-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OmSIsplOxcB2g/Et8owLB/vOFjeY9XUKIbChRHpMfyEf7jssJjE+ysqEck0YGpee mN89+LnthDLDN+7pyaP+kQ== 0001017062-99-000552.txt : 19990402 0001017062-99-000552.hdr.sgml : 19990402 ACCESSION NUMBER: 0001017062-99-000552 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRIS GROUP INC CENTRAL INDEX KEY: 0000798085 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 330097221 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12099 FILM NUMBER: 99580282 BUSINESS ADDRESS: STREET 1: 650 TOWN CENTER DR STE 1600 CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7145491600 MAIL ADDRESS: STREET 1: 650 TOWN CENTER DRIVE STREET 2: STE 1600 CITY: COSTA MESA STATE: CA ZIP: 92626-1925 FORMER COMPANY: FORMER CONFORMED NAME: US FACILITIES CORP DATE OF NAME CHANGE: 19920703 10-K 1 1998 FORM 10-K =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended December 31, 1998 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From _________________ to ________________ Commission File Number: 001-12099 ---------------- THE CENTRIS GROUP, INC. (Exact name of Registrant as specified in its charter) Delaware 33-0097221 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 650 Town Center Drive, Suite 1600, Costa Mesa, CA 92626 (Address of Principal Executive Offices) (714) 549-1600 (Registrant's telephone number, including area code) ---------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Securities Exchanges on which Registered - -------------------------------------- ----------------------------- Common Stock, par value $.01 per share New York Stock Exchange Common Stock Purchase Rights New York Stock Exchange Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Aggregate Market Value of Voting Stock held by non-affiliates of the Registrant as of March 19, 1999: $100,658,790 (10,458,057 shares at the closing price of $9 5/8 per share). For this purpose, all shares held by officers and directors of the Registrant are considered to be held by affiliates, but neither the Registrant nor such persons concede that they are affiliates of the Registrant. Number of Shares of Common Stock of the Registrant outstanding as of March 19, 1999: 11,597,476 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement to be filed within 120 days after December 31, 1998, are incorporated by reference into Part III of this Form 10-K. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] =============================================================================== THE CENTRIS GROUP, INC. TABLE OF CONTENTS
Page ---- PART I ITEM 1. BUSINESS......................................................... 3 a. Medical Lines................................................. 5 b. Specialty Lines............................................... 7 c. Statutory Financial Information............................... 8 d. Competition................................................... 14 e. Regulation.................................................... 14 f. Employees..................................................... 16 ITEM 2. PROPERTIES....................................................... 17 ITEM 3. LEGAL PROCEEDINGS................................................ 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS......................................................... 18 ITEM 6. SELECTED FINANCIAL DATA.......................................... 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................... 20 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................ 31 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 32 ITEM 11. EXECUTIVE COMPENSATION........................................... 32 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 32 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 32 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. 33
2 PART 1 Item 1. Business GENERAL INFORMATION The Registrant, The Centris Group, Inc. (the "Company"), is a Delaware holding company formed in 1982 which operates as a specialty insurance group through its subsidiaries. The Company's USBenefits Insurance Services, Inc. ("USBenefits") subsidiary is the managing general underwriter and marketing organization for medical stop-loss and provider excess coverages issued by The Continental Insurance Company ("Continental"), one of the CNA Insurance Companies, and for group term life insurance issued by an affiliate of Continental. The Company's INTERRA, Inc. subsidiary ("INTERRA") manages and underwrites catastrophic accident and health risks nationally and internationally. The Company has discontinued its property/casualty segment effective December 31, 1998. For additional information see "DISCONTINUED OPERATIONS". The Company will continue writing specialty lines insurance business through its USF Insurance Company ("USFIC") subsidiary and will report information herein and in future filings relative to the specialty lines business under a "Specialty Lines" segment. On February 3, 1998, the Company announced that its Board of Directors had authorized a two-for-one split of its common stock in the form of a 100% stock dividend to stockholders of record as of February 18, 1998. Certificates reflecting the stock split were issued February 27, 1998. All references in this Form 10-K to number of shares, per share amounts and market prices of the Company's common stock have been adjusted retroactively for all periods presented to reflect this change in capital structure. DISCONTINUED OPERATIONS During 1998, the Company made the decision to exit the property/casualty reinsurance market by offering its wholly owned subsidiary, USF RE INSURANCE COMPANY ("USF RE"), for sale. Accordingly, the Company discontinued its property/casualty segment and has segregated 1998 results between income from continuing operations and discontinued operations. The Company, through USF RE, entered the property/casualty reinsurance market in 1987. Since that time the property/casualty segment experienced significant growth. In recent years, however, it has become increasingly difficult to compete in the property/casualty reinsurance arena as other market participants grow ever larger and the business has begun to resemble a commodity financial product with significant exposure to natural catastrophic events. In 1998, the Company concluded that its capital can be deployed more efficiently by focusing on the medical lines business, where it is a market leader. Accordingly, the Company discontinued its property/casualty segment effective December 31, 1998. The Company has signed a Letter of Intent with Folksamerica Holding Company, Inc. for the sale of USF RE for $92,500,000. The consideration is expected to be $71,750,000 in cash and an adjustable subordinated 5 year note for $20,750,000. The note, which accrues interest at the U.S. Treasury Note rate plus 50 basis points, is adjustable downward based on adverse loss development of the Company's reinsurance reserves at December 31, 1998. It is management's expectation and intention to negotiate a definitive agreement for the sale of USF RE to Folksamerica. In the event that the sale is not consummated the reinsurance subsidiary will be put in run-off. Financial information pertaining to the discontinued operations assumes a sale of USF RE under terms outlined herein. 3 VASA GROUP ACQUISITION On December 31, 1998, the Company acquired Seaboard Life Insurance Company (USA), an Indiana domiciled life insurance company ("Seaboard Life"), and its affiliate, VASA North America, Inc. and its subsidiaries. The principal subsidiaries of VASA North America, Inc. are VASA North Atlantic Insurance Company ("VNAIC"), an Indiana domiciled property/casualty insurance company, and VASA Brougher, Inc. ("VBI"), a managing general underwriter for medical stop-loss and group term life insurance coverages issued by Seaboard Life and VNAIC. Seaboard Life is licensed in 41 states and the District of Columbia and VNAIC is licensed in 36 states and the District of Columbia. Seaboard Life and VNAIC are referred to herein as the "Insurance Companies." The Insurance Companies both carry an "A-" (Excellent) rating from A.M. Best Company. The purchase did not include the individual life and annuity business of Seaboard Life which is being sold separately by the Sellers. These companies were acquired from Seaboard Life Insurance Company of Canada and its parent, Seaboard North American Holdings, Inc., a Canadian company that is owned by Eureko, B.V. of the Netherlands ("Eureko"). The preliminary purchase price paid by the Company for the VASA group was the estimated statutory book value of the Insurance Companies as of December 31, 1998, plus or minus certain adjustments or $42,681,784. Financing for the transaction was provided by the Company's principal lender, Fleet National Bank, which increased its Credit Agreement with the Company from $35,000,000 to $75,000,000. The Company pledged the stock of the Insurance Companies as additional security for the increased loan and has committed to pay down the loan balance to $47,550,000 by June 30, 1999. In accordance with the terms of the stock purchase agreement, an audit of the Insurance Companies as of December 31, 1998 was performed, and the Company has determined that the final purchase price for the acquired group is $36,613,134. The Company has made a claim with Eureko for a refund of the difference between the preliminary purchase price and the final purchase price and is waiting for payment from Eureko. The stock purchase agreement provides a mechanism for resolving any disputes with respect to the amount of the final purchase price. For additional information see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and also "Note 2" of Notes to CONSOLIDATED FINANCIAL STATEMENTS contained herein. The Company is in the process of running off the existing VBI medical stop- loss and group term life business in exchange for a management fee from the Sellers that was included within the purchase price, and Eureko is providing loss ratio protection for the in-force business being run-off by VBI so that the Insurance Companies will have neither an underwriting gain nor incur an underwriting loss on such business. Under the stock purchase agreement the Company has the right to renew the existing VBI in-force business and will be offering renewal quotations to all accounts in excess of 51 covered employee lives. The Company has made arrangements with an unrelated managing general underwriter to offer coverage to accounts with less than 51 lives and will receive a fee for all such business renewed by this unrelated managing general underwriter. Effective January 1, 1999, Seaboard Life and VNAIC began to reinsure the medical stop-loss and provider excess business, respectively, underwritten by USBenefits on behalf of Continental. USF RE ceased being the reinsurer of such business on a run-off basis as of December 31, 1998. See "BUSINESS--MEDICAL LINES--MEDICAL LINES REINSURANCE". On March 11, 1999, Seaboard Life and VNAIC changed their names in the State of Indiana only to Centris Life Insurance Company and Centris Insurance Company, respectively. The Insurance Companies will be filing applications to adopt their new names in all states or other jurisdictions where they are licensed or otherwise authorized to transact business. For purposes of convenience and continuity, the Insurance Companies will continue to be referred to in this Form 10-K by their prior names. 