial
condition of its reinsurers to minimize its exposure to significant  losses from
reinsurer  insolvencies.   All  reinsurers  that  the  Company  has  reinsurance
contracts with are rated A- or better by the A.M. Best Company.

Recently Issued  Accounting  Standards.  In June 1998, the Financial  Accounting
Standards Board (the "FASB") issued Statement of Financial  Accounting Standards
No. 133,  "Accounting for Derivative  Instruments and Hedging Activities" ("SFAS
133"), as amended,  which is effective for fiscal years beginning after June 15,
2000. SFAS 133  establishes  additional  accounting and reporting  standards for
derivative instruments and hedging activities.  SFAS 133 requires that an entity
recognize all  derivatives  as either assets or  liabilities in the statement of
financial  position.  This statement also defines and allows  companies to apply
hedge accounting to its designated derivatives under certain instances.  It also
requires  that all  derivatives  be marked to market on an ongoing  basis.  This
applies whether the derivatives are stand-alone instruments, such as warrants or
interest rate swaps, or embedded derivatives,  such as call options contained in
convertible  debt  investments.  Along  with  the  derivatives,  in the  case of
qualifying  hedges, the underlying hedged items are also to be marked to market.
These market value adjustments are to be included either in the income statement
or  other  comprehensive   income,   depending  on  the  nature  of  the  hedged
transaction.  The fair value of financial instruments is generally determined by
reference  to market  values  resulting  from  trading on a national  securities
exchange or in an over the counter market. In cases where derivatives  relate to
financial instruments of non-public companies, or where quoted market prices are
otherwise not available,  such as for  derivative  financial  instruments,  fair
value is based on estimates using present value or other  valuation  techniques.
Based on  management's  understanding  of SFAS 133, the Company does not believe
that it has any derivative instruments and does not have any hedging activities.
The majority of the Company's investments are held by insurance companies, which
are regulated as to the types of investments they may hold.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 clarifies existing  accounting  principles related to revenue recognition in
financial  statements.  The Company is required to comply with the provisions of
SAB 101 in its quarter ending  December 31, 2000.  Based upon the current nature
of the Company's operations,  management does not believe that SAB 101 will have
any impact on the Company's results of operations.

     Business Segment.  As of December 31, 1999 the Company operated in a single
business segment, workers' compensation insurance.

Use of Estimates in the Preparation of Financial Statements.  The preparation of
the Company's  financial  statements  requires  management to make estimates and
assumptions  that  affect  the  amounts  of  reported  assets  and  liabilities,
particularly  loss and LAE reserves  and  incurred  loss and LAE reported in the
financial  statements.  Loss  and LAE  reserves  have a  significant  degree  of
uncertainty when related to their  subsequent  payments.  Although  reserves are
established on the basis of a reasonable  estimate,  it is not only possible but
probable that reserves will differ from their related  subsequent  developments.
Underlying  causes  for  this  uncertainty  include,  but  are not  limited  to,
uncertainty  in  development  patterns  and  unanticipated  inflationary  trends
affecting the services provided by the insurance contract.  This uncertainty can
result in both adverse as well as  favorable  development  of actual  subsequent
activity when compared to the reserve established. Any subsequent change in loss
and LAE reserves  established  in a prior year would be reflected in the current
year's operating results.

3.       PROPERTY AND EQUIPMENT

Property and equipment at December 31, consists of the following (in thousands):

<TABLE>

<CAPTION>

                                                                             1999           1998
                                                                           --------  --     ----
<S>                                                                         <C>           <C>
                Buildings and leasehold improvements                        $1,124        $   974
                Furniture, fixtures and equipment                            3,003          2,936
                Data processing equipment and software                       3,560          3,154
                Construction in progress                                     5,178          1,625
                Less:  accumulated depreciation                             (4,511)        (3,436)
                                                                            ------         ------
                  Net property and equipment                                $8,354         $5,253
                                                                            =======        ======
</TABLE>

Depreciation  expense  in 1999,  1998 and 1997 was  $1,075,000,  $1,345,000  and
$722,000, respectively.

During the second  quarter of 2000 the Company  wrote-off  capitalized  costs of
$3.0  million on an  information  system  software  project  that was  cancelled
because the vendor was unable to fulfill its contractual obligations.

4.


<PAGE>


INVESTMENTS

The following table summarizes the Company's debt securities and preferred stock
investments as of December 31, 1999 (in thousands):

<TABLE>

<CAPTION>

                                                                                         Gross        Gross

                                                                          Amortized    Unrealized    Unrealized      Fair

                                                                             Cost         Gains        Losses        Value
Available-for-Sale:

U.S. Government

<S>                                                                          <C>              <C>        <C>        <C>
    and its Agencies..........................................               $101,102         $122       $13,041    $ 88,183
Municipal Obligations.........................................                 31,818           20         1,236      30,602
Corporate Bonds...............................................                 32,907           45         1,730      31,222
Other.........................................................                 17,908                      2,619      15,289
Total Debt Securities.........................................                183,735          187        18,626     165,296
Preferred Stock...............................................                  3,817                        331       3,486
   Total Available-for-Sale...................................               $187,552         $187       $18,957    $168,782

Held-to-Maturity

  U.S. Government

========================================================================
    and its Agencies..........................................                 $9,782         $341         $ 708     $ 9,415
Municipal Obligations.........................................                  5,558           64            55       5,567
Corporate Bonds...............................................                  5,738          115                     5,853
Other.........................................................                  3,945                        751       3,194
  Total Held-to-Maturity......................................                $25,023         $520        $1,514    $ 24,029


The following table summarizes the Company's debt securities and preferred stock
investments as of December 31, 1998 (in thousands):

                                                                                          Gross        Gross

                                                                           Amortized     Unrealized    Unrealized

                                                                             Cost         Gains        Losses     Fair Value

Available-for-Sale:

U.S. Government
    and its Agencies..........................................                $78,071         $717        $1,189    $ 77,599
Municipal Obligations.........................................                 23,585          145           227      23,503
Corporate Bonds...............................................                 76,479          596           823      76,252
Other.........................................................                  8,542           19           271       8,290
Total Debt Securities.........................................                186,677        1,477         2,510     185,644
Preferred Stock...............................................                    931            9            58         882
  Total Available-for-Sale....................................               $187,608       $1,486        $2,568    $186,526

Held-to-Maturity

  U.S. Government

========================================================================
    and its Agencies..........................................                $15,492         $ 47         $ 483    $ 15,056
Municipal Obligations.........................................                  6,300          319                     6,619
Corporate Bonds...............................................                 11,909          557                    12,466
Other.........................................................                 20,266                        937      19,329
  Total Held-to-Maturity......................................                $53,967        $ 923        $1,420    $ 53,470
</TABLE>

===========================================================================


<PAGE>


The contractual maturities of available-for-sale debt securities at December 31,
1999 are shown below.  Actual maturities may differ from contractual  maturities
because borrowers may have the right to call or prepay obligations.

<TABLE>

<CAPTION>

                                                                             Amortized       Estimated

(in thousands)                                                                 Cost          Fair Value
<S>                                                                        <C>              <C>
Due in one year or less.......................................             $    8,492       $    8,485
Due after one year through five years.........................                 38,414           37,688
Due after five years through ten years........................                 13,909           13,298
Due after ten years through fifteen years.....................                 13,844           12,664
Due after fifteen years.......................................                109,076           93,161
                                                                            ---------        ---------
     Total....................................................               $183,735         $165,296
                                                                             ========         ========
</TABLE>

------------------------------------------------------------------------------
The contractual  maturities of held-to-maturity  debt securities at December 31,
1999 are shown below.  Actual maturities may differ from contractual  maturities
because borrowers may have the right to call or prepay obligations:

<TABLE>

<CAPTION>

                                                                             Amortized       Estimated

(in thousands)                                                                 Cost          Fair Value
<S>                                                                          <C>              <C>
Due in one year or less.......................................               $  2,580         $  2,611
Due after one year through five years.........................                  9,565            9,585
Due after five years through ten years........................                    776              775
Due after ten years through fifteen years.....................                  4,795            4,565
Due after fifteen years.......................................                  7,307            6,493
                                                                            ---------      -----------
     Total....................................................                $25,023         $ 24,029
                                                                              =======         ========
</TABLE>
----------------------------------------------------------------------------
Gross realized gains on investments for the nine months ended September 30, 2000
and the years ended December 31, 1999, 1998 and 1997 were $220,000  (unaudited),
$261,000,  $4,120,000 and  $2,517,000,  respectively.  Gross realized  losses on
investments  for the nine months  ended  September  30, 2000 and the years ended
December 31, 1999, 1998 and 1997 were $680,000 (unaudited), $642,000, $2,132,000
and $1,937,000, respectively.

Investment  income,  by major category of investments,  is summarized as follows
(in thousands):

<TABLE>

<CAPTION>

                                              Nine months ended September 30,

                                                                                            Year Ended December 31,

                                                    2000             1999             1999            1998            1997
                                                  --------      --   -----       --   -----         --------        ------
                                               (Unaudited)    (Unaudited)

<S>                                                 <C>         <C>               <C>                <C>              <C>
Interest from debt securities                       $10,352     $10,962           $14,387            $17,175          $16,206
Dividend income from preferred stock                    280         328               411                511              358
Mortgage interest                                       592         928             1,130                734              397
Other                                                    42                        ______
                                                -----------    --------                         --------------
     Total investment income                         11,266      12,218            15,928             18,420           16,961
Investment expenses                                      49         143                152               179              180
                                                -----------   ---------         ----------        ----------       ----------
     Net investment income                          $11,217     $12,075           $15,776            $18,241          $16,781
                                                    =======     =======           =======            =======          =======
</TABLE>

Of the total debt securities and cash  equivalents,  $152,356,000,  $171,639,000
and $179,878,000,  at fair value, were on deposit with regulatory authorities in
compliance with certain legal requirements  related to the insurance  operations
at September 30, 2000, December 31, 1999 and 1998, respectively.

