Filed by CII Financial, Inc.
Pursuant to Rule 425
under the Securities Act of 1933
For: CII Financial, Inc.
Commission File No.: 333-52726
CII FINANCIAL, INC.
California Indemnity Insurance Company
Commercial Casualty Insurance Company
subsidiaries of Sierra Health Services, Inc.
P.O.Box 15645, Las Vegas, Nevada 89114-5645 tel. 702 242 7046 fax 702 242 4819
January 5, 2001
To Holders of CII Financial, Inc.
7 1/2% Convertible Subordinated Debentures Due September 15, 2001
The purpose of this letter is to remind you of certain important
information regarding our pending offer 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.
You can choose to exchange 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 for
each $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 for each $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.
The offer expires at 5:00 p.m., New York City time, on January 25,
2001, unless extended.
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.
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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.
o We, and other affiliates, are guarantors of $135 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 our
guarantee prior to any payment being made on the old debentures.
o 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.
o 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. We intend to list the new 9% senior subordinated debentures on
the New York Stock Exchange.
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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.
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.
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 intense price competition brought on by changes in applicable insurance
regulations. Some of our largest competitors are now facing bankruptcy or
receivership and we incurred a net loss of $8.5 million for the nine months
ended September 30, 2000. However, we have recently seen improvement in our
pricing in California as a number of our competitors have been forced to
retrench or exit the market altogether.
In addition, our parent, Sierra Health Services, has recently reduced
its senior credit facilities, which are guaranteed by us and other affiliates.
On January 2, 2001, Sierra announced that it sold the majority of its Las Vegas
real estate holdings and entered into a long-term lease arrangement with the
buyers. Sierra received net cash proceeds of $61.7 million and applied $50
million to its credit facilities, which had been fully drawn at $185 million. As
a result, the size of the credit facilities and the outstanding loan balance
were reduced to $135 million. Sierra also used $4.3 million of the proceeds to
make required capital contributions to regulated subsidiaries.
While there can be no assurance of our conclusion, we believe we will
be in a better position to repay the new 9% senior subordinated debentures when
they mature on 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.
The offer expires at 5:00 p.m., New York City time, on January 25,
2001, unless extended.
The terms of the offer are contained in our Preliminary Prospectus and
Exchange Offer, which was sent to you previously. 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 a copy of the Preliminary Prospectus or need assistance in
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,
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Kathleen M. Marlon
Chairman, President,
and Chief Executive Officer
<PAGE>
Additional Information and Where to Find It
CII Financial, Inc. has filed a Registration Statement with the
Securities and Exchange Commission on Form S-4 registering the new debentures to
be issued in the exchange offer. The Registration Statement and the preliminary
prospectus contained therein contain important information about CII Financial,
the exchange offer and related matters. Security holders are urged to read the
Registration Statement and the preliminary prospectus contained therein and any
other relevant documents filed by CII Financial with the SEC.
This Registration Statement has not yet become effective. The new
debentures may not be sold and, although you may tender your old debentures,
tenders may not be accepted prior to the time the Registration Statement becomes
effective. This shall not constitute an offer to sell or an offer to buy nor
shall there be any sale of the new debentures in any State in which such offer,
solicitation or sale would be unlawful.
Security holders are able to obtain copies of the Registration
Statement on Form S-4 and the preliminary prospectus and any other relevant
documents for free through the Web site maintained by the SEC at
http://www.sec.gov. In addition, these documents are available free of charge by
contacting 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.