4 FINANCIAL INFORMATION RELATING TO BUSINESS SEGMENTS The Company's operations are classified into two business segments: (1) medical lines (which includes the revenues from commissions and fees of the Company and from reinsurance of a 25% share (net of external reinsurance) of its medical lines business); and (2) specialty lines. As noted above, the Company discontinued its property/casualty segment as of December 31, 1998. For additional information see "STATUTORY FINANCIAL INFORMATION--Loss and Loss Adjustment Expense ("LAE") Reserves," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and also "Note 3" of Notes to CONSOLIDATED FINANCIAL STATEMENTS contained herein. MEDICAL LINES General Since 1980, USBenefits has had an agreement to underwrite and manage medical lines coverages for Continental or its predecessor. Such agreement provides that USBenefits is responsible for designing medical lines products, marketing the products, underwriting risks, collecting premiums, administering coverage agreements, investigating and settling claims and making claim payments within specified limits. While USBenefits participates in the setting of rates and underwriting standards, which are the ultimate responsibility of Continental, it does not insure any risks in its role as an underwriting manager; all insurance risks are borne by Continental and its reinsurers, including USF RE, Seaboard Life and VNAIC. See "BUSINESS--MEDICAL LINES--MEDICAL LINES REINSURANCE". Other than Continental, no one insurance company, third party administrator ("TPA") or insurance producer accounts for 10% or more of USBenefits' revenues. Under its current management agreement with Continental, USBenefits is paid management fees for its services which are a percentage of premiums collected. The management agreement may be terminated by either party at any December 31 upon 90 days prior notice, and can also be terminated upon the occurrence of certain events. The management agreement provides that during its term and for a period of 12 months following termination, Continental will not solicit or take away USBenefits' customers, and that upon termination USBenefits has the right to the expirations and renewals of the medical lines business. The Company believes that these provisions permit USBenefits to move the medical lines business to another insurance company if its relationship with Continental were to terminate. Alternatively, USBenefits could write medical lines coverages on a direct basis through its affiliates, Seaboard Life and VNAIC, in the states where such companies are licensed. INTERRA underwrites on behalf of an unaffiliated life insurance company and underwrites accident and health reinsurance for its affiliate, Seaboard Life, which took over such business from USF RE effective January 1, 1999. In addition, INTERRA provides catastrophic claims management services to the Company and its subsidiaries. INTERRA also provides the Company with growth opportunities in the international accident and health reinsurance marketplace. Marketing USBenefits markets and distributes its medical lines products through a network of TPAs, insurance agents, brokers and consultants (collectively "Producers"). Producers have non-exclusive arrangements with USBenefits that enable them to submit requests for coverage quotations on behalf of their clients. Continental may pay a fee or commission to Producers for placing the coverage, the amount of which is based on a percentage of the premium written and is negotiated on a case-by-case basis. Additionally, USBenefits may pay an annual production bonus to Producers based on the amount of new business and rate of retention and loss ratio of accounts during the calendar year. USBenefits markets its products to a variety of employers, including both large and small employee groups. 5 The Company believes there will be opportunities for growth from industry consolidation. As noted above, effective on December 31, 1998, the Company acquired one of its competitors, VBI and its affiliates. Prior to its acquisition by the Company, VBI was believed to be the fifth largest provider of medical stop-loss coverage in terms of premium written. Several of USBenefits' other competitors have also been acquired, and this activity is expected to continue. Many smaller managing general underwriters have lost their issuing carriers due to unacceptably high loss ratios on their books of business. There has also been consolidation in the TPA marketplace, one of USBenefits' primary sources of business. The remaining TPAs are larger, more financially secure, and seek to do business with sound, well established companies such as USBenefits. In the past few years, USBenefits has embarked on a program of actively marketing its products to brokers and consultants. These producers control a sizable portion of USBenefits' target market, midsized employer groups, and are the primary source of business for larger employer groups. USBenefits has been able to increase its business with the brokerage community while maintaining its relationships with its traditional TPA distribution system. Products Medical Stop-Loss. USBenefits offers two types of medical stop-loss products: specific excess and aggregate excess. Employers can elect to purchase specific excess coverage only, or a combination of specific and aggregate coverage. Generally, self-insured employers purchase a combination of specific and aggregate medical stop-loss coverage in order to minimize their exposure under their self-funded plans. Medical stop-loss coverage is written on a basic form which can be customized to meet the employer's individual needs and ability to retain risk. Medical stop-loss coverage indemnifies only the employer for its obligations under its self-insured plan of medical benefits; no plan participant or beneficiary is covered by the medical stop-loss policy. Provider Excess. USBenefits' provider excess product limits the exposures which providers of medical services incur when they enter into capitated fee arrangements; it protects these providers from losses that can arise when expenses exceed a predetermined level. Underwriting Management Under its agreement with Continental, USBenefits, with the assistance of USF RE through December 31, 1998, and thereafter with the assistance of Seaboard Life and VNAIC, provides the services necessary to underwrite and service the medical lines business, including, but not limited to: (i) selecting Producers; (ii) accepting medical lines risks and issuing coverage agreements on behalf of Continental within mutually agreed upon underwriting and pricing guidelines; and (iii) processing claims for reimbursement under policies on behalf of Continental. Continental pays USBenefits management fees for these services, which are a percentage of premiums collected. Medical Lines Reinsurance As noted above, as of December 31, 1998, USF RE terminated its reinsurance of the medical lines business on a run-off basis. This means that USF RE will continue to receive premiums on all policies in force as of December 31, 1998, until their expiration and will pay all claims incurred under such policies until the extinguishment of all liabilities thereunder. Effective January 1, 1999, the Insurance Companies became reinsurers of Continental for the medical stop-loss and provider excess business. The Insurance Companies have not assumed any liability for group term life business produced by USBenefits on behalf of Continental's affiliate. Under a new reinsurance arrangement in effect for all medical stop-loss and provider excess business issued or renewed from and after January 1, 1999, the Insurance Companies will reinsure 75% of Continental's liability under all such contracts issued through USBenefits, as opposed to the 50% previously reinsured by USF RE. In addition, the Insurance Companies will reinsure a proportionate share of loss adjustment expenses and any liability incurred by Continental for extra-contractual or punitive damages. The Insurance Companies in turn 6 have entered into retrocessional arrangements with four unaffiliated reinsurers pursuant to which such reinsurance companies will reinsure 66 2/3% of the net retained liability of the Insurance Companies under all medical stop-loss and provider excess business assumed by them from Continental. The net effect of such reinsurance arrangements is that the Insurance Companies net retained liability under all medical stop-loss and provider excess contracts will be limited to 25% of the total exposure under each policy. The amount of premium ceded by Continental to the Insurance Companies under the reinsurance agreement is equal to a proportionate share of the original gross premiums written by Continental, less a ceding commission paid by the Insurance Companies to Continental which covers Continental's costs of acquiring and servicing such business. A proportionate share of such ceding commission is recoverable by the Insurance Companies from their reinsurers. SPECIALTY LINES General Specialty Lines insurance underwriting is conducted by the Company's subsidiary, USF Insurance Company ("USFIC") which is presently rated "A" (Excellent) by A.M. Best Company, a rating that it currently shares with USF RE, under an Intercompany Pooling Agreement that has been terminated effective as of January 1, 1999. A.M. Best Company has placed USFIC's and USF RE's rating under review pending final resolution of the announced sale of USF RE. There can be no assurance that USFIC will continue to be rated by A.M. Best Company following the disposition of USF RE or that if USFIC continues to be rated, that it will retain its current rating of "A". USFIC is domiciled in Pennsylvania but operates out of its administrative offices in Florham Park, NJ. It is eligible to offer surplus lines coverage in 34 states, the District of Columbia and the U.S. Virgin Islands. In addition, USFIC holds admitted licenses in Pennsylvania, New York and Florida. USFIC writes both standard and surplus lines insurance on commercial and personal property/casualty risks which are marketed exclusively through managing general agents, general agents and program administrators. In 1999 USFIC will change its focus to include writing specialty risks for medically related lines of business where it can leverage existing relationships and opportunities through US Benefits and INTERRA. 7 STATUTORY FINANCIAL INFORMATION The information presented below conforms to the requirements of "Disclosures Concerning Unpaid Claims and Claim Adjustment Expenses of Property/Casualty Insurance Underwriters" contained in the Securities Exchange Act of 1934 Guide 4 and the Securities Act of 1933 Guide 6. As a result of the Company's decision to discontinue its property/casualty segment, statutory financial information is presented for continuing and discontinued operations as well as on a combined (total) basis. Combined Ratio The statutory combined ratio is the traditional indicator of the potential underwriting profitability of an insurance company's business. It reflects the percentage of losses and loss adjustment expenses incurred to earned premiums (the "loss ratio") plus the percentage of production and servicing expenses to net written premiums (the "underwriting expense ratio"). The table below sets forth consolidated loss ratio, underwriting expense ratio and combined ratio determined in accordance with statutory accounting practices ("SAP") for the years indicated.