The Company holds certain  mortgage  notes on residential  and  commercial  real
estate. In connection with CII Financial's relocation of its principal executive
offices to Pleasanton, California in July 1992, to retain key officers and other
employees,  the  Company  extended  mortgage  loans  for  the  purchase  of such
employees' principal  residences.  The interest rate was reduced to a fixed rate
of 3% per annum; the maturity date was fixed to March 2009; and each loan can be
assumed,  one time, by a qualified  purchaser of the employee's  residence.  The
interest rate, upon assumption,  increases to 3.5% per annum. As of December 31,
1999 and 1998,  the  outstanding  balances  on  employee  relocation  loans were
$4,764,000  and  $4,949,000,  respectively.  The Company  also holds  commercial
mortgage loans,  the majority of which are with Sierra  affiliates.  These loans
are also  first  trust  deeds and earn  between  7% and 11 1/2% per  annum.  The
Company  has one  mortgage  loan  with a  non-affiliated  third  party  which is
currently in default;  the  principle  balance  outstanding  was  $1,633,000  at
September 30, 2000. The property has been appraised at a value that exceeds book
value.  Interest income has not been accrued since the default date. The Company
is currently  litigating  the priority of its lien on the property.  The Company
has made demand under its title insurance policy and will foreclose  pending the
outcome of the litigation on its claim.

5.       Reinsurance

The Company has reinsurance treaties in effect with unrelated entities.  In 1999
and 1998,  workers'  compensation  claims between  $500,000 and $100,000,000 per
occurrence are 100% reinsured.  In 1997,  workers'  compensation  claims between
$350,000  and  $60,000,000  per  occurrence  were 100%  reinsured.  In addition,
effective  July  1,  1998,  workers'  compensation  claims  below  $500,000  per
occurrence  were  reinsured  under  quota  share and excess of loss  reinsurance
agreements  (referred to as "low level  reinsurance")  with an A+ rated carrier.
Under this  agreement,  the Company  reinsures  30% of the first $10,000 of each
loss,  75% of the  next  $40,000  and  100% of the next  $450,000.  The  Company
receives a 9.25% ceding commission from the reinsurer as a partial reimbursement
of its operating expenses.  The low level reinsurance  agreement expired on June
30, 2000; however the Company opted to continue ceding premiums and losses under
the low level agreement on a run off basis for all policies in force on June 30,
2000.  Effective  January 1, 2000 we entered into a  reinsurance  contract  that
provides  statutory  (unlimited)  coverage for workers'  compensation  claims in
excess  of  $500,000  per  occurrence.  The  contract  is in effect  for  claims
occurring  on or after  January 1, 2000 through  December  31, 2000.  On July 1,
2000,  the Company  entered into a reinsurance  agreement  that covers losses on
claims in excess of $250,000  to $500,000  for  policies  issued  after June 30,
2000.

The low level  reinsurance  agreement at signing  contained both retroactive and
prospective  reinsurance  coverage and the Company has  bifurcated the low level
reinsurance  agreement to account for the different accounting  treatments.  The
amount by which the estimated ceded  liabilities  exceed the amount paid for the
retroactive coverage is reported as a deferred gain and amortized to income over
the  estimated  remaining  settlement  period  using the  interest  method.  Any
subsequent  changes in estimated or actual cash flows related to the retroactive
coverage are accounted for by adjusting the previously recorded deferred gain to
the balance that would have existed had the revised  estimate been  available at
the inception of the reinsurance  transactions,  with a corresponding  charge or
credit to income.  During 1999,  the Company  recorded an adjustment to increase
its deferred gain related to retroactive reinsurance coverage by $4,615,000. For
the years ended December 31, 1999 and 1998, the Company amortized deferred gains
of $3,850,000 and $1,038,000, respectively.

At  December  31, 1999 and 1998,  the amount of  reinsurance  recoverable  under
prospective  reinsurance  contracts for unpaid loss and LAE was $110,089,000 and
$37,797,000,  respectively.  At  December  31,  1999 and  1998,  the  amount  of
reinsurance   recoverable  under  the  retroactive   reinsurance   contract  was
$14,842,000 and $18,710,000,  respectively. The amount of reinsurance receivable
for paid loss and LAE was  $6,931,000  and  $1,917,000  at December 31, 1999 and
1998,  respectively.  Such  amortization is included in loss and loss adjustment
expense on the accompanying consolidated statements of operations.

Reinsurance  contracts  do not  relieve  the  Company  from its  obligations  to
enrollees or  policyholders.  Failure of reinsurers  to honor their  obligations
could  result in losses to the  Company.  The Company  evaluates  the  financial
condition of its reinsurers to minimize its exposure to significant  losses from
reinsurer  insolvencies.  Substantially all of the reinsurance  recoverables are
due from reinsurers rated A+ by the A.M. Best Company.

The following  table  provides  workers'  compensation  prospective  reinsurance
information for the periods ended (in thousands):

<TABLE>

<CAPTION>

                                                                                 Change in
                                                               Recoveries       Recoverable

                                                                on Paid          or Unpaid             Premiums

                                                               Loss / LAE        Loss / LAE              Ceded

Nine Months Ended September 30, 2000 (Unaudited):

<S>                                                             <C>                 <C>                 <C>
             Low level reinsurance carrier                      $36,180             $79,170             $56,732
             Excess of loss reinsurance carriers                  1,678               6,275               2,445
                                                              ---------           ---------           ---------
      Total                                                     $37,858             $85,445             $59,177
                                                                =======             =======             =======

Nine Months Ended September 30, 1999 (Unaudited):

             Low level reinsurance carrier                      $14,088             $40,191             $43,264
             Excess of loss reinsurance carriers                  2,578               3,145               2,194
                                                              ---------           ---------           ---------
      Total                                                     $16,666             $43,336             $45,458
                                                                =======             =======             =======

Year Ended December 31, 1999:

             Low level reinsurance carrier                      $21,941             $69,104             $60,702
             Excess of loss reinsurance carriers                  1,730               3,188               3,025
                                                              ---------           ---------           ---------
      Total                                                     $23,671             $72,292             $63,727
                                                                =======             =======             =======

Year Ended December 31, 1998:

             Low level reinsurance carrier                      $ 1,379             $19,664             $16,095
             Excess of loss reinsurance carriers                  3,292              (2,923)              3,672
                                                               --------            --------           ---------
      Total                                                     $ 4,671             $16,741             $19,767
                                                                =======             =======             =======

Year Ended December 31, 1997:

             Excess of loss reinsurance carriers               $    841            $  5,380            $  4,983
                                                               ========            ========            ========

6.       Loss and Loss Adjustment Expenses

</TABLE>

The  following  table  provides a  reconciliation  of the  beginning  and ending
reserve  balances  for unpaid loss and LAE.  The loss  estimates  are subject to
change in subsequent  accounting  periods and any change to the current  reserve
estimates would be accounted for in future results of operations.

While management of the Company believes that current  estimates are reasonable,
significant adverse or favorable loss development could occur in the future.


<PAGE>





<TABLE>

<CAPTION>

                                          Nine Months Ended September 30,

(In thousands)                                                                       Year Ended December 31,
                                                2000              1999          1999            1998       1997
                                          ----  --------     ---- -------   ------------   ---- -------
                                             (Unaudited)      (Unaudited)
<S>                                            <C>              <C>           <C>              <C>          <C>
Net beginning loss and LAE reserve             $134,305         $174,467      $174,467         $181,643     $172,100
                                               --------         --------      --------         --------     --------

Net provision for insured events incurred in:

      Current year                               63,843           36,061        51,541          103,990      102,302
      Prior years                                20,177           (1,248)        9,920           (9,643)      (8,970)
                                              ---------        ---------    ----------      -----------    ---------
  Total net provision                            84,020           34,813        61,461           94,347       93,332
                                              ---------        ---------     ---------       ----------    ---------

Net payments for loss and LAE attributable to insured events incurred in:

      Current year                               15,763          12,836         21,207           29,591       26,812
      Prior years                                49,893          64,668         80,416           71,932       56,977
                                              ---------        --------      ---------        ---------    ---------
  Total net payments                             65,656          77,504        101,623          101,523       83,789
                                              ---------        --------       --------         --------    ---------

Net ending loss and LAE reserve                 152,669         131,776        134,305          174,467      181,643
Reinsurance recoverable                         189,233          81,367        110,089           37,797       21,056
                                              ---------       ---------       --------        ---------   ----------

Gross ending loss and LAE reserve              $341,902        $213,143       $244,394         $212,264     $202,699
                                               ========        ========       ========         ========     ========

</TABLE>

During the nine months ended  September 30, 2000,  the Company  experienced  net
adverse development related to accident years 1999 and prior. Estimated loss and
LAE  incurred in accident  years 1996 to 1998 have  developed  significantly  in
response  to the  continuation  of  increasing  claim  severity  patterns on the
Company's  California  book of business.  Many workers'  compensation  insurance
carriers in California are also  experiencing  high claim  severity.  For claims
occurring on and after July 1, 1998,  the Company has  reinsured a percentage of
the  higher  claim  severity  to its  reinsurer  under the  Company's  low level
reinsurance  agreement.  The low level reinsurance agreement expired on June 30,
2000; however the Company opted to continue ceding premiums and losses under the
low level  agreement  on a run off basis for all  policies  in force on June 30,
2000.  Effective  January 1, 2000 we entered into a  reinsurance  contract  that
provides  statutory  (unlimited)  coverage for workers'  compensation  claims in
excess  of  $500,000  per  occurrence.  The  contract  is in effect  for  claims
occurring  on or after  January 1, 2000 through  December  31, 2000.  On July 1,
2000,  the Company  entered into a reinsurance  agreement  that covers losses on
claims in excess of $250,000  to $500,000  for  policies  issued  after June 30,
2000.

