Filed by CII Financial, Inc.
Pursuant to Rule 425
under the Securities Act of 1933
For: CII Financial, Inc.
Commission File No.: 333-52726
December 26, 2000
To Holders of CII Financial, Inc.
7-1/2% Convertible Subordinated Debentures Due September 15, 2001
We are offering to acquire all of our outstanding $47,059,000 principal
amount of 7-1/2% Convertible Subordinated Debentures Due September 15, 2001,
CUSIP No. 12551LAB7.
The purpose of this letter is to call your attention to certain
important information regarding our offer. The offer expires at 5:00 p.m., New
York City time, on January 24, 2001.
You can choose to sell your old 7-1/2% debentures for either cash or
new debentures.
o If you choose new debentures, you will receive $1,000 principal
amount of our new 9% senior subordinated debentures due 2006 per
$1,000 principal amount of your old 7-1/2% junior subordinated
debentures, plus accrued and unpaid interest in cash.
o If you choose cash, you will receive $525 in cash per $1,000
principal amount of your old 7-1/2% junior subordinated
debentures, plus accrued and unpaid interest in cash. However, we
will purchase no more than $19.5 million total principal amount of
old debentures for cash.
If holders of more than $19.5 million total principal amount of old
7-1/2% debentures elect to sell their debentures for cash, 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 $19.5 million principal amount of debentures
for cash and we will exchange the balance of your debentures for new debentures.
All holders who elect to receive cash will be treated equally in this process.
We are a holding company with no significant operating assets of our
own. Our subsidiaries are regulated insurance companies which are restricted
from providing us with dividends or other funds. Currently, our subsidiaries are
prohibited from paying any dividends to us without prior approval by the
California Department of Insurance. We intend to seek approval from the
California Department for our subsidiaries to provide a portion of the funds we
need to complete this offer.
Your old 7-1/2% junior subordinated debentures will mature on September
15, 2001. We are making this offer because, although our insurance subsidiaries
are solvent, CII Financial has no available source of cash with which to pay
your old 7-1/2% debentures when they mature.
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As many of you know, the California workers' compensation market, where
we conduct more than 77% of our business, has been severely impacted in recent
years by negative pricing brought on by changes in applicable insurance
regulations. A number of our largest competitors are now facing bankruptcy or
receivership and we incurred losses of $8.4 million for the nine months ended
September 30, 2000. However, we have recently seen improvement in California as
a number of our competitors have been forced to retrench or exit the market
altogether.
While there can be no assurance that this trend will continue, we
believe we will be in a better position to repay the new 9% senior subordinated
debentures due September 15, 2006 than we are to pay the old 7-1/2% debentures
on September 15, 2001. In addition, we have provided a cash option for holders
who do not wish to exchange their old debentures for new debentures.
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In considering our offer, you should be aware of a number of
significant risks that will affect any old debentures that remain
outstanding after expiration of our offer.
1) We are a guarantor of $185 million of loans made under credit facilities of
our parent, Sierra Health Services. Our old 7-1/2% debentures rank junior to
our guarantee of the credit facilities. In the event of a default in payment
on our old debentures, Sierra's senior lenders would have the right to
receive payment in full on their guarantee prior to any payment being made
on the old debentures.
2) Up to $47 million principal amount of new 9% senior subordinated debentures
due 2006 will be issued. Any old 7-1/2% debentures that remain outstanding
will rank junior to all of the new 9% senior subordinated debentures.
3) There may be no active trading market for any old 7-1/2% debentures that
remain outstanding after completion of the offer. As a result, you may have
difficulty selling your old debentures after expiration of the offer.
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If you want to participate in the offer, you must make the necessary
arrangements promptly. In particular, if your debentures are held through a
broker, dealer, bank, trust company or other nominee, you will need to instruct
this firm to tender the debentures on your behalf. Since this procedure may take
a considerable amount of time, you should give these instructions as soon as
possible.
The offer expires at 5:00 p.m., New York City time, on January 24,
2001.
The terms of the offer are contained in our Preliminary Prospectus and
Exchange Offer, which accompanies this letter. The offer is subject to certain
conditions, including participation by holders of at least 90% of the
outstanding debentures, receipt of sufficient financing, receipt of necessary
approvals from our regulators and receipt of necessary consents from bank
lenders.
If you need assistance making arrangements to tender your securities,
please call the Information Agent for the offer, D.F. King & Co., at (800)
735-3591. If you have any questions about the offer, please call the Dealer
Manager for the offer, Banc of America Securities, at (888) 292-0070. We
appreciate your consideration of our offer.
Sincerely,
Kathleen M. Marlon
President and Chief Executive Officer