Year Ended December 31, ----------------- 1998 1997 1996 ----- ----- ----- Continuing Operations: Loss ratio............................................... 85.7 80.1 69.9 Underwriting expense ratio............................... 27.1 27.6 27.8 ----- ----- ----- Combined ratio......................................... 112.8 107.7 97.7 ===== ===== ===== Discontinued Operations: Loss ratio............................................... 97.4 74.8 74.0 Underwriting expense ratio............................... 27.5 25.4 27.9 ----- ----- ----- Combined ratio......................................... 124.9 100.2 101.9 ===== ===== ===== Total: Loss ratio............................................... 90.0 78.4 71.0 Underwriting expense ratio............................... 27.2 27.5 27.9 ----- ----- ----- Combined ratio......................................... 117.2 105.9 98.9 ===== ===== =====
Loss and Loss Adjustment Expense ("LAE") Reserves For information pertinent to loss and loss adjustment expense reserves see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and also "Note 1(F)" and "Note 7" of "Notes to CONSOLIDATED FINANCIAL STATEMENTS," contained in this Form 10-K. 8 The following table reconciles consolidated reserve for losses and LAE from SAP to amounts based on GAAP:
December 31, ------------------------- 1998 1997 1996 -------- -------- ------- (Dollars in thousands) Continuing Operations: Statutory loss and LAE reserves................. $ 63,939 $ 28,376 $21,218 Reserves ceded to reinsurers.................... 32,079 7,667 5,080 Provision for uncollectible reinsurance......... -- -- -- -------- -------- ------- GAAP loss and LAE reserves.................... $ 96,018 $ 36,043 $26,298 ======== ======== ======= Discontinued Operations: Statutory loss and LAE reserves................. $ 85,571 $ 62,486 $51,167 Reserves ceded to reinsurers.................... 19,319 18,272 17,185 Provision for uncollectible reinsurance......... -- -- 19 -------- -------- ------- GAAP loss and LAE reserves.................... $104,890 $ 80,758 $68,371 ======== ======== ======= Total: Statutory loss and LAE reserves................. $149,510 $ 90,862 $72,385 Reserves ceded to reinsurers.................... 51,398 25,939 22,265 Provision for uncollectible reinsurance......... -- -- 19 -------- -------- ------- GAAP loss and LAE reserves.................... $200,908 $116,801 $94,669 ======== ======== =======
Except for the foregoing, there is no difference in reserves for losses and LAE whether determined in accordance with GAAP or SAP. Amounts presented for 1998 include $23,557,000 of loss and LAE reserves of Seaboard Life and VNAIC. 9 The table below provides a reconciliation of beginning and ending consolidated statutory liability balances as of December 31, 1998, 1997 and 1996.
December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- (Dollars in thousands) Continuing Operations: Reserves for losses and LAE at beginning of period........................................ $ 28,376 $ 21,218 $ 20,066 Reserves of acquired company................... 23,557 7,348 -- Incurred losses and LAE: Provision for losses and LAE for claims occurring in the current year............... 84,364 81,578 57,291 Increase in estimated losses and LAE for claims occurring in prior years............. 12,485 8,310 5,457 Payments: Losses and LAE payments for claims occurring during: The current year........................... (46,625) (65,521) (37,773) Prior years................................ (38,218) (24,557) (23,823) -------- -------- -------- Reserve for losses and LAE at end of period.................................. $ 63,939 $ 28,376 $ 21,218 ======== ======== ======== Discontinued Operations: Reserves for losses and LAE at beginning of period........................................ $ 62,486 $ 51,167 $ 42,354 Reserves of acquired company................... -- -- -- Incurred losses and LAE: Provision for losses and LAE for claims occurring in the current year............... 49,101 35,390 26,194 Increase in estimated losses and LAE for claims occurring in prior years............. 11,926 (207) (769) Payments: Losses and LAE payments for claims occurring during: The current year........................... (14,785) (9,913) (5,514) Prior years................................ (23,157) (13,951) (11,098) -------- -------- -------- Reserve for losses and LAE at end of period.................................. $ 85,571 $ 62,486 $ 51,167 ======== ======== ======== Total: Reserves for losses and LAE at beginning of period........................................ $ 90,862 $ 72,385 $ 62,420 Reserves of acquired company................... 23,557 7,348 -- Incurred losses and LAE: Provision for losses and LAE for claims occurring in the current year............... 133,465 116,968 83,485 Increase in estimated losses and LAE for claims occurring in prior years............. 24,411 8,103 4,688 Payments: Losses and LAE payments for claims occurring during: The current year........................... (61,410) (75,434) (43,287) Prior years................................ (61,375) (38,508) (34,921) -------- -------- -------- Reserve for losses and LAE at end of period.................................. $149,510 $ 90,862 $ 72,385 ======== ======== ========
The tables contained in the following pages present the development of the consolidated statutory balance sheet liability for losses and LAE for 1988 through 1998 for continuing, discontinued and total operations. 10 The top line of the tables shows the estimated liability for unpaid losses and LAE recorded at December 31 for each of the indicated years. This liability represents the estimated amount of losses and LAE for claims arising in all years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported. The upper portion of the tables shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims for individual years. The lower portion of the tables shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year, and a reconciliation of the gross and net amounts for the latest five years.
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 ----- ------ ------ ----- ------ ------ ------ ------ ------ ------- ------ (Dollars in thousands) Continuing Operations: Net Liability for Losses/LAE--End of Year. 8,695 11,371 11,950 9,529 15,821 19,108 19,125 20,066 21,218 28,376 63,939 (1998 figure includes reserves of acquired companies of 23,557.) Net Liability re- estimated as of: 1 year later............. 7,380 11,867 9,891 9,988 17,291 20,078 20,906 25,476 29,390 40,480 2 years later............ 7,591 11,627 8,871 9,700 17,367 19,938 20,872 26,456 27,020 3 years later............ 7,535 11,604 8,832 9,666 17,323 19,926 20,903 26,271 4 years later............ 7,562 11,610 8,831 9,659 17,322 19,930 20,895 5 years later............ 7,567 11,610 8,831 9,659 17,321 19,933 6 years later............ 7,567 11,610 8,831 9,657 17,320 7 years later............ 7,567 11,610 8,830 9,656 8 years later............ 7,567 11,609 8,828 9 years later............ 7,567 11,607 10 years later........... 7,565 Net Cumulative redundancy/(deficiency). 1,130 (236) 3,122 (127) (1,499) (825) (1,770) (6,205) (5,802) (12,104) Cumulative %............. 13% (2)% 26% (1)% (9)% (4)% (9)% (31)% (27)% (43)% Paid (cumulative) as of: 1 year later............. 6,881 10,978 8,531 9,165 16,827 19,255 19,885 23,299 23,640 36,774 2 years later............ 7,126 11,161 8,746 9,550 17,246 19,744 20,635 25,270 25,260 3 years later............ 7,069 11,178 8,750 9,562 17,254 19,801 20,739 25,632 4 years later............ 7,081 11,178 8,751 9,561 17,266 19,836 20,757 5 years later............ 7,081 11,178 8,750 9,563 17,266 19,840 6 years later............ 7,082 11,178 8,752 9,561 17,266 7 years later............ 7,082 11,180 8,751 9,562 8 years later............ 7,082 11,179 8,751 9 years later............ 7,082 11,179 10 years later........... 7,082 Gross Liability--End of Year..................................... 21,503 23,813 26,298 36,043 96,018 Reinsurance Recoverable.......................................... 2,378 3,747 5,080 7,667 32,079 Net Liability--End of Year....................................... 19,125 20,066 21,218 28,376 63,939 Gross Re-Estimated Liability-Latest.............................. 26,794 32,715 33,861 50,503 Re-Estimated Recoverable-Latest.................................. 5,899 6,444 6,841 10,023 Net Re-Estimated Liability-Latest................................ 20,895 26,271 27,020 40,480 Gross Cumulative Redundancy (Deficiency)......................... (5,291) (8,902) (7,563) (14,460)
The continuing operations information presented includes the Company's medical lines and specialty insurance segments. The medical lines segment is subject to fluctuations in the cost of health care services, changes in the frequency of services provided to the covered population and the expansion of routine medical services applicable to prescribed procedures which are normal and recurring aspects inherent in the estimation of accident and health reserves. In recent years, competition in the medical lines segment has constrained the Company's ability to increase premium rate levels commensurate with increases in health care costs. Each calendar year will be affected by such normal, recurring elements that cause fluctuations in the ordinary course of business. 11 In the 1998 period, increases in estimated losses and LAE claims arise from the 1997 medical stop loss policy year and the run-off of a book of business acquired in the Global transaction in 1997. Medical lines reserves pertaining to business written through December 31, 1998, of $34.6 million are included in the expected sale of USF RE to Folksamerica. In conjunction with the sale, the Company expects to purchase a $5 million cover on its medical lines reserves which, when combined with 1998 USF RE medical lines reserve increases of $11.1 million result in an expectation that future periods will not be impacted by prior period loss reserve development.