7.       Long Term Debt

7 1/2%  Convertible  Subordinated  Debentures.  The Company's  long-term debt at
December 31, 1999 and 1998 consists of convertible  subordinated debentures with
an outstanding balance of $50,498,000 and $51,251,000 respectively. In September
1991, the Company issued convertible  subordinated debentures (the "Debentures")
due  September  15, 2001.  The  Debentures  bear interest at 7 1/2% which is due
semi-annually  on March  15 and  September  15.  Each  $1,000  in  principal  is
convertible  into 25.382 shares of Sierra common stock at a conversion  price of
$39.398  per share.  Unamortized  issuance  costs of  $362,000  and  $509,000 at
December 31, 1999 and 1998,  are  included in other  assets on the  consolidated
balance sheets and are being amortized over the life of the Debentures.  Accrued
interest on the  Debentures as of December 31, 1999 and 1998 was  $1,099,000 and
$1,117,000,  respectively. The Debentures are redeemable in whole or in part, at
a  redemption  price of  100.75%  plus  accrued  interest.  The  Debentures  are
subordinated  obligations  of  CII  Financial  only  and  were  not  assumed  or
guaranteed by Sierra.  During the years ended December 31, 1999,  1998 and 1997,
the Company repurchased $753,000,  $3,216,000 and $30,000  respectively,  of the
debentures  on the open market  resulting  in  extraordinary  gains of $170,000,
$73,000 and $3,000 and a  corresponding  tax  provision of $59,000,  $25,000 and
$1,000 in 1999, 1998 and 1997 respectively.

The fair value of the Debentures at December 31, 1999 was $35,601,000, which was
determined  based on the  estimated  market  price on  December  31,  1999.  The
Debentures are scheduled to mature on September 15, 2001.

CII Financial has limited  sources of cash and borrowed  approximately  $365,000
from Sierra to make the September 15, 2000  interest  payment.  CII Financial is
dependent upon dividends from its  subsidiary,  California  Indemnity  Insurance
Company, to meet its debt payment obligations.  Currently,  California Indemnity
cannot pay any dividends without prior approval by the California  Department of
insurance  as it has no earned  surplus  and it may not have  sufficient  earned
surplus from which to pay a dividend to CII Financial when the Debentures mature
in 2001.  Sierra has no  obligation to lend any or enough funds to CII Financial
to pay the  Debentures  when they mature.  Accordingly,  CII Financial  does not
expect to have readily  available  funds to pay the Debentures when they mature.
The  Company  is  exploring  strategies  regarding  refinancing  of  the 7  1/2%
subordinated   convertible  debentures  including  refinancing,   extending  the
maturity date or exchanging the Debentures.  There can be no assurances that CII
Financial  or  Sierra  will  have  the  cash  resources  required  to  meet  the
obligations   under  the  Debentures  or  that  the  Company  will  be  able  to
successfully implement a strategy for refinancing of the Debentures. In December
2000, CII Financial  commenced a proposed exchange offer to the holders of the 7
1/2% debentures to restructure the debt, extend the maturity date and reduce the
overall debt of the Company. The offering proposed to exchange an amount of cash
plus new subordinated debentures with a later maturity date.

8.       Commitments and Contingencies

Leases.  The Company is the lessee under several  operating leases most of which
relate to office  facilities  and  equipment.  The  rentals on these  leases are
charged to expense over the lease term and, where  applicable,  provide for rent
escalations  based on certain costs and price index factors.  The following is a
schedule, by year, of the future minimum lease payments under existing operating
leases (in thousands):

<TABLE>

<CAPTION>
Year Ending December 31,
<S>     <C>                                                        <C>
        2000.............................................          $  2,756
        2001.............................................             2,617
        2002.............................................             2,457
        2003.............................................             1,661
        2004.............................................             1,297
        Thereafter.......................................             5,342
                                                                 ----------
             Total.......................................          $ 16,130
                                                                   ========
</TABLE>

Rent expense  totaled  $2,602,000,  $1,314,000 and $1,313,000 in 1999,  1998 and
1997, respectively.

Guaranty of Sierra's Credit  Facility Debt. At June 30, 2000,  Sierra was not in
compliance with certain financial  covenants relating to its line of credit. The
lenders  provided  Sierra with  waivers  effective  June 30,  2000 and  expiring
October 31, 2000. In consideration for the banks granting one of the waivers, in
August 2000,  CII  Financial  became a guarantor of the Sierra  credit  facility
debt. Should CII Financial be asked by the banks to perform on its guaranty, the
Debentures  would be  subordinated to Sierra's credit facility debt. The waivers
expired on October  31,  2000 and Sierra  received a Notice of Default  from the
banks on  November  8,  2000.  No demand was made by the banks to perform on the
guaranty and Sierra was able to amend its credit facility  agreement on December
15, 2000.  The new Sierra  credit  facility  agreement  expires on September 30,
2003. In the amended agreement, CII Financial continues to provide a guaranty of
the debt in the event of a default by Sierra.

Litigation and Legal Matters. The Company is subject to various claims and other
litigation in the ordinary course of business.  Such litigation  includes claims
for  workers'  compensation  and claims by  providers  for  payment  for medical
services  rendered  to  injured  workers.   In  the  opinion  of  the  Company's
management, the ultimate resolution of pending legal proceedings should not have
a material adverse effect on the Company's financial condition.

9.       Federal Income Taxes

A summary of the  provision  for income  taxes for the years ended  December 31,
1999, 1998 and 1997 is as follows (in thousands):

<TABLE>

<CAPTION>

                                                                         Year Ended December 31,
                                                              1999                 1998                1997

(Benefit) provision for income taxes:

<S>                                                         <C>                   <C>                 <C>
  Current tax on operating income                           ($2,286)              $6,829              $3,045
  Deferred tax on operating income                            5,888               (2,663)             (2,773)
                                                            -------               ------               -----
     Total tax on operating income                            3,602                4,166                 272
  Current tax on extraordinary gain                              59                   25                   1
                                                         ----------            ---------          ----------
     Total                                                   $3,661               $4,191              $  273
                                                            =======               ======              ======
</TABLE>

The following reconciles the difference between the 1999, 1998 and 1997 reported
and statutory provision for income taxes:

<TABLE>

<CAPTION>

                                                             1999            1998          1997
                                                        --   ------     --   ------     -- ----

<S>                                                           <C>             <C>           <C>
         Statutory rate                                       35%             35%           35%
         Tax preferred investments                            (6%)            (2%)          (4%)
         Change in valuation allowance                        16%            (11%)         (34%)
         Other                                                 5%              1%            5%
                                                          -------          ------         -----
            Provision for income taxes                        50%             23%            2%
                                                           ======           =====         =====
</TABLE>

In 1991 and 1992, California Indemnity had taxable net operating losses ("NOLs")
that were available to be carried forward to offset future taxable  income.  The
deferred  income  tax asset  related  to these  NOLs was fully  reserved  with a
valuation  allowance.  In  1997  and  1998,  California  Indemnity  had  taxable
operating  income,  which was partially  offset by the NOLs, due to the separate
return limitation year rules. The valuation  allowances were reversed as the NOL
was used and the NOLs were fully utilized in 1998.

On a separate  return basis,  CII Financial has  historically  had taxable NOLs,
including the three years ended December 31, 1999. The deferred income tax asset
related to CII Financial's NOLs was fully reserved. Due to the smaller amount of
taxable  income at the  insurance  subsidiaries  in 1999  compared to 1998,  the
effect of CII  Financial's  valuation  allowance  on the  provision  was greater
compared to prior years.


<PAGE>


The tax effects of significant  items  comprising the Company's net deferred tax
assets are as follows (in thousands):

<TABLE>

<CAPTION>

                                                                        1999               1998
                                                                        ------             ----
Deferred tax assets:
<S>                                                                   <C>               <C>
         Loss and LAE reserves                                        $  1,956          $  6,401
         Accruals not currently deductible                               1,128             1,374
         Compensation accruals                                             616               754
         Bad debt allowances                                               397               447
         Loss carryforwards and credits                                 13,514            12,657
         Unearned premiums                                                 935               781
         Deferred reinsurance gains                                      2,456             2,188
         Unrealized investment losses                                    6,569               378
                                                                     ---------         ---------
              Total                                                     27,571            24,980

Deferred tax liabilities:
         Deferred policy acquisition costs                                 832               631
         Depreciation and amortization                                   1,255               454
         Other                                                             652               543
                                                                    ----------        ----------
              Total                                                      2,739             1,628

Net deferred tax asset before valuation allowance                       24,832            23,352
Valuation allowance                                                    (10,227)           (9,052)
                                                                       -------         ---------

Net deferred tax asset                                                 $14,605           $14,300
                                                                       =======           =======
</TABLE>

In lieu of state  franchise and corporate  income taxes,  California  Indemnity,
Commercial Casualty, CII Insurance and Sierra Texas pay premium taxes based upon
direct written premiums to the states in which they write business.  Premium tax
expense  of  $4,078,000,   $4,228,000  and  $3,730,000  is  included  in  policy
acquisition  costs in the  consolidated  statements of operations  for the years
ended December 31, 1999, 1998 and 1997, respectively.