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- (Dollars in thousands) Discontinued Operations: Net Liability for Losses/LAE--End of Year. 8,965 17,326 24,025 26,952 29,662 32,250 37,179 42,354 51,167 62,486 85,571 Net Liability re- estimated as of: 1 year later............. 9,623 17,848 23,980 27,540 29,828 33,705 38,206 41,632 51,098 74,792 2 years later............ 10,161 17,992 23,849 26,681 30,115 32,687 35,729 40,561 52,578 3 years later............ 10,755 18,090 22,822 26,371 29,463 30,259 33,853 40,091 4 years later............ 10,732 16,971 21,391 24,870 25,463 28,043 32,116 5 years later............ 10,496 15,782 20,779 21,955 24,318 26,433 6 years later............ 10,427 15,205 18,280 21,130 23,114 7 years later............ 10,140 14,037 17,447 20,548 8 years later............ 9,929 13,160 17,162 9 years later............ 9,780 13,127 10 years later........... 9,758 Net Cumulative redundancy/(deficiency). (793) 4,199 6,863 6,404 6,548 5,817 5,063 2,263 (1,411) (12,306) Cumulative %............. (9)% 24% 29% 24% 22% 18% 14% 5% (3)% (20)% Paid (cumulative) as of: 1 year later............. 2,492 3,277 5,387 5,351 5,363 6,820 12,230 11,622 14,869 24,601 2 years later............ 4,550 7,104 8,751 8,282 9,128 14,208 18,249 20,341 25,423 3 years later............ 7,890 9,917 11,196 10,602 14,493 18,687 22,530 24,508 4 years later............ 8,612 10,655 12,525 14,443 17,081 20,420 23,799 5 years later............ 8,846 11,475 14,118 16,109 18,547 20,564 6 years later............ 9,524 12,302 14,529 17,201 18,650 7 years later............ 9,040 12,426 15,050 17,643 8 years later............ 9,088 12,522 15,317 9 years later............ 9,114 12,635 10 years later........... 9,120 Gross Liability--End of Year....................................... 48,094 55,033 68,352 80,758 104,890 Reinsurance Recoverable............................................ 10,915 12,679 17,185 18,272 19,319 Net Liability--End of Year......................................... 37,179 42,354 51,167 62,486 85,571 Gross Re-Estimated Liability-Latest................................ 41,179 49,921 65,885 93,310 Re-Estimated Recoverable-Latest.................................... 9,063 9,830 13,307 18,518 Net Re-Estimated Liability-Latest.................................. 32,116 40,091 52,578 74,792 Gross Cumulative Redundancy (Deficiency)........................... 6,915 5,112 2,467 (12,552)
Within the discontinued operations information presented, the increase in losses and LAE for claims occurring in prior years is attributable to development in the discontinued property/casualty segment (USF RE) of the non- proportional assumed liability, auto physical damage and commercial automobile liability lines of business. As part of the expected sale of USF RE, all reserves related to business written through December 31, 1998 will be transferred to Folksamerica. 12
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------- ------- (Dollars in thousands) Total: Net Liability for Losses/LAE--End of Year. 17,660 28,697 35,975 36,481 45,483 51,358 56,304 62,420 72,385 90,862 149,510 (1998 figure includes reserves of acquired companies of 23,557.) Net Liability re- estimated as of: 1 year later............. 17,003 29,715 33,871 37,528 47,119 53,783 59,112 67,108 80,488 115,272 2 years later............ 17,752 29,619 32,720 36,381 47,482 52,625 56,601 67,017 79,598 3 years later............ 18,290 29,694 31,654 36,037 46,786 50,185 54,756 66,362 4 years later............ 18,294 28,581 30,222 34,529 42,785 47,973 53,011 5 years later............ 18,063 27,392 29,610 31,614 41,639 46,366 6 years later............ 17,994 26,815 27,111 30,787 40,434 7 years later............ 17,707 25,647 26,277 30,204 8 years later............ 17,496 24,769 25,990 9 years later............ 17,347 24,734 10 years later........... 17,323 Net Cumulative redundancy/(deficiency). 337 3,963 9,985 6,277 5,049 4,992 3,293 (3,942) (7,213) (24,410) Cumulative %............. 2% 14% 28% 17% 11% 10% 6% (6)% (10)% (27)% Paid (cumulative) as of: 1 year later............. 9,373 14,255 13,918 14,516 22,190 26,075 32,115 34,921 38,509 61,375 2 years later............ 11,676 18,265 17,497 17,832 26,374 33,952 38,884 45,611 50,683 3 years later............ 14,959 21,095 19,946 20,164 31,747 38,488 43,269 50,140 4 years later............ 15,693 21,833 21,276 24,004 34,347 40,256 44,556 5 years later............ 15,927 22,653 22,868 25,672 35,813 40,404 6 years later............ 16,606 23,480 23,281 26,762 35,916 7 years later............ 16,122 23,606 23,801 27,205 8 years later............ 16,170 23,701 24,068 9 years later............ 16,196 23,814 10 years later........... 16,202 Gross Liability--End of Year....................................... 69,597 78,846 94,650 116,801 200,908 Reinsurance Recoverable............................................ 13,293 16,426 22,265 25,939 51,398 Net Liability--End of Year......................................... 56,304 62,420 72,385 90,862 149,510 Gross Re-Estimated Liability-Latest................................ 67,973 82,636 99,746 143,813 Re-Estimated Recoverable-Latest.................................... 14,962 16,274 20,148 28,541 Net Re-Estimated Liability-Latest.................................. 53,011 66,362 79,598 115,272 Gross Cumulative Redundancy (Deficiency)........................... 1,624 (3,790) (5,096) (27,012)
Investments For information, see "Note 1 (c) and Note 5 of Notes to Consolidated Financial Statements." 13 COMPETITION The insurance and reinsurance industries are highly competitive and consist of a large number of companies, many of which have financial resources, employees, facilities and experience substantially in excess of those of the Company. Medical Lines The medical lines business is highly competitive and involves a diversified field of participants from small, start-up operations to large, well- established organizations such as USBenefits. Information on the size of the medical stop-loss market is not available as data on the market are not routinely collected, compiled or systematically analyzed. However, the Company believes that there are currently over 200 providers of medical stop-loss and provider excess coverages. Based on its over-18 years of experience in the medical stop-loss business, the Company believes that it is the largest provider of medical stop-loss coverage in the United States and one of the leading sources of provider excess coverage. However, other large and established companies offer medical lines products and services similar to those offered by the Company. USBenefits currently relies on its long-standing relationships with independent TPAs as a source of business, as well as growing relationships with insurance agents, brokers and consultants. USBenefits must compete for its business by offering competitively priced products, providing high quality, timely services and paying commissions which are competitive. USBenefits believes that its experience in the medical stop-loss business and the proprietary claims data it has collected over the years give it a competitive advantage over many of its competitors who must rely on general industry information. Specialty Lines Competition in the insurance business is based on many factors, including an insurer's perceived overall financial strength, premiums charged, A.M. Best Company rating, services offered, claims handling, experience in the lines of business written and the number of jurisdictions in which a company is authorized to do business. USFIC's competition includes numerous major domestic and international insurance companies and underwriting syndicates. Conditions remain competitive in most areas of the property/casualty insurance market. USFIC has been able to compete against many companies with significantly larger policyholders' surplus and greater resources by focusing its efforts on specialty areas where it can best utilize its underwriting expertise and capital resources. REGULATION General Insurance and reinsurance companies are subject to primary regulation and supervision by the insurance departments of their states of domicile, as well as by agencies of other states where they are licensed or authorized to transact business. Such regulation and supervision is designed to protect policyholders, not stockholders. Although the extent of such regulation varies from state to state, in general the insurance laws of states provide such supervisory agencies with broad administrative powers. These powers include the granting and revocation of licenses to transact business, the licensing of agents, the approval of policy forms and rates, the determination of reserve requirements, the monitoring of financial stability, the form and content of required financial statements, and the type and character of investments. The National Association of Insurance Commissioners ("NAIC") has proposed a variety of model laws and regulations as part of its accreditation program affecting insurance companies generally, including laws and regulations relating to solvency standards for all insurance companies. Most of these model laws and regulations have been adopted by the majority of states and only two states, New York and Nevada have not been accredited. Adoption of these laws has not had a material negative impact on the Company's insurance operations. 14 The Company's insurance subsidiaries, Seaboard Life, VNAIC, USFIC and USF RE (whose property/casualty reinsurance operations have been discontinued as of December 31, 1998), hereinafter collectively referred to as the "Insurance Subsidiaries," are required to file detailed annual financial and other reports with the appropriate insurance regulatory agency in each state in which they are admitted or authorized to do business. Their business and accounts are subject to examination by such agencies at any time, and the laws of their states of domicile, Indiana, Pennsylvania and Massachusetts, and other states require periodic examination of the Insurance Subsidiaries. Seaboard Life and VNAIC were examined by the Indiana Insurance Department for the four-year periods ended December 31, 1995 and December 31, 1993, respectively. USF RE was examined by the Division of Insurance of the Commonwealth of Massachusetts during 1993 for the four-year period ended December 31, 1992. USFIC was examined by the Insurance Department of the Commonwealth of Pennsylvania during 1998 for the five-year period ended December 31, 1997. The final reports of these examinations did not indicate any concerns of a material nature or which were significant to any of the Insurance Subsidiaries' surplus as regards policyholders. USF RE is currently being examined for the five year period ended December 31, 1997. The Company has received preliminary notice that the examination will result in an adjustment of approximately $16,400,000 to policyholder's surplus for the year ended December 31, 1997 as a result of availability of more recent information showing loss reserve development occurring in the 1998 calendar period. The Company believes it has recognized all such development in its 1998 financial statements. Specialty Lines USFIC is required by state laws governing surplus lines to be eligible to write business as a surplus lines insurer in each state in which its products are sold. Eligibility is based on a number of considerations, including size, financial condition, experience in the insurer's state of domicile, expertise of management and plan of operations. The writing of surplus lines is constrained by laws that require that the business can be written in a state only if coverage for the risk is not available from an insurer admitted in such state. Furthermore, the business can only be written through a licensed excess and surplus lines broker. Medical Lines State regulation of self-insured medical plans is preempted by the Employee Retirement Income Security Act of 1974 ("ERISA"). However, as medical stop- loss has grown in importance, states have attempted to circumvent ERISA's preemption by seeking to assert their regulatory authority over insurance companies writing medical stop-loss coverages and related service providers, such as USBenefits. The NAIC has adopted a model Managing General Agents Law, the substance of which has been enacted in 49 states and the District of Columbia. This model law requires the licensing of managing general agents that perform certain functions on behalf of insurance companies, such as underwriting together with claims settlement and payment. It also imposes certain requirements with respect to the content of agreements between insurance companies and managing general agents. USBenefits is licensed or registered as a managing general agent or third party administrator in various states where such licensing is required. It is also licensed directly, or through one or more of its employees, in 47 states and the District of Columbia as an accident and health insurance agent and in 49 states and the District of Columbia as a property/casualty insurance agent. Additionally, INTERRA is subject to regulation in various states where it operates in any one of its capacities as a reinsurance intermediary--broker, reinsurance intermediary--manager or catastrophic claims management company. State Insurance Holding Company Laws The Company, its stockholders, and the Insurance Subsidiaries are subject to the Insurance Holding Company Acts of the State of Indiana where Seaboard Life and VNAIC are domiciled, the Commonwealth of Pennsylvania where USFIC is domiciled and the Commonwealth of Massachusetts where USF RE is domiciled. None of the Insurance Subsidiaries are deemed to be commercially domiciled in any state. Generally, these Insurance Holding Company Acts prohibit any person from acquiring "control" of a domestic insurer, or of a 15 company controlling a domestic insurer, without prior approval of the Insurance Commissioner of such insurer's state of domicile. Control is presumed to exist through ownership or the right to acquire 10% or more of the stock of the insurer; but this presumption may be rebutted. These Insurance Holding Company Acts require holding companies and their insurance subsidiaries to register and file on a regular basis reports which include information concerning their capital structure, ownership and financial condition. All transactions between members of the holding company group are subject to fairness and reasonableness standards, and notice of certain transactions must be given to the Commissioners of Insurance of Indiana, Pennsylvania and Massachusetts 30 days prior to entering into such transactions, during which time the Commissioners of these states may indicate their disapproval. The amount of dividends which the Insurance Subsidiaries are permitted to pay to their respective parents and ultimately to the Company are limited by the insurance laws of their respective states of domicile. The Insurance Subsidiaries must give notice to the Insurance Commissioner of their states of domicile of all dividends and other distributions to stockholders within five business days after they are declared, and may not pay such dividends until ten business days after receipt by the Commissioner of the required notices. Following such dividends or distributions, the Insurance Subsidiaries' surplus to policyholders must be reasonable in relation to their outstanding liabilities and adequate for their financial needs. In addition, the Insurance Subsidiaries may not pay any "extraordinary" dividend or distribution until 30 days after the Insurance Commissioner of their state of domicile has received notice of such dividend or distribution, and until the Commissioner has either (i) not disapproved such payment within such 30-day period, or (ii) approved such payment within such 30-day period. For 1999, the amount which may be paid in dividends by the Seaboard Life, VNAIC and USFIC without prior regulatory approval is $5,709,000. In the event that USF RE is not sold an additional $9,365,000 is available for dividend purposes. Since being acquired by the Company, none of the Insurance Subsidiaries has paid any dividends to its respective parent. Legislative and Regulatory Developments As noted in prior filings by the Company, with the Securities and Exchange Commission various Federal and state healthcare legislative and regulatory proposals have been considered which could impact the financing and delivery of healthcare. Congress enacted certain of those proposals, some of which cover self-insured medical benefit plans. Management cannot predict at this time what impact, if any, these enactments would have on the Company's medical lines business. However, based on management's review of the latest information received, management believes that these enactments will not have an adverse impact on the Company's business. EMPLOYEES As of March 20, 1999 the Company had 246 full-time employees. No employees are represented by labor unions, and management considers its employee relations to be excellent. 16 EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are:
Name Age Position ---- --- -------- David L. Cargile........ 53 Chairman, President and Chief Executive Officer Howard S. Singer........ 53 Executive Vice President-Corporate Finance and Investor Relations John T. Grush........... 50 Senior Vice President Charles M. Caporale..... 48 Senior Vice President, Chief Financial Officer and Treasurer Jose A. Velasco......... 44 Senior Vice President, Chief Administrative Officer, Secretary and General Counsel Craig J. Kelbel......... 44 Senior Vice President Edward D. Jones......... 53 Senior Vice President Mark A. Carney.......... 40 Senior Vice President
All executive officers other than Charles M. Caporale and Mark A. Carney have been employed by the Company for more than five years. There are no family relationships among any of the executive officers of the Company. There have been no events under bankruptcy or insolvency laws, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officer during the past five years. Mr. Caporale joined the Company in July, 1997 as Senior Vice President, Chief Financial Officer and Treasurer. Before joining the Company, Mr. Caporale began his career at Coopers & Lybrand and served in various capacities in the insurance industry prior to joining the Minet group of companies in 1985. He occupied management positions at Minet, including Executive Vice President and Chief Financial Officer of Minet, Inc. Mr. Carney joined the company in September, 1997 as a Senior Vice President in connection with the acquisition of INTERRA and continues to serve as INTERRA's President and Chief Operating Officer. Prior to joining the Company, Mr. Carney held various executive positions with health care companies and founded INTERRA in 1993. From 1993 to 1997 Mr. Carney was Chairman, President and Chief Operating Officer of INTERRA. Item 2. Properties The principal executive offices of the Company and its subsidiaries are located in 40,281 square feet of leased office space at 650 Town Center Drive, Costa Mesa, California. The lease on this facility was renewed for the period from October 1, 1995 through March 31, 2007, with a five-year option to extend. Additional offices are maintained in leased premises in Skokie, Illinois; Indianapolis, Indiana; Florham Park, New Jersey; Atlanta, Georgia; and Tulsa, Oklahoma. Item 3. Legal Proceedings From time to time the Company is a party to legal proceedings incidental to its business, none of which individually or in the aggregate is considered by the Company to be material to its financial condition or results of operations. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report. 17 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters The Company's common stock, par value $.01 per share (the "Common Stock"), is traded on the New York Stock Exchange under the symbol "CGE". The table below establishes the high and low sale prices for the Common Stock for the period from January 1, 1997 through December 31, 1998 (as reported on the New York Stock Exchange). The last reported closing price of the Common Stock on the New York Stock Exchange on March 19, 1999, was $9 5/8.
Quarter Ended High Low ------------- -------- -------- March 31, 1997........................................... 10 3/16 9 7/16 June 30, 1997............................................ 10 5/8 9 September 30, 1997....................................... 11 7/8 9 3/4 December 31, 1997........................................ 11 15/16 10 March 31, 1998........................................... 12 15/16 10 7/8 June 30, 1998............................................ 14 13/16 12 September 30, 1998....................................... 12 1/2 8 7/8 December 31, 1998........................................ 10 7/16 7 15/16
As of March 19, 1999 there were 111 holders of record based on the records of the Company's transfer agent which does not include beneficial owners of Common Stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. The Company believes that as of March 12, 1999, there were approximately 2,000 holders of its Common Stock. On February 3, 1998, the Company announced that its Board of Directors had authorized a two-for-one split of its common stock in the form of a 100% stock dividend to stockholders of record as of February 18, 1998. Certificates reflecting the stock split were issued February 27, 1998. Amounts presented have been retroactively adjusted to reflect the stock split. The Company paid quarterly cash dividends of $.03 per share in 1998, 1997 and 1996. The Company expects to generate adequate short-term and long-term cash flow from its operations to continue its dividend to shareholders in future periods. For information concerning limitations on dividends, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources" as well as Note 10--"Stockholders' Equity" of Notes to Consolidated Financial Statements contained in this Form 10-K. 18 Item 6. Selected Financial Data The income statement data for each of the three years to the period ended December 31, 1998, and the balance sheet data at December 31, 1997 and 1998, are derived from the audited consolidated financial statements and notes thereto, which are included elsewhere in this report, and are qualified by reference to such financial statements and notes thereto. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this report.