10.      Dividend Restrictions - Insurance Subsidiaries

Under  California   insurance  company  statutes  and  regulations,   California
Indemnity, Commercial Casualty and CII Insurance are restricted as to the amount
of  dividends  they may pay on their  common  stock to their  respective  parent
companies. Sierra Texas is regulated by Texas insurance statutes and regulations
that are similar to California in terms of paying dividends. No dividends may be
paid  without  at  least  ten  business  days  prior  notice  to  the  Insurance
Commissioner.  Unless specially approved by the Insurance  Commissioner prior to
payment, dividends may be paid only out of accumulated earned surplus, excluding
any earned  surplus  attributable  to  unrealized  appreciation  in assets or an
exchange of assets.

If a dividend or other distribution is contemplated  which, along with all other
dividends or distributions made within the preceding twelve months,  exceeds the
greater of 10% of the insurance company's  policyholders'  surplus as of the end
of the prior  calendar  year or net income for such  calendar  year, at least 30
days  prior  notice to the  Commissioner  must be given,  and no  payment of the
dividend or distribution  may be made unless and until (i) the  Commissioner has
approved  it or (ii)  the 30 days  have  elapsed  and the  Commissioner  has not
disapproved the proposed payment.

Net income and stockholder's equity of domestic insurance subsidiaries, as filed
with regulatory authorities on the basis of statutory accounting practices,  are
summarized as follows (in thousands):

<TABLE>

<CAPTION>

                                                        Nine Months
                                                           Ended

                                                       September 30,              Year Ended December 31,
                                                            2000              1999           1998           1997
                                                         ---------         ---------      ---------      -------
                                                        (Unaudited)

<S>                                                     <C>               <C>             <C>              <C>
Statutory net (loss) income for the period ended        $  (7,185)        $  12,283       $  20,877        $11,277
Statutory stockholder's equity at the
   period ended                                           106,078           118,278         116,580         96,061
</TABLE>

Based on its financial  position as of December 31, 1999,  California  Indemnity
can pay $6,840,000 in shareholder dividends to CII Financial during 2000 without
the  prior  approval  of  the  California  Insurance  Commissioner.   Commercial
Casualty,  CII  Insurance  and Sierra  Texas can pay  $1,686,000,  $376,000  and
$216,000,  respectively  to California  Indemnity  without prior approval of the
applicable state insurance commissioner.

CII  Financial,  Inc. paid  dividends of  $2,637,000,  in March 2000, to Sierra.
California   Indemnity  paid  dividends  to  CII  Financial  of  $6,800,000  and
$6,000,000, during 2000 and 1999, respectively. During 1999, Commercial Casualty
paid $1,700,000 in dividends to California Indemnity.  Due notice was filed with
the  California  Department  of  Insurance,  and the  payment was made after the
expiration  of  the  required  waiting  period  in  accordance  with  California
Insurance regulations.

The National Association of Insurance  Commissioners  adopted risk-based capital
guidelines for property-casualty  insurance companies whereby required statutory
surplus  would be based,  in part,  on a formula  based risk  assessment  of the
individual investments held in the insurance company's portfolio.  The Company's
risk-based  capital results for the years ended December 31, 1999, 1998 and 1997
exceeded the minimum surplus required under the regulations.

In March  1998,  the NAIC  adopted  the  Codification  of  Statutory  Accounting
Principals  (the  "Codification").   The  codification,  which  is  intended  to
standardize  regulatory  accounting  and reporting  for the insurance  industry,
becomes effective January 1, 2001. However, statutory accounting principles will
continue to be established by individual state laws and permitted practices. The
state of  California  has indicated  that it intends to require  adoption of the
Codification for the preparation of statutory financial statements.  The Company
has not finalized the  quantification  of the effects of the Codification on its
statutory financial statements.

11.      Employee Compensation and Benefit Plans

Defined  Contribution  Plan.  All  employees who meet minimum  requirements  can
participate  in  Sierra's  defined  contribution  pension  and 401(k)  plan (the
"Plan").  The Plan  covers  all  employees  who meet  certain  age and length of
service requirements. For the years ended December 31, 1998 and 1997 and for the
six months  ended June 30,  1999,  the  Company  contributed  a maximum of 2% of
eligible  employees'  compensation  and matched 50% of a participant's  elective
deferral  up to a maximum of either  10% of an  employee's  compensation  or the
maximum  allowable  under current IRS statute.  Effective July 1, 1999, the Plan
was modified such that the Company  matches  50%-100% of an employee's  elective
deferral  and  the  maximum  Company  match  is  6%  of a  participant's  annual
compensation,  subject to Internal  Revenue  Service  limits.  The Plan does not
require additional Company contributions. For the years ended December 31, 1999,
1998  and  1997,  the  Company   expensed   $601,000,   $625,000  and  $630,000,
respectively, to this plan.

Executive  Retirement  Plans.  The Company  offered key employees and officers a
Supplemental   Executive  Retirement  Plan  and  Supplemental  Senior  Executive
Retirement  Plan.  Eligibility  for  participation  in both plans was limited to
officers and key  employees  selected  and  approved by the Board of  Directors.
These plans were terminated  effective  October 31, 1995, and there have been no
further contributions.  Pursuant to contractual obligations under the plans, the
Company paid  $250,000 to a former plan  participant  in each of the years ended
December 31, 1999, 1998 and 1997.

Employment Contracts.  The Company currently has an employment contract with its
Chief  Executive  Officer  expiring   December  2001.   Minimum  aggregate  cash
compensation  obligations  under this  contract  are  $214,000 for both 2000 and
2001.

Employee Stock  Purchase Plan. The Company offers  employee stock purchase plans
through Sierra (the "Purchase Plan") whereby employees may purchase newly issued
shares of stock  through  payroll  deductions at 85% of the fair market value of
such shares on specified dates as defined in the Purchase Plan.

Stock Option Plans.  The Company  offers  several plans,  through  Sierra,  that
provide common  stock-based  awards to employees and to non-employee  directors.
The plans  provide for the  granting of options,  stock,  and other  stock-based
awards.  Awards are  granted by a  committee  appointed  by the Sierra  Board of
Directors.  Options become exercisable at such times and in such installments as
set by the committee.  The exercise price of each option equals the market price
of Sierra stock on the date of grant.  Stock options generally vest at a rate of
20% - 25% per  year.  Options  generally  expire  one year  after the end of the
vesting  period.  The tax benefit  related to the exercise of options by Company
employees is passed on to the Company by Sierra.  This totaled $0,  $418,000 and
$1,737,000 for 1999, 1998 and 1997 respectively.

12.      Other Related Party Transactions

The Company entered into a management  services  agreement with Sierra effective
January 1, 1999. The agreement provides investment, accounting, human resources,
systems and other administrative  services. The fee for the services is based on
the lower of actual cost or fair market value.  Management  fee expense for 1999
totaled $1,338,000.  The Company did not have a management agreement with Sierra
prior to January 1, 1999.

The Company purchases employee health insurance from its affiliates, Health Plan
of Nevada, Inc., Sierra Health and Life Insurance Company, Inc. and Texas Health
Choice,   L.C.  The  Company  paid  $642,000,   $528,000  and  $498,000  to  the
aforementioned affiliates for years ended 1999, 1998 and 1997, respectively. The
premiums paid to its affiliates were determined on an arms-length basis.

At January 1, 1998,  California Indemnity had an investment in real estate owned
and occupied of $11,959,000.  During the year,  California  Indemnity obtained a
mortgage  loan on this  property  in the  amount of  $5,000,000.  In the  fourth
quarter of 1998, the property,  net of the mortgage  loan,  with a book value of
$8,442,000,  which  approximated  fair value,  was  contributed to a real estate
limited partnership of which Sierra is the general partner. California Indemnity
agreed to adjust its  partnership  interest to approximate  its  occupancy.  The
adjustment  resulted in Sierra  purchasing a portion of  California  Indemnity's
interests for $2,262,000.  Simultaneously  with the execution of the partnership
agreement,  California  Indemnity  contributed one-half of its adjusted interest
into  the  limited  partnership,  valued  at  $3,092,000,  to  its  wholly-owned
subsidiary,  Commercial Casualty. Together,  California Indemnity and Commercial
Casualty own limited partner interests totaling 27% of the limited  partnership.
These  transactions  were done to enable both  companies  to qualify for certain
premium tax credits in the state of Nevada and were  approved by the  California
Department of Insurance. As part of the transaction to form and fund the limited
partnership,  California  Indemnity  was released from any  obligation  directly
under the mortgage loan.

Concurrent with the sale of the real estate, California Indemnity entered into a
rental agreement with the related  partnership under which California  Indemnity
leases a portion of the  transferred  real  estate.  Rental  expense  under this
agreement  was   approximately   $1,168,000  and  $270,000  in  1999  and  1998,
respectively.

In September 1998, California Indemnity refinanced a 15-year mortgage note of an
affiliated  real  estate  partnership.  Sierra  is  the  majority  owner  of the
partnership.  The note is secured by a first deed of trust and pays  interest at
7% per annum. The loan to value ratio was approximately 68%.

In March 2000,  California  Indemnity  financed a $7,400,000  five-year mortgage
note to Sierra. The note is secured by a first deed of trust and earns quarterly
interest  payments  at 8.75% per annum  beginning  April 1, 2000 until  April 1,
2005, when the unpaid principal  balance is due and payable in full. The note is
callable in April 2001.

13.      Quarterly Results of Operations (Unaudited)

The following table sets forth the unaudited data regarding  operations for each
quarter  of the nine  months  ended  September  30,  2000,  and the years  ended
December 31, 1999 and 1998. In the opinion of  management,  such  unaudited data
includes  all  adjustments,  consisting  only of normal  recurring  adjustments,
necessary to present fairly the information  presented.  The Company's operating
results for any quarter are not necessarily  indicative of the operating results
for any future period.