Year Ended December 31, ------------------------------------------------ 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (In thousands of dollars, except per share data) Income Statement Data: Revenues: Premiums earned(a)......... $111,435 $109,513 $ 89,332 $ 88,918 $ 86,507 Commissions and fees(a).... 34,829 33,335 26,722 25,994 23,583 Investment income including realized investment gains(a).................. 22,052 14,884 6,587 5,429 3,073 -------- -------- -------- -------- -------- Total revenues........... $168,316 $157,732 $122,641 $120,341 $113,163 ======== ======== ======== ======== ======== Income from continuing operations before income taxes(a).................... $ 15,974 $ 14,574 $ 13,796 $ 14,188 $ 9,117 ======== ======== ======== ======== ======== Net (loss) income............ $(13,382) $ 15,212 $ 15,020 $ 13,854 $ 6,238 Change in unrealized investment gains, after tax. (5,938) 261 (1,351) 9,848 (6,918) -------- -------- -------- -------- -------- Comprehensive net (loss) income...................... $(19,320) $ 15,473 $ 13,669 $ 23,702 $ (680) ======== ======== ======== ======== ======== Comprehensive net (loss) income per share............ $ (1.57) $ 1.27 $ 1.14 $ 2.07 $ .06 ======== ======== ======== ======== ======== Cash dividends per share..... $ .12 $ .12 $ .12 $ .10 $ -- ======== ======== ======== ======== ======== Balance Sheet Data: Total assets(b)............ $646,445 $343,248 $288,743 $249,872 $199,737 ======== ======== ======== ======== ======== Notes payable(b)........... $ 72,550 $ 32,500 $ 35,000 $ 35,000 $ 25,000 ======== ======== ======== ======== ======== Stockholders' equity....... $ 91,034 $117,590 $102,364 $ 88,061 $ 63,079 ======== ======== ======== ======== ======== Cash Flow Data: From operating activities.. $ 8,517 $ 22,276 $ 27,794 $ 13,220 $ 16,469 From investing activities.. (36,664) (19,539) (25,461) (20,837) (36,406) From financing activities.. 32,814 (2,747) 634 11,280 21,588
- -------- (a) Amounts have been reclassified to present the Company's property/casualty segment as discontinued operations. (b) The increase in total assets and notes payable as of December 31, 1998 primarily reflects the acquisition of Seaboard Life Insurance Company (USA) and VASA North America, Inc. through additional borrowings under the Company's existing credit agreement. The fair value of assets acquired was $245.8 million. 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Business Operations General During 1998, The Centris Group, Inc., (the "Company") made the decision to exit the property/casualty reinsurance market by offering its wholly owned subsidiary, USF RE INSURANCE COMPANY ("USF RE"), for sale. Accordingly, the Company discontinued its property/casualty segment and has segregated 1998 results between income from continuing operations and discontinued operations. Effective December 31, 1998 the Company adopted the provisions of SFAS No. 130, "Disclosures about Segments of an Enterprise and Related Information" and established three reportable segments (medical lines, specialty insurance and holding company). Information in this Management's Discussion and Analysis is presented for the Company's continuing reportable segments and its discontinued segment. Acquisitions On December 31, 1998, the Company acquired from Seaboard Life Insurance Company of Canada and its parent, Seaboard North American Holdings, Inc., a Canadian company that is owned by Eureko, B.V. of the Netherlands ("Eureko"), Seaboard Life Insurance Company (USA), an Indiana domiciled life insurance company ("Seaboard Life"), and its affiliate, VASA North America, Inc. and its subsidiaries. The principal subsidiaries of VASA North America, Inc. are VASA North Atlantic Insurance Company ("VNAIC"), an Indiana domiciled property/casualty insurance company , and VASA Brougher, Inc. ("VBI"), a managing general underwriter of medical stop-loss and group term life insurance coverages issued by Seaboard Life and VNAIC . Seaboard Life is licensed in 41 states and the District of Columbia and VNAIC is licensed in 36 states and the District of Columbia. Seaboard Life and VNAIC are referred to herein as the "Insurance Companies." The Insurance Companies both carry an "A- " (Excellent) rating from A.M. Best Company. The purchase did not include the individual life and annuity business of Seaboard Life which is being sold separately by the Sellers. Effective January 1, 1999, the Company will incorporate Seaboard Life and VNAIC operations into its medical lines segment. The preliminary purchase price paid by Centris for the VASA group was the estimated statutory book value of the Insurance Companies as of December 31, 1998, plus or minus certain adjustments or $42,681,784. Financing for the transaction was provided by Centris' principal lender, Fleet National Bank, which increased its Credit Agreement with Centris from $35,000,000 to $75,000,000. Centris pledged the stock of the Insurance Companies as additional security for the increased loan and has committed to pay down the loan balance to $50,000,000 by June 30, 1999. In accordance with the terms of the stock purchase agreement, an audit of the Insurance Companies as of December 31, 1998 was performed, and Centris has determined that the final purchase price for the acquired group is $36,613,134. Centris has made a claim with Eureko for a refund of the difference between the preliminary purchase price and the final purchase price and is waiting for payment from Eureko. The stock purchase agreement provides a mechanism for resolving any disputes with respect to the amount of the final purchase price. The Company is in the process of running off the existing VBI medical stop- loss and group term life business in exchange for a management fee from the sellers that was included within the purchase price, and Eureko is providing loss ratio protection for the in-force business being run-off by VBI so that the Insurance Companies will have neither an underwriting gain nor incur an underwriting loss on such business. Under the stock purchase agreement the Company has the right to renew the existing VBI in-force business and will be offering renewal quotations to all accounts in excess of 51 covered employee lives. The Company has made arrangements with an unrelated managing general underwriter to offer coverage to accounts with less than 51 lives and will receive a fee for all such business renewed by the unrelated managing general underwriter. Effective January 1, 1999, Seaboard Life and VNAIC began to reinsure the medical stop-loss and provider excess business, respectively, underwritten by USBenefits on behalf of Continental. USF RE ceased being the reinsurer of such business on a run-off basis as of December 31, 1998. 20 In January, 1997, USBenefits acquired the operations of Global Excess Holdings, Inc. ("Global") a Michigan based managing general underwriter of medical stop-loss insurance that produced approximately $30 million of medical stop-loss premiums in 1996. The results of this operation were incorporated into the medical lines segment. In early September, 1997, the Company acquired INTERRA, an Indiana based company which manages and underwrites catastrophic accident and health risks nationally and internationally. INTERRA brings fee income and underwriting opportunities for the Company's risk assumption businesses in one of the fastest growing sectors of the industry--international accident and health insurance and reinsurance. INTERRA underwrites on behalf of an unaffiliated life insurance company and for its affiliate, Seaboard Life. Previously it had written business for USF RE. INTERRA also provides catastrophic claims management services to the Company and its subsidiaries. INTERRA's results are included in the medical lines segment. The Company continues to actively pursue accretive acquisition opportunities in complementary business lines. Continuing Operations The Company conducts continuing operations primarily in two segments: Medical lines includes (i) medical stop-loss and provider excess coverages underwritten by USBenefits Insurance Services, Inc. ("USBenefits") on behalf of The Continental Insurance Company ("Continental"), one of the CNA Insurance Companies, (ii) catastrophic accident and health risks underwritten and managed nationally and internationally by INTERRA, Inc. ("INTERRA"), and (iii) reinsurance of 50% of such business by USF RE through December 31, 1998, at which time USF RE terminated its reinsurance of the medical lines business on a run-off basis. Effective January 1, 1999, Seaboard Life and VNAIC became reinsurers of the medical lines business with net retained liability under all medical stop-loss and provider excess contracts limited to 25%. In addition, USBenefits is the underwriting manager and marketing organization for medical lines coverages issued on behalf of Continental. Medical stop-loss coverage is a form of excess insurance that protects employers that self-fund their employee healthcare plans by capping their exposure from the risk of loss. Provider excess coverage limits the financial risks healthcare providers face from medical plans that prepay the providers fixed sums per plan participant (capitated fees) or provide specified rates for services. Medical lines products are marketed through a network of unaffiliated third party administrators, insurance agents, brokers and consultants. Substantially all commissions and fees and premiums earned from continuing operations for 1998, 1997 and 1996, respectively, arise from USBenefits' and USF RE's relationship with Continental and its affiliate. Specialty Lines insurance underwriting is conducted by the Company's subsidiary, USF Insurance Company ("USFIC") which is presently rated "A" (Excellent) by A.M. Best Company, a rating that it currently shares with USF RE, under an Intercompany Pooling Agreement that has been terminated effective as of January 1, 1999. A.M. Best Company has placed USFIC's and USF RE's rating under review pending final resolution of the announced sale of USF RE. There can be no assurance that USFIC will continue to be rated by A.M. Best Company following the disposition of USF RE or that if USFIC continues to be rated, that it will retain its current rating of "A". USFIC is domiciled in Pennsylvania but operates out of its administrative offices in Florham Park, NJ. It is eligible to offer surplus lines coverage in 34 states, the District of Columbia and the U.S. Virgin Islands. In addition, USFIC holds admitted licenses in Pennsylvania, New York and Florida. USFIC writes both standard and surplus lines insurance on commercial and personal property/casualty risks which are marketed exclusively through managing general agents, general agents and program administrators. In 1999 USFIC will change its focus to include writing specialty risks for medically related lines of business where it can leverage existing relationships and opportunities through US Benefits and INTERRA. 21 Results of Operations Consolidated Results The table below presents certain consolidated financial information regarding the Company's operations.
Year Ended December 31, ------------------------------------------- 1998 Change 1997 Change 1996 -------- ------ -------- ------ -------- (dollars in thousands) Revenues: Premiums earned.................. $111,435 2 % $109,513 23 % $ 89,332 Commissions and fees............. 34,829 4 % 33,335 25 % 26,722 Net investment income............ 5,284 13 % 4,671 5 % 4,461 Net realized investment gains.... 16,768 64 % 10,213 380 % 2,126 -------- --- -------- --- -------- Total revenues................. $168,316 7 % $157,732 29 % $122,641 -------- -------- -------- Expenses: Insurance expenses............... 132,224 7 % 123,587 35 % 91,458 General and administrative....... 17,967 4 % 17,198 16 % 14,777 Interest expense................. 2,151 (9)% 2,373 (9)% 2,610 -------- --- -------- --- -------- Total expenses................. 152,342 6 % 143,158 32 % 108,845 -------- -------- -------- Income from continuing operations before income taxes............... 15,974 10 % 14,574 6 % 13,796 Income tax expense................. 6,088 16 % 5,245 43 % 3,673 -------- -------- -------- Income from continuing operations.. 9,886 6 % 9,329 (8)% 10,123 Discontinued operations: Income (loss) from operations of property/casualty segment, less applicable tax benefit of $(3,311) in 1998 and tax expenses of $1,538 in 1997 and $1,469 in 1996.................. (3,647) -- 5,883 20 % 4,897 Loss on disposal of property/casualty segment, less applicable income tax benefit of $(1,356).......................... (19,621) -- -- -- -- -------- --- -------- --- -------- Net (loss) income.................. $(13,382) -- $ 15,212 1 % $ 15,020 ======== === ======== === ========
Increases in premiums earned and commissions and fees in 1998 as compared to 1997 were attributable to modest growth in the medical lines segment. In 1998, the Company was more selective in its' underwriting of medical stop loss as rating actions adopted in late 1997 took effect. These actions, which resulted in a 2% decrease in medical stop loss premium volume, included a focus on larger groups where there is more predictability and better opportunities to write profitable business, increased selectivity in those areas of the country where managed care is not firmly established and a reduction in the amount of business written through producers whose book of business has been less profitable. Provider excess premium volume, which represents 12% of the medical lines book, advanced 35% in 1998 over 1997 through a combination of increased group size and increased penetration into this market. Revenue changes between 1997 and 1996 primarily reflect additional medical stop-loss business from the 1997 acquisition of Global Excess Re combined with increased production of provider excess. Returns on invested assets are an integral element of results from operations. Underwriting cash flows, which consist of premiums collected over losses and expenses paid, and investment cash flows, which consist of income from existing investments and proceeds from sales and maturities of investments, provide the funds used to build the investment portfolio. The portfolio is managed based upon Company guidelines which incorporate a variety of factors including the relationship of invested assets to liabilities, total return, business needs, regulatory requirements and tax considerations. Increases in net investment income result from higher levels of invested assets and the increasingly higher concentration of these assets in higher yielding fixed income securities as 22 opposed to equity securities and short term investments. Increases in realized gains between years are generally a result of continuous evaluation of the investment portfolio to enhance and maintain yields and total return consistent with the Company's investment guidelines. Increases in realized gains in 1998 as compared to prior periods include the effect of positioning the USF RE subsidiary for sale by decreasing its exposure to market risk. Insurance expenses are comprised of losses and loss adjustment expenses incurred and policy acquisition expenses. Insurance and reinsurance companies establish reserves for losses incurred, but not yet paid, in order to match such losses with the related premiums earned. The process of establishing loss reserves is subject to uncertainties that are a normal, recurring aspect of the insurance business which requires the use of informed judgments and estimates. Loss and loss adjustment expense reserve development is reviewed on a regular basis, incorporating analysis of current trends, market changes in the Company's business segments and historical experience to analyze the Company's actuarial assumptions. As additional experience and other data becomes available, the Company's actuarial estimates may be revised. Such revisions may impact earnings. Policy acquisition expenses vary on the basis of market conditions and mix of business. See segment disclosures contained herein for additional discussion of insurance expenses. General and administrative (G&A) expenses related to continuing operations remained at 11% of revenues in 1998 and 1997, reflecting the Company's continuous focus on managing its expense as it incorporates acquired companies into its business mix. Higher levels of general and administrative expenses in 1997 as compared to 1996 reflect the acquisitions of Global Excess Holdings, Inc. and INTERRA which were completed in the 1997 period. Income taxes as a percentage of pre-tax income fluctuate depending on the proportion of tax exempt investment income to total pre-tax income and the proportion of total income subject to state income taxes. Fluctuations in effective income tax rates between the periods presented primarily result from the tax effect of acquired companies and utilization of tax benefits and changes in valuation allowances which were available in prior periods. Tax benefits arising from the loss on disposal of discontinued operations are limited due to the effect of loss disallowance rules applicable to the divestiture of USF RE which takes the form of a sale of stock. Net income from continuing operations for 1998 as compared to prior periods reflects a higher level of realized gains and growth of the provider excess component of the medical lines segment offset by increases in the Company's insurance expenses, primarily losses and loss adjustment expenses. Net income from continuing operations in 1997 as compared to 1996 is primarily the result of 1997 acquisitions and growth in the provider excess line offset by increases in medical lines reserves. Net income for the 1998 period (as compared to the 1997 period) incorporates the effect of discontinuing the Company's property/casualty segment which includes a loss on disposal of $19,621,000 net of available tax benefits and includes losses from operations of the segment of $3,647,000 caused by catastrophes occurring in the 1998 period. Net income in 1997 as compared to 1996 includes the impact of increases in reserves in the medical lines segment in the third quarter of 1997 and favorable underwriting results in the property/casualty segment. Discontinued Operations During 1998, the Company made the decision to exit the property/casualty reinsurance market by offering its wholly owned subsidiary, USF RE INSURANCE COMPANY ("USF RE"), for sale. Accordingly, the Company discontinued its property/casualty segment and has segregated 1998 results between income from continuing operations and discontinued operations. The Company, through USF RE, entered the property/casualty reinsurance market in 1987. Since that time the property/casualty segment experienced significant growth. In recent years, however, it has become increasingly difficult to compete in the property/casualty reinsurance arena as other market participants grow ever larger and the business has begun to 23 resemble a commodity financial product with significant exposures to natural catastrophic events. In 1998, the Company concluded that its capital can be deployed more efficiently by focusing on the medical lines business, where it is a market leader. Accordingly, the Company discontinued its property/casualty segment effective December 31, 1998. The Company has signed a Letter of Intent with Folksamerica Holding Company, Inc. for the sale of USF RE for $92,500,000. The consideration is expected to be $71,750,000 in cash and an adjustable subordinated 5 year note for $20,750,000. The note, which accrues interest at the U.S. Treasury Note rate plus 50 basis points, is adjustable downward based on adverse loss development of the Company's reinsurance reserves at December 31, 1998. It is management's expectation and intention to negotiate a definitive agreement for the sale of USF RE to Folksamerica. In the event that the sale is not consummated the reinsurance subsidiary will be put in run-off. Financial information pertaining to the discontinued operations assumes a sale of USF RE under terms outlined herein. Business Segments The following tables present pre-tax operating information by continuing business segment and holding company operations (including realized gains) for the years ended December 31, 1998, 1997 and 1996. Medical Lines
Year Ended December 31, ---------------------------------------- 1998 Change 1997 Change 1996 ------- ------ -------- ------ ------- (dollars in thousands) Gross premiums written................ 105,116 1 % $103,673 23 % $84,179 Net premiums written.................. 105,116 2 % 103,479 23 % 84,179 Revenues: Premiums earned..................... 105,116 2 % 103,479 23 % 84,179 Commissions and fees................ 34,829 4 % 33,335 25 % 26,722 Net investment income............... 4,002 11 % 3,605 9 % 3,312 ------- --- -------- --- ------- Total revenues.................... 143,947 3 % 140,419 23 % 114,213 ------- --- -------- --- ------- Expenses: Losses and loss adjustment.......... 90,622 9 % 82,760 42 % 58,095 Policy acquisition.................. 35,489 1 % 35,003 23 % 28,526 General and administrative.......... 13,970 5 % 13,328 32 % 10,111 ------- --- -------- --- ------- Total expenses.................... 140,081 7 % 131,091 36 % 96,732 ------- --- -------- --- ------- Income before income taxes............ $ 3,866 (59)% $ 9,328 (47)% $17,481 ======= === ======== === =======
Increases in premiums earned in 1998 over 1997 were modest as the medical stop loss premium volume was off 2% as a result of pricing and underwriting actions taken in late 1997 to support the underwriting profitability of this line of business. These actions included a focus on larger groups where there is more predictability and better opportunities to write profitable business, specific rating actions in those parts of the country where managed care is not firmly established and a reduction of business from producers whose book of business has been less profitable. Offsetting the medical stop loss result, provider excess premium volume was up 35% over the prior year and now represents 12% of total medical lines premium volume. Increases in commissions and fees at a rate in excess of premium growth results from Interra's operations which produces fee income without the corresponding risk premium. Increases in revenues for 1997 as compared to 1996 are primarily due to additional medical stop-loss business from the acquisition of Global in January 1997 combined with the growth of the provider excess line. The medical lines segment is subject to fluctuations in the cost of health care services, changes in the frequency of services provided to the covered population and the expansion of routine medical services 24 applicable to prescribed procedures which are normal and recurring aspects inherent in the estimation of accident and health reserves. Calendar year results of the medical lines segment reflects various policy years at different stages of completion for each line of business included in the segment. The respective policy years become complete 15 to 18 months after policy inception. Each policy year is subject to differing market conditions and varying claim development patterns. Additionally, in recent years competition in the medical lines segment has constrained the ability to increase premium rate levels commensurate with increases in health care costs. Each calendar year will be affected by such normal, recurring elements that cause fluctuations in the ordinary course of business. In the 1998 period, increases in estimated losses and LAE for claims arise from the 1997 medical stop-loss policy year and the run-off of a book of business acquired in the Global transaction in 1997. Medical lines reserves pertaining to business written through December 31, 1998, of $34.6 million, are included in the expected sale of USF RE to Folksamerica. In conjunction with the sale, the Company expects to purchase a $5 million cover on its medical lines reserves which, when combined with 1998 USF RE medical lines reserve increases of $11.1 million result in an expectation that future periods will not be impacted by prior period loss reserve development. The change in medical lines pre-tax income between the 1997 and 1996 periods primarily reflects third quarter 1997 additions of $8 million to medical lines reserves resulting from the Company's continuous review of its reserves, which indicated increases in the severity and frequency of specific and aggregate claims in the second half of 1996 and the first half of 1997. Policy acquisition expenses vary due to the level of production activity, mix of business and market conditions. Policy acquisition costs include producer commissions and bonuses, unallocated loss adjustment expenses and fees under the Company's contracts with Continental. The Company added a loss ratio modifier to its producer bonus arrangement in 1998, which combined with the other pricing actions described, had the effect of moderating the growth of policy acquisition costs in 1998. Increases in general and administrative expenses in 1998 primarily result from including Interra's activities for a full year. Increases in general and administrative expenses in 1997 over 1996 related to the acquired Global operations. Specialty Lines