       Nine months ended September 30, 2000 (in thousands):

<TABLE>

<CAPTION>

                                                                3rd Quarter         2nd Quarter        1st Quarter

<S>                                                               <C>                 <C>                <C>
Net earned premiums                                               $38,263             $27,344            $25,344
Net investment income                                               3,817               3,571              3,369
                                                                ---------          ----------          ---------
Total revenues                                                     42,080              30,915             28,713
Costs and expenses                                                 40,832              48,957             25,926
                                                                 --------          ----------           --------
Income (loss) before income tax and extraordinary
   gain                                                             1,248             (18,042)             2,787
Federal income tax provision (benefit)                                437              (6,492)             1,153
                                                               ----------          ----------          ---------
Income (loss) before extraordinary gain                               811             (11,550)             1,634
Extraordinary gain, net of tax                                         93                 485                 76
                                                              -----------        ------------         ----------

Net income (loss)                                               $     904            $(11,065)           $ 1,710
                                                                =========            ========            =======

Year ended December 31, 1999 (in thousands):

                                            4th Quarter         3rd Quarter         2nd Quarter        1st Quarter

Net earned premiums                            $24,705            $21,860              $18,470            $17,920
Net investment income                            3,490              3,788                3,944              4,173
                                             ---------          ---------             --------           --------
Total revenues                                  28,195             25,648               22,414             22,093
Costs and expenses                              32,952             21,451               18,641             18,211
                                               -------           --------              -------            -------
(Loss) income before income
    tax and extraordinary gain                  (4,757)             4,197                3,773              3,882
Federal income tax

    (benefit) provision                         (1,212)             1,679                1,535              1,600
                                              --------           --------             --------           --------
(Loss) income before

    extraordinary gain                          (3,545)             2,518                2,238              2,282
Extraordinary gain, net of tax                     109                                       1                  1
                                            ----------          ---------          -----------        -----------

Net (loss) income                             $ (3,436)           $ 2,518              $ 2,239            $ 2,283
                                              ========            =======              =======            =======

Year ended December 31, 1998 (in thousands):

                                            4th Quarter         3rd Quarter         2nd Quarter        1st Quarter

Net earned premiums                           $24,308             $40,162             $36,978            $32,826
Net investment income                           4,511               5,445               5,540              4,733
                                             --------            --------            --------           --------
Total revenues                                 28,819              45,607              42,518             37,559
Costs and expenses                             22,946              40,901              37,896             34,882
                                              -------             -------             -------            -------
Income before income

   tax and extraordinary gain                   5,873               4,706               4,622              2,677
Federal income tax

   provision (benefit)                          4,192                 (25)                 (1)            ______
                                              -------          ----------         -----------
Income before  extraordinary gain               1,681               4,731               4,623              2,677
Extraordinary gain, net of tax                 ______                  45                   3             ______
                                                               ----------         -----------

Net income                                    $ 1,681             $ 4,776             $ 4,626            $ 2,677
                                              =======             =======             =======            =======

</TABLE>


<PAGE>





                      CII FINANCIAL, INC. AND SUBSIDIARIES

           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                 CONDENSED BALANCE SHEETS - Parent Company Only

                                 (In thousands, except share data)

<TABLE>

<CAPTION>

                                                                         September 30,             December 31,
                                                                             2000              1999            1998
                                                                             ----              ----            ----
   ASSETS                                                                 (Unaudited)
<CAPTION>

<S>                                                                      <C>              <C>             <C>
       Cash and cash equivalents                                         $          83    $       857     $       481
       Equity in net assets of subsidiaries                                    104,512        115,002         125,945
       Property and equipment, net                                               1,216          1,621           2,209
       Net due from affiliates                                                     936
       Other assets                                                                314             568          1,051
                                                                          ------------    ------------    -----------

            TOTAL ASSETS                                                      $107,061       $118,048        $129,686
                                                                              ========       ========        ========


   LIABILITIES AND STOCKHOLDER'S EQUITY
       Convertible subordinated debentures                                   $  47,059      $  50,498       $  51,251
       Net payable to affiliates                                                                  251           3,217
       Accrued interest payable                                                    111          1,099           1,117
       Accounts payable and accrued expenses                                     1,377            147              154
                                                                           -----------    -----------     ------------
            TOTAL LIABILITIES                                                   48,547         51,995          55,739
                                                                            ----------      ---------      ----------


   STOCKHOLDER'S EQUITY
       Common stock, no par value, 1,000 shares authorized;
           shares issued and outstanding - 100                                   3,604          3,604           3,604
       Additional paid-in capital                                               64,450         64,450          64,450
       Accumulated other comprehensive loss:
           Unrealized holding loss on available-for-sale
              investments of subsidiaries                                       (8,651)       (12,200)           (702)
       (Accumulated deficit) retained earnings                                    (889)        10,199           6,595
                                                                           -----------     ----------     -----------
            TOTAL STOCKHOLDER'S EQUITY                                          58,514         66,053          73,947
                                                                            ----------     ----------      ----------

   TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                                 $107,061       $118,048        $129,686
                                                                              ========       ========        ========
</TABLE>


<PAGE>


                      CII FINANCIAL, INC. AND SUBSIDIARIES
     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

             CONDENSED STATEMENT OF OPERATIONS - Parent Company Only

                                 (In thousands)

<TABLE>

<CAPTION>

                                                        Nine Months Ended September

                                                                    30,                         Year Ended December 31,
                                                            2000            1999           1999          1998           1997
                                                            ----            ----           ----          ----           ----
                                                         (Unaudited)     (Unaudited)

REVENUES

<S>                                                       <C>                           <C>            <C>            <C>
    Net investment income                                 $     38                      $        1     $      25      $    118
    Realized gains on investments                                                                                          294
    Other                                                      707         $    840          1,084         1,323           435
                                                          --------         --------       --------      --------      --------

  Total revenues                                               745              840          1,085         1,348           847
                                                         ---------        ---------       --------      --------      --------

EXPENSES

    Interest expense                                         2,725            2,882          3,707         3,997         4,088
    General and administrative                                 523              620            765           897           568
                                                          --------         --------      ---------     ---------      --------

  Total expenses                                             3,248            3,502          4,472         4,894         4,656
                                                           -------          -------       --------      --------       -------

Equity in undistributed (loss) earnings of
   subsidiaries                                             (7,239)           9,701          7,141        17,309        14,062
                                                            ------          -------          -----        ------        ------

(LOSS) INCOME BEFORE FEDERAL
INCOME TAX (BENEFIT) EXPENSE
AND EXTRAORDINARY GAIN                                      (9,742)           7,039          3,754        13,763        10,253

Federal income tax (benefit) expense                          (637)                            261            51          (288)
                                                          --------      ------------     ---------    ----------     ---------

(LOSS) INCOME BEFORE
EXTRAORDINARY GAIN                                          (9,105)           7,039          3,493        13,712        10,541
                                                          --------          -------       --------       -------      --------

Extraordinary gain from debt extinguishments
(net of income taxes of $353, $0, $59, $25 and $1)             654                             111            48               2
                                                        ----------      ------------     ---------    ----------    ------------

NET (LOSS) INCOME                                          $(8,451)          $7,039         $3,604       $13,760       $10,543
                                                           =======           ======         ======       =======       =======
</TABLE>


<PAGE>


                      CII FINANCIAL, INC. AND SUBSIDIARIES
     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

             CONDENSED STATEMENT OF CASH FLOWS - Parent Company Only

                                 (In thousands)

<TABLE>

<CAPTION>

                                                             Nine Months Ended September

                                                                         30,                      Year Ended December 31,
                                                                2000            1999          1999         1998          1997
                                                                ----            ----          ----         ----          ----
                                                             (Unaudited)    (Unaudited)

CASH FLOW OPERATING ACTIVITIES:
<S>                                                          <C>             <C>             <C>         <C>            <C>
    Net (loss) income                                        $  (8,451)      $  7,039        $  3,604    $ 13,760       $10,543
    Adjustments to reconcile net (loss) income to net
      cash used in operating activities:
    Equity in undistributed earnings of subsidiaries             7,239         (9,701)         (7,141)    (17,309)      (14,062)
    Extraordinary gain                                          (1,007)                          (170)        (73)           (3)
    Depreciation and amortization                                  524            520             721         883           464
    Change in assets and liabilities:
      Net payable to parent and subsidiaries                    (1,187)            69          (2,370)      1,126            53
      Other assets                                                 134            311             338        (466)        2,040
      Accounts payable and accrued expenses                      1,231           (428)             (7)        374        (2,113)

      Interest payable                                            (988)          (961)            (18)        (78)             3
                                                            ----------      ---------             ---  ----------    -----------

Net cash used in operating activities                           (2,505)        (3,151)         (5,043)     (1,783)       (3,075)
                                                             ---------       --------       ---------    --------      --------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                                           77               2        (553)          210
    Proceeds from sales/maturities of available-for-sale
                                                            --------       ---------       ---------   --
        investments                                                                                                       2,698
                                                                ------        -------        --------   ---------     ---------


Net cash provided by (used in) investing activities                                   77            2        (553)        2,908
                                                            ----------     -------------            -                 ---------

CASH FLOW FROM FINANCING ACTIVITIES:
    Repurchase of convertible subordinated debentures           (2,432)           (55)           (583)     (3,143)          (27)
    Capital contribution                                                                                    3,665
    Dividend to Sierra                                          (2,637)
    Dividend from subsidiaries                                   6,800          3,000           6,000

    Stock option activity                                      _______                                        418         1,737
                                                                               ------          ------  ----------     ---------


Net cash provided by financing activities                        1,731          2,945           5,417         940         1,710
                                                            ----------     ----------           -----  ----------    ----------

NET CHANGE IN CASH AND CASH
  EQUIVALENTS                                                     (774)          (129)            376      (1,396)        1,543
                                                            ----------     ----------             ---     -------     ---------
CASH AND CASH EQUIVALENTS AT
   BEGINNING OF PERIOD                                             857            481             481       1,877           334
                                                            ----------     ----------             ---    --------    ----------

CASH AND CASH EQUIVALENTS AT END OF                                                        $
                                                                                           =
  PERIOD                                                    $       83     $       352            857   $     481        $1,877
                                                            ==========     ===========            ===   =========        ======

</TABLE>










No  person  has  been  authorized  to  give  any  information  or  to  make  any
representations  other than those  contained in the exchange offer and, if given
or made, such information or  representations  must not be relied upon as having
been authorized.  This statement and any related  documents do not constitute an
offer to buy or the  solicitation of an offer to sell debentures or common stock
in any  circumstances in which such offer or solicitation is unlawful.  In those
jurisdictions where the securities,  blue sky or other laws require the offer to
be made by a licensed broker or dealer,  the offer shall be deemed to be made on
behalf of CII Financial by the dealer manager or one or more registered  brokers
or dealers licensed under the laws of such jurisdiction.

<PAGE>




     In order to tender, a holder must send or deliver a properly  completed and
signed  Letter  of  Transmittal,   certificates  for  old  junior   subordinated
debentures and any other required documents to the Exchange Agent at its address
set forth below or tender pursuant to DTC's Automated Tender Offer Program.

                                   The Exchange Agent for the Exchange Offer is:

                                                WELLS FARGO CORPORATE TRUST

                                              By Registered & Certified Mail:

                                              WELLS FARGO BANK MINNESOTA, N.A.
                                                 Corporate Trust Operations
                                                       MAC N9303-121
                                                        PO Box 1517
                                                   Minneapolis, MN 55480

                                           By Regular Mail or Overnight Courier:

                                              WELLS FARGO BANK MINNESOTA, N.A.
                                                 Corporate Trust Operations
                                                       MAC N9303-121
                                                  Sixth & Marquette Avenue
                                                   Minneapolis, MN 55479

                                                  In Person by Hand Only:

                                              WELLS FARGO BANK MINNESOTA, N.A.
                                            12th Floor - Northstar East Building
                                                  Corporate Trust Services
                                                  608 Second Avenue South
                                                   Minneapolis, MN 55479

                                  By Facsimile (for Eligible Institutions only):
                                                       (612) 667-4927

                                             For Information or Confirmation by
                                                         Telephone:
                                                       (800) 344-5128

     Any questions or requests for assistance or for  additional  copies of this
Prospectus,  the Letter of Transmittal  or related  documents may be directed to
the Information Agent at its telephone number set forth below. A holder may also
contact  the Dealer  Manager  at its  telephone  number set forth  below or such
holder's  broker,  dealer,  commercial  bank, trust company or other nominee for
assistance concerning the Exchange Offer.

                                The Information Agent for the Exchange Offer is:

                                               D.F. King & Co., Inc.
                                                  77 Water Street
                                             New York, New York 10005
                                Bankers and Brokers Call Collect: (212) 269-5550
                                     All Others Call Toll-Free: (800) 735-3591

                        The exclusive Dealer Manager for the Exchange Offer is:

                                          Banc of America Securities LLC
                                         100 North Tryon Street, 7th Floor
                                          Charlotte, North Carolina 28255
                                      Attention: High Yield Special Products
                                             (704) 388-4813 (Collect)
                                            (888) 292-0070 (Toll Free)



<PAGE>



                                                       II-6


                                                        II-1
                                                      PART II

                                      INFORMATION NOT REQUIRED IN PROSPECTUS

Item 20.  Indemnification of Directors and Officers.

     Section 317 of the California Corporations Code authorizes a corporation to
indemnify  any director or officer who was or is a party or is  threatened to be
made a party to any  proceeding  (other than an action by or in the right of the
corporation  to obtain a judgment  in its favor)  because the person is or was a
director or officer of the  corporation,  against  expenses,  judgments,  fines,
settlements  and other amounts  actually and  reasonably  incurred in connection
with the proceeding. This indemnification is allowed only if the person acted in
good  faith and in a manner  the person  reasonably  believed  to be in the best
interests of the corporation.  In the case of a criminal proceeding,  the person
must have had no reasonable cause to believe his or her conduct was unlawful.  A
corporation may advance  expenses  incurred in defending any proceeding prior to
the  final  disposition  of  the  proceeding  if  the  corporation  receives  an
undertaking  by or on behalf of the  director or officer to repay that amount if
it is ultimately determined that the person is not entitled to be indemnified. A
corporation may also indemnify a director or officer against  expenses  actually
and  reasonably  incurred  by that  person in  connection  with the  defense  or
settlement  of the  action  by or in the  right of the  corporation  to obtain a
judgment in its favor. This  indemnification is allowed only if the person acted
in good faith and in a manner the person believed to be in the best interests of
the corporation and its shareholders.

     The  decision of whether  indemnification  will be provided in a particular
case will be made by (i) a majority vote of a quorum consisting of directors who
are not  parties  to the  proceeding,  (ii) if a quorum  is not  obtainable,  by
independent legal counsel in a written opinion,  (iii) approval of a majority of
the shareholders,  excluding the shares of the person to be indemnified; or (iv)
the court in which the proceeding is or was pending.

     Indemnification  is not  allowed  if it  would be  inconsistent  with (i) a
resolution of the shareholders,  (ii) the company's articles of incorporation or
by-laws,  (iii) an  agreement  in effect at the time of the cause of action,  or
(iv) any condition expressly imposed by a court in approving a settlement.

     In addition, a California  corporation may obtain and maintain insurance on
behalf of any director or officer of the corporation for any liability  asserted
against him or her,  whether or not the  corporation  has the power to indemnify
him or her against liability under the California Corporations Code.

     Article 7 of CII Financial,  Inc.'s (the "Company") by-laws provide for the
indemnification under certain conditions of directors,  officers,  employees any
agents acting in their official capacities.

     The Company has not entered into separate  indemnification  agreements with
any of its officers or directors.

     The Company has  purchased  directors'  and officers'  liability  insurance
insuring the Company's  officers and directors  against certain  liabilities and
expenses incurred by such persons in such capacities.

Item 21.  Exhibits and Financial Statement Schedules.