Year Ended December 31, --------------------------------------- 1998 Change 1997 Change 1996 ------- ------ ------- ------ ------- (dollars in thousands) Gross premiums written................ $28,314 105 % $13,791 36 % $10,128 Net premiums written.................. 4,797 (28)% 6,663 27 % 5,229 ======= === ======= === ======= Revenues: Premiums earned..................... 6,319 5 % 6,034 17 % 5,153 Commissions and fees................ -- -- % -- -- -- Net investment income............... 1,182 18 % 1,004 (8)% 1,091 ------- ------- ------- Total revenues.................... 7,501 7 % 7,038 13 % 6,244 ------- --- ------- --- ------- Expenses: Losses and loss adjustment.......... 4,887 1 % 4,830 15 % 4,199 Policy acquisition.................. 1,226 23 % 994 56 % 638 General and administrative.......... 807 (29)% 1,129 (47)% 2,111 ------- --- ------- --- ------- Total expenses.................... 6,920 (1)% 6,953 -- 6,948 ------- --- ------- --- ------- Income before income taxes............ $ 581 -- $ 85 -- $ (704) ======= === ======= === =======
In the specialty lines segment, revenue growth in 1998 was achieved as a result of a redirection in the Company's operations. In late 1997 USFIC, a wholly owned subsidiary of the Company, began to focus on 25 program opportunities as well as the exclusive use of managing general agents to produce business. Part of this strategy is to also act as a policy issuing carrier earning non risk exposed fee income to balance the risks assumed on the balance of the business. In mid 1998 the infrastructure that was in place to directly service and produce USFIC's business was transferred to a national brokerage firm. This new entity was appointed an exclusive managing general agent and it continues to renew and write new business on behalf of USFIC. As a result of these changes, the specialty lines segment produced pre tax income of $581,000 in 1998. In 1999 USFIC will expand its focus to include writing specialty risks for medically related lines of business where it can leverage existing relationships and opportunities through USBenefits and INTERRA. Retrocessions The Company evaluates the financial condition of potential retrocessionaires to determine whether to cede premium to such companies. Retrocession agreements are placed with unaffiliated companies which management believes are financially secure and experienced in this type of business. Reinsurance recoverables are monitored continually, and retrocessionaires who are not qualified in the states of domicile of the Company's insurance carriers are required to post security in the amount of their estimated liability. Holding Company
Year Ended December 31, --------------------------------------- 1998 Change 1997 Change 1996 ------- ------ ------- ------ ------- (dollars in thousands) Revenues: Investment income...................... $ 100 61 % $ 62 7 % $ 58 Net realized investment gains.......... 16,768 64 % 10,213 380 % 2,126 ------- --- ------- --- ------- Total revenues....................... 16,868 64 % 10,275 370 % 2,184 ------- --- ------- --- ------- Expenses: General and administrative............. 3,190 16 % 2,741 7 % 2,555 Interest............................... 2,151 (9)% 2,373 (9)% 2,610 ------- --- ------- --- ------- Total expenses....................... 5,341 4 % 5,114 (1)% 5,165 ------- --- ------- --- ------- Income (loss) before income taxes........ $11,527 123 % $ 5,161 -- $(2,981) ======= === ======= === =======
In 1998, the Company decreased its exposure to bond market fluctuations resulting in higher levels of realized gains in its fixed income portfolio. Realized gains in 1997 were due to the Company lessening its exposure to stock market volatility resulting in $10,213,000 in pre-tax gains primarily from its equity portfolio. Interest expense declined in 1998 and 1997 as the Company made principal payments on its outstanding bank loan. Interest expense will increase in 1999 due to the purchase of the VASA group which was funded by an increase in the Company's Credit Agreement with Fleet National Bank. Accounting Policies See "Note 1" to the Company's Consolidated Financial Statements appearing elsewhere in this Form 10-K for information regarding significant accounting policies. Inflation The healthcare marketplace has long been subject to the effects of increases in costs of services. Inflation can also negatively impact insurance and reinsurance operations by causing higher claims settlements than may have originally been estimated, while not necessarily allowing an immediate increase in premiums to a level 26 necessary to maintain profit margins. Historically the Company has made no explicit provisions for inflation, but trends are considered when setting underwriting terms and claim reserves. Inflation also affects interest rates, which in turn affect investment income and the market value of the Company's investment portfolio. Liquidity and Capital Resources The Company utilizes cash from operations and maturing investments to meet its insurance obligations to policyholders and claimants, as well as to meet operating costs. Primary sources of cash from operations include premium collections, commissions and fees and investment income. The principal uses of cash from operations are for premium payments to insurance companies, payments of claims under reinsurance and insurance contracts, and operating expenses such as salaries, commissions, taxes and general overhead. The Company secured a $25,000,000 bank loan in December 1994 which was increased to $75,000,000 by December 1998. Of this amount, the Company contributed $30,500,000 million to the surplus of its insurance group prior to 1997 to support additional growth and borrowed $42,700,000 for the purchase of Seaboard Life and the VNA companies in 1998. At December 31,1998, $72,550,000 was outstanding under the bank loan. The Company is required to pay down the loan to $47,550,000 by June 30, 1999. Proceeds from the expected sale of USF RE, or an extraordinary dividend from USF RE in the event of a runoff scenario, will be used to meet this obligation. The Credit Agreement with the Company's lender contains certain covenants, restrictions and dividend payment limitations and call provisions in the event of non-compliance. The Company notified its lender, Fleet National Bank, that it would not meet one of its debt covenants related to the surplus level of Seaboard Life and VNAIC. The covenant was based on best estimates of the surplus of these companies when it was adopted in November, 1998. An audit of these companies, as required by the Stock Purchase Agreement to determine the purchase price, revealed that statutory surplus was less than expected in the covenant calculation. The Company expects to increase the surplus of Seaboard Life by a capital contribution in the first quarter of 1999 to cure this item and has received a waiver from Fleet National Bank for this item as of December 31, 1998. The Company also notified its lender that it is in non-compliance with one of its debt covenants related to the maintenance of a minimum level of stockholders' equity of the Company. The charge of $19,621,000 taken by the Company in connection with discontinuing the property/casualty segment through the expected sale of USF RE, caused the Company's equity to drop below $100,000,000. The Company believes that its 1999 operating results will be adequate to cure this item and has been informed that it will receive a waiver for this item upon completion of the definitive agreement for the sale of USF RE. In the event that the Company's actual results are below 1999 estimates, it has the option of paying down the debt utilizing the remaining expected free cash of $45,000,000 from the sale of USF RE and/or renegotiating this individual covenant. In the event that Company expectations to cure non-compliance with this covenant are not met, Fleet National Bank retains the option to call the note as prescribed in the Credit Agreement. The Company has received no indication that Fleet National Bank intends to call the debt. The Company was otherwise in compliance with its debt covenants at December 31, 1998. See Footnote 8 to the Company's Consolidated Financial Statements appearing elsewhere in this Form 10-K for additional discussion. The Company anticipates that it will continue to generate sufficient cash flow from operations to cover its short-term (1-18 months) and long-term (18 months to 3 years) liquidity needs. While the Company currently has no immediate plans for significant capital outlays, from time to time it contemplates acquisition opportunities that complement its business operations. The sale of USF RE is expected to generate free cash of approximately $45,000,000 after expenses and the required pay down of the Company's debt noted above. During 1998, the investment portfolio grew by 6% prior to the acquisition of the Seaboard Life and VNA companies on December 31, 1998 as a result of operating cash flows. The acquisition of Seaboard Life and VNAIC added $55,893,000 to the invested assets of the Company. The portfolio currently reflects an allocation of approximately 96% in fixed income investments, both taxable and tax preferenced, with an "AA" average fixed income portfolio rating, and 4% in equities. All such securities are carried at quoted market values at the latest balance sheet date. The portfolio does not contain any real estate investments, derivatives, high yield bonds, private placements or mortgage loans. Assets held for resale include fixed income securities and mortgage loans. 27 These assets support the reserves of Seaboard Life's individual life and annuity business. Such business is in the process of being reinsured on a 100% indemnity basis and will not be part of the Company's operations. USF RE, USFIC, Seaboard Life and VNAIC are restricted in the annual amount of dividends which they may pay to the Company without receiving prior approval from the Commissioner of Insurance in the respective state of domicile. During 1999, the amount which may be paid without such prior approval by Seaboard Life, VNAIC and USFIC is $5,709,000. In the event that USF RE is not sold an additional $9,365,000 is available for dividend purposes. Since the Company's inception, it has not received any dividends from any of its insurance company subsidiaries. Application of the National Association of Insurance Commissioners ("NAIC") risk-based capital ("RBC") requirements for property and casualty and life insurance entities indicates that the Company's insurance company subsidiaries substantially exceed the capital level required under the RBC requirements. Each of the Company's insurance company subsidiaries experienced unusual values in the NAIC insurance regulatory information system ("IRIS") tests. Generally, unusual values on two or more of the tests require an insurance company to report to the NAIC its plans to rectify the situation. USFIC had three unusual values on tests that measured surplus aid to surplus, two year overall operating ratio and one year reserve development to surplus. Over the last two years USFIC has been negatively impacted by medical lines underwriting results, which it assumes from USF RE as part of the intercompany pooling arrangement between the two insurers. With effect from January 1, 1999, that agreement has been cancelled and management expects the two year operating ratio and one year reserve development tests to return to more normal results. Seaboard Life experienced 6 out of 13 unusual results on its IRIS tests all but two related to surplus levels. Seaboard Life's operating results under its previous owner produced a net loss for the 1998 year so these unusual values were not unexpected. The Company expects to increase Seaboard's surplus during the first quarter of 1999. Such action, combined with returning Seaboard to profitability, is expected to return these test results to more usual values. Year 2000 As the year 2000 approaches, the Company recognizes the need to ensure that its operations will not be adversely affected by year 2000 computer software and hardware issues. Such issues pertain to date sensitive software and hardware which could incorrectly recognize a two digit date field. This could result in a system miscalculation or failure and lead to a disruption of operations, including, among other things, a temporary inability to process transactions, send invoices, make claims or other payments or engage in similar activities. The Company has a formal plan in place to evaluate and implement solutions to year 2000 related problems which focuses on eight separate compliance issues: (i) the ability of the Company's systems to handle the transition to the Year