(a) Exhibits

Exhibit
Number              Description
1                  --Form of Dealer Management Agreement*
3.1                --Articles of Incorporation of the Company*
3.2                --Bylaws of the Company*
4.1                --Form of Indenture, of old junior subordinated debentures
                     due 2001 from the Company to
                    Manufacturers Hanover Trust Company as Trustee dated
                     September 15, 1991, incorporated by
                    reference to Exhibit 4.2 of Post-Effective Amendment No. 1
                    on Form S-3 to Registration Statement
                    on Form S-4 dated October 6, 1995 (Reg. No. 33-60591)
4.2                --First Supplemental Indenture between the Company, Sierra
                      Health Services, Inc. ("Sierra") and
                    Chemical Bank as Trustee, dated as of October 31, 1995, to
                        Indenture dated September 15, 1991,
                    incorporated by reference to Exhibit 4.3 of Post-Effective
                        Amendment No. 2 on Form S-3 to
                    Registration Statement on Form S-4 dated October 31, 1995
                        (Reg. No. 33-60591)
4.3                --Form of Indenture, of 9% senior subordinated debentures due
                         September 15, 2006 from the Company
                    to Wells Fargo Bank Minnesota, N.A., as Trustee*
4.4  --Specimen 9% senior  subordinated  debenture due September 15, 2006 of the
Company* 5.1 --Opinion of Morgan,  Lewis & Bockius LLP as to the legality of the
9% senior subordinated
                    debentures due September 15, 2006 of the Company being
                        registered*
10.1               --Administrative Services agreement between Health Plan of
                        Nevada, Inc. and Sierra dated December
                    1, 1987, incorporated by reference to Exhibit 10.17 to
                        Sierra's Annual Report on Form 10-K for
                    the fiscal year ended December 31, 1991
10.2               --Administrative Services agreement between Sierra Health and
                         Life Insurance Company, Inc. and
                    Sierra dated April 1, 1989, incorporated by reference to
                        Exhibit 10.18 to Sierra's Annual Report
                    on Form 10-K for the fiscal year ended December 31, 1991
10.3               --Agreement between Health Plan of Nevada, Inc. and the
                        United States Health Care Financing
                    Administration dated July 24, 1992, incorporated by
                        reference to Exhibit 10.18 to Sierra's
                    Annual Report on Form 10-K filed for the fiscal year ended
                        December 31, 1992
10.4                --Credit  Agreement  dated as of  October  30,  1998,  among
                    Sierra  as  borrower,  Bank of  America  National  Trust and
                    Savings  Association  as  Administrative  Agent and  Issuing
                    Bank,  First Union National Bank as Syndication  Agent,  and
                    the other financial  institutions party thereto, dated as of
                    October 30, 1998,  incorporated by reference to Exhibit 10.4
                    to Sierra's  Annual Report on Form 10-K filed for the fiscal
                    year ended December 31, 1998
10.5                --First  Amendment  to Credit  Agreement  among  Sierra,  as
                    borrower,   Bank  of  America  National  Trust  and  Savings
                    Association as Administrative Agent and Issuing Bank and the
                    other  financial  institutions  party  thereto,  dated as of
                    November 23, 1998, incorporated by reference to Exhibit 10.5
                    to Sierra's  Annual Report on Form 10-K filed for the fiscal
                    year ended December 31, 1998
10.6                --Second  Amendment  to  Credit  Agreement  among  Sierra as
                    borrower,   Bank  of  America  National  Trust  and  Savings
                    Association as Administrative  Agent and the other financial
                    institutions  party  thereto,  dated as of January 15, 1999,
                    incorporated by reference to Exhibit 10.6 to Sierra's Annual
                    Report on Form 10-K filed for the fiscal year ended December
                    31, 1998
10.7                --Third  Amendment  to  Credit  Agreement  among  Sierra  as
                    borrower,   Bank  of  America  National  Trust  and  Savings
                    Association as Administrative  Agent and the other financial
                    institutions party thereto,  dated as of September 30, 1999,
                    incorporated by reference to Exhibit 10.7 to Sierra's Annual
                    Report on Form 10-K filed for the fiscal year ended December
                    31, 1999
10.8               --Amended and Restated Credit Agreement among Sierra as
                         borrower, Bank of America, N.A. as
                    Administrative Agent and Issuing Bank, First Union National
                         Bank, as Syndication Agent and the
                    other financial institutions party thereto, dated as of
                        December 15, 2000 incorporated by
                    reference to Sierra's Report on Form 8-K dated December 22,
                         2000.
10.9               --Agreement and Plan of Merger dated as of June 12, 1995
                         among Sierra, Health Acquisition Corp.,
                    and the Company, incorporated by reference to the Report on
                        Form 8-K dated June 13, 1995, as
                    amended
10.10              --Guaranty, dated as of August 23, 2000, among the Company,
                        among others, as guarantors, in favor
                    of Bank of America National Trust and Savings Association as
                        Administrative Agent and the other
                    financial institutions party thereto*
10.11              --First Amendment to Guaranty among the Company, among
                        others,
                         as guarantors, in favor of Bank of
                    America National Trust and Savings Association as
                        Administrative Agent and the other financial
                    institutions party thereto*
10.12              --First and Second Underlying Excess Loss Reinsurance
                        Agreement dated July 1, 1998, by and
                    between Traveler's Indemnity Insurance Company of Illinois,
                         California Indemnity Insurance
                    Company, Commercial Casualty Insurance Company, CII
                        Insurance Company and Sierra Insurance
                    Company of Texas*
10.13               --Casualty Quota Share  Reinsurance  Agreement dated July 1,
                    1998, by and between Traveler's  Indemnity Insurance Company
                    of  Illinois,   California   Indemnity   Insurance  Company,
                    Commercial Casualty Insurance Company, CII Insurance Company
                    and Sierra Insurance Company of Texas*
10.14               --Statutory Workers' Compensation Excess of Loss Reinsurance
                    Agreement  dated  January 1, 2000,  by and between  National
                    Union Fire Insurance  Company of  Pittsburgh,  Pennsylvania,
                    California Indemnity Insurance Company,  Commercial Casualty
                    Insurance   Company,   CII  Insurance   Company  and  Sierra
                    Insurance Company of Texas*
10.15               --Summary   of   Workers'   Compensation   Excess   of  Loss
                    Reinsurance  Agreement  dated July 1, 2000,  by and  between
                    National  Union  Fire   Insurance   Company  of  Pittsburgh,
                    Pennsylvania,   California   Indemnity   Insurance  Company,
                    Commercial Casualty Insurance Company, CII Insurance Company
                    and Sierra Insurance Company of Texas*
10.16              --Limited Partnership Agreement of the 2716 N. Tenaya Way
                        Limited Partnership dated December 3,
                    1998, among California Indemnity Insurance Company,
                        Commercial Casualty Insurance Company and
                    Sierra *
10.17              --Lease of 2716 North Tenaya Way, Las Vegas, Nevada, dated
                         December 28, 1998, among 2716 N.
                    Tenaya Way Limited Partnership, California Indemnity
                         Insurance Company and Commercial Casualty
                    Insurance Company*
10.18              --Lease of 5627 Gibraltar Drive, Pleasanton, California,
                         dated April 20, 1992, among the Company
                    and Hacienda Venture*
10.19              --First Amendment dated August 22, 1994, to the Lease of 5627
                        Gibraltar Drive, Pleasanton,
                    California, among the Company and Hacienda Venture*
10.20               --Second  Amendment  dated August 19, 1999,  to the Lease of
                    5627  Gibraltar  Drive,  Pleasanton,  California,  among the
                    Company  and  Property LS OB One,  successor  in interest to
                    Hacienda Venture*
10.21              --Intercompany Pooling Agreement dated January 1, 1999, among
                                 California Indemnity Insurance
                    Company, Commercial Casualty Insurance Company, CII
                        Insurance Company and Sierra Insurance
                    Company of Texas *
10.22              --Investment Services Agreement dated January 1, 1999, among
                        Sierra, California Indemnity
                    Insurance Company, Commercial Casualty Insurance Company,
                        CII Insurance Company and Sierra
                    Insurance Company of Texas *
10.23              --Tax Allocation Agreement dated May 30, 1997, among Sierra,
                        Health Plan of Nevada, the Company,
                    Sierra Health and Life Insurance Company, California
                        Indemnity Insurance Company, Commercial
                    Casualty Insurance Company and CII Insurance Company *
10.24              --Intercompany Services Agreement dated January 1, 1999, by
                        and between Sierra and California
                    Indemnity Insurance Company *
12                 --Ratio of Earnings to Fixed Charges of the Company
21                 --Subsidiaries of the Company*
23.1               --Consent of Deloitte & Touche LLP
23.2               --Consent of Morgan, Lewis & Bockius LLP (included in the
                        opinion filed as Exhibit 5.1)*
24                 --Powers of Attorney for the Company (included on signature
                        page hereof)
25                 --Statement of Eligibility of Trustee on Form T-1*
27                 --Financial Data Schedule
99.1               --Form of Letter of Transmittal
99.2               --Form of Notice of Guaranteed Delivery
99.3               --Form of Notice of Brokers, Dealers, Commercial Banks, Trust
                         Companies and other Nominees
99.4               --Form of Notice to Clients
99.5               --Form of Company Letter to Debenture holders
99.6               --Form of Exchange Agent Agreement *
-------------------

* To be filed by amendment




<PAGE>


Item 22. Undertakings.

     The undersigned registrant hereby undertakes:

(1) To file,  during  any  period in which  offers or sales  are being  made,
                        a
post-effective amendment to this registration statement:

(i)      To include any prospectus required by Section 10(a)(3) of the
                        Securities Act of 1933;

(ii) To  reflect  in the  prospectus  any  facts or  events  arising  after  the
effective date of the registration  statement (or the most recent post-effective
amendment  thereof)  which,  individually  or  in  the  aggregate,  represent  a
fundamental  change in the information set forth in the registration  statement.
Notwithstanding the foregoing,  any increase or decrease in volume of securities
offered (if the total dollar value of  securities  offered would not exceed that
which  was  registered)  and any  deviation  from  the  low or  high  end of the
estimated  maximum  offering  range may be reflected  in the form of  prospectus
filed with the  Commission  pursuant  to Rule 424(b) if, in the  aggregate,  the
changes in volume  and price  represent  no more than 20  percent  change in the
maximum  aggregate  offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.

(iii) To include any material with respect to the plan of  distribution  and not
previously  disclosed in the  registration  statement or any material  change to
such information in the registration statement;

(2) That, for the purpose of determining  any liability under the Securities Act
of  1933,  each  such  post-effective  amendment  shall  be  deemed  to be a new
registration  statement  relating to the  securities  offered  therein,  and the
offering of such  securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from  registration by means of a  post-effective  amendment any of
the securities  being  registered  which remain unsold at the termination of the
offering.

(4) Insofar as indemnification  for liabilities arising under the Securities Act
of 1933 may be permitted to directors,  officers and controlling  persons of the
registrant pursuant to the foregoing  provisions,  or otherwise,  the registrant
has been advised that in the opinion of the Securities  and Exchange  Commission
such  indemnification  is against  public policy as expressed in the Act and is,
therefore,  unenforceable. In the event that a claim for indemnification against
such liabilities  (other than the payment by the registrant of expenses incurred
or paid by a director,  officer or  controlling  person of the registrant in the
successful  defense of any  action,  suit or  proceeding)  is  asserted  by such
director,  officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been  settled by  controlling  precedent,  submit to a court of  appropriate
jurisdiction the question whether such  indemnification  by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.



<PAGE>



                                                    SIGNATURES

     Pursuant to the requirements of the Securities Act, the Registrant has duly
caused  this  Registration   Statement  to  be  signed  on  its  behalf  by  the
undersigned,  thereunto  duly  authorized,  in the City of Las  Vegas,  State of
Nevada, on the 26th day of December 2000.

                                              CII FINANCIAL, INC.



                                          By    / s / Kathleen M. Marlon
                                                Kathleen M. Marlon
                                                President, Chief
                                                Executive Officer and Chairman

     Pursuant  to  the   requirements  of  the  Securities  Act  of  1933,  this
Registration  Statement  has  been  signed  by  the  following  persons  in  the
capacities  and on the dates  indicated.  Each person  whose  signature  to this
Registration  Statement  appears below hereby  appoints  Kathleen M. Marlon,  as
his/her  attorney-in-fact,  to sign on his/her  behalf  individually  and in the
capacity stated below and to file all supplements, amendments and post-effective
amendments  to this  Registration  Statement  and any  and  all  instruments  or
documents filed as a part of or in connection with this  Registration  Statement
or any amendment or supplement thereto,  and any such  attorney-in-fact may make
such   changes  and   additions   to  this   Registration   Statement   as  such
attorney-in-fact may deemed necessary or appropriate.

Signature                  Title                           Date

                           President, Chief Executive
/ s / Kathleen M. Marlon   Officer, Chairman and           December 26, 2000
Kathleen M. Marlon         Director (Principal
                           Executive Officer)

/ s / John F. Okita        Chief Financial Officer         December 26, 2000
John F. Okita              (Principal Financial
                           and Accounting Officer)

/ s / Paul H. Palmer       Director                        December 26, 2000
Paul H. Palmer

/ s / Frank E. Collins     Director                        December 26, 2000
Frank E. Collins





<PAGE>





                                                   Exhibit Index

Exhibit
Number    Description
1         --Form of Dealer Management Agreement*
3.1       --Articles of Incorporation of CII Financial, Inc. (the "Company")*
3.2       --Bylaws of the Company*
4.1       --Form of Indenture, of old junior subordinated debentures due 2001
                 from the Company to
          Manufacturers   Hanover   Trust  Company  as  Trustee  dated
          September 15, 1991, incorporated by reference to Exhibit 4.2
          of   Post-Effective   Amendment   No.   1  on  Form  S-3  to
          Registration  Statement  on Form S-4 dated  October  6, 1995
          (Reg. No. 33-60591)
4.2       --First Supplemental Indenture between the Company, Sierra Health
                Services, Inc. ("Sierra") and
          Chemical  Bank as Trustee,  dated as of October 31, 1995, to
          Indenture   dated   September  15,  1991,   incorporated  by
          reference to Exhibit 4.3 of  Post-Effective  Amendment No. 2
          on Form S-3 to Registration Statement on Form
          S-4 dated October 31, 1995 (Reg. No. 33-60591)
4.3       --Form of Indenture, of 9% senior subordinated debentures due
                September 15, 2006 from the Company
          to Wells Fargo Bank Minnesota, N.A., as Trustee*
4.4  --Specimen 9% senior  subordinated  debenture due September 15, 2006 of the
Company* 5.1 --Opinion of Morgan,  Lewis & Bockius LLP as to the legality of the
9% senior subordinated
                    debentures due September 15, 2006 of the Company being
                        registered*
10.1               --Administrative Services agreement between Health Plan of
                        Nevada, Inc. and Sierra dated December
                    1, 1987, incorporated by reference to Exhibit 10.17 to
                        Sierra's Annual Report on Form 10-K for
                    the fiscal year ended December 31, 1991
10.2               --Administrative Services agreement between Sierra Health and
                         Life Insurance Company, Inc. and
                    Sierra dated April 1, 1989, incorporated by reference to
                        Exhibit 10.18 to Sierra's Annual Report
                    on Form 10-K for the fiscal year ended December 31, 1991
10.3               --Agreement between Health Plan of Nevada, Inc. and the
                        United States Health Care Financing
                    Administration dated July 24, 1992, incorporated by
                        reference to Exhibit 10.18 to Sierra's
                    Annual Report on Form 10-K filed for the fiscal year ended
                         December 31, 1992
10.4                --Credit  Agreement  dated as of  October  30,  1998,  among
                    Sierra  as  borrower,  Bank of  America  National  Trust and
                    Savings  Association  as  Administrative  Agent and  Issuing
                    Bank,  First Union National Bank as Syndication  Agent,  and
                    the other financial  institutions party thereto, dated as of
                    October 30, 1998,  incorporated by reference to Exhibit 10.4
                    to Sierra's  Annual Report on Form 10-K filed for the fiscal
                    year ended December 31, 1998
10.5                --First  Amendment  to Credit  Agreement  among  Sierra,  as
                    borrower,   Bank  of  America  National  Trust  and  Savings
                    Association as Administrative Agent and Issuing Bank and the
                    other  financial  institutions  party  thereto,  dated as of
                    November 23, 1998, incorporated by reference to Exhibit 10.5
                    to Sierra's  Annual Report on Form 10-K filed for the fiscal
                    year ended December 31, 1998
10.6                --Second  Amendment  to  Credit  Agreement  among  Sierra as
                    borrower,   Bank  of  America  National  Trust  and  Savings
                    Association as Administrative  Agent and the other financial
                    institutions  party  thereto,  dated as of January 15, 1999,
                    incorporated by reference to Exhibit 10.6 to Sierra's Annual
                    Report on Form 10-K filed for the fiscal year ended December
                    31, 1998
10.7                --Third  Amendment  to  Credit  Agreement  among  Sierra  as
                    borrower,   Bank  of  America  National  Trust  and  Savings
                    Association as Administrative  Agent and the other financial
                    institutions party thereto,  dated as of September 30, 1999,
                    incorporated by reference to Exhibit 10.7 to Sierra's Annual
                    Report on Form 10-K filed for the fiscal year ended December
                    31, 1999
10.8               --Amended and Restated Credit Agreement among Sierra as
                         borrower, Bank of America, N.A. as
                    Administrative Agent and Issuing Bank, First Union National
                         Bank, as Syndication Agent and the
                    other financial institutions party thereto, dated as of
                        December 15, 2000*
10.9               --Agreement and Plan of Merger dated as of June 12, 1995
                         among Sierra, Health Acquisition Corp.,
                    and the Company, incorporated by reference to the Report on
                        Form 8-K dated June 13, 1995, as
                    amended
10.10              --Guaranty, dated as of August 23, 2000, among the Company,
                         among others, as guarantors, in favor
                    of Bank of America National Trust and Savings Association as
                        Administrative Agent and the other
                    financial institutions party thereto*
10.11              --First Amendment to Guaranty among the Company, among
                        others, as guarantors, in favor of Bank of
                    America National Trust and Savings Association as
                         Administrative Agent and the other financial
                    institutions party thereto*
10.12              --First and Second Underlying Excess Loss Reinsurance
                        Agreement dated July 1, 1998, by and
                    between Traveler's Indemnity Insurance Company of Illinois,
                         California Indemnity Insurance
                    Company, Commercial Casualty Insurance Company, CII
                        Insurance Company and Sierra Insurance
                    Company of Texas*
10.13               --Casualty Quota Share  Reinsurance  Agreement dated July 1,
                    1998,  by and  between  Traveler's  Indemnity  Insurance
                    Company of Illinois, California Indemnity Insurance Company,
                    Commercial Casualty Insurance Company, CII Insurance Company
                    and Sierra Insurance Company of Texas*
10.14               --Statutory   Workers'   Compensation   Excess  of  Loss
                    Reinsurance  Agreement dated January 1, 2000, by and between
                    National  Union  Fire   Insurance   Company  of  Pittsburgh,
                    Pennsylvania,   California   Indemnity   Insurance  Company,
                    Commercial Casualty Insurance Company, CII Insurance Company
                    and Sierra Insurance Company of Texas*
10.15               --Summary   of   Workers' Compensation   Excess  of  Loss
                    Reinsurance  Agreement  dated July 1, 2000,  by and  between
                    National  Union  Fire   Insurance   Company  of  Pittsburgh,
                    Pennsylvania,   California   Indemnity   Insurance  Company,
                    Commercial Casualty Insurance Company, CII Insurance Company
                    and Sierra Insurance Company of Texas*
10.16              --Limited Partnership Agreement of the 2716 N. Tenaya Way
                        Limited Partnership dated December 3,
                    1998, among California Indemnity Insurance Company,
                        Commercial Casualty Insurance Company and
                    Sierra*
10.17              --Lease of 2716 North Tenaya Way, Las Vegas, Nevada, dated
                        December 28,1998, among 2716 N. Tenaya
                    Way Limited Partnership, California Indemnity Insurance
                        Company and Commercial Casualty
                    Insurance Company *
10.18              --Lease of 5627 Gilbraltar Drive, Pleasanton, California,
                        dated April 20, 1992, among the Company
                    and Hacienda Venture*
10.19              --First Amendment dated August 22, 1994, to the Lease of
                        5627 Gilbraltar Drive, Pleasanton,
                    California, among the Company and Hacienda Venture*
10.20               --Second  Amendment  dated August 19, 1999,  to the Lease of
                    5627 Gilbraltar  Drive,  Pleasanton,  California,  among the
                    Company  and  Property LS OB One,  successor  in interest to
                    Hacienda Venture*
10.21              --Intercompany Pooling Agreement dated January 1, 1999, among
                         California Indemnity Insurance
                    Company, Commercial Casualty Insurance Company, CII
                        Insurance
                         Company and Sierra Insurance
                    Company of Texas *
10.22              --Investment Services Agreement dated January 1, 1999, among
                        Sierra, California Indemnity
                    Insurance Company, Commercial Casualty Insurance Company,
                        CII Insurance Company and Sierra
                    Insurance Company of Texas *
10.23              --Tax Allocation Agreement dated May 30, 1997, among Sierra,
                        Health Plan of Nevada, the Company,
                    Sierra Health and Life Insurance Company, California
                        Indemnity Insurance Company, Commercial
                    Casualty Insurance Company and CII Insurance Company *
10.24              --Intercompany Services Agreement dated January 1, 1999, by
                        and between Sierra and California
                    Indemnity Insurance Company *
12                 --Ratio of Earnings to Fixed Charges of the Company *
21                 --Subsidiaries of the Company *
23.1               --Consent of Deloitte & Touche LLP
23.2               --Consent of Morgan, Lewis & Bockius LLP (included in the
                        opinion filed as Exhibit 5.1)*
24                 --Powers of Attorney for the Company (included on signature
                        page hereof)
25                 --Statement of Eligibility of Trustee on Form T-1
27                 --Financial Data Schedule
99.1               --Form of Letter of Transmittal
99.2               --Form of Notice of Guaranteed Delivery.
99.3               --Form of Notice of Brokers, Dealers, Commercial Banks,
                        Trust Companies and Other Nominees
99.4               --Form of Notice to Clients
99.5               --Form of Company Letter to Debenture holders
99.6               --Form of Exchange Agent Agreement *
-------------------

* To be filed by amendment














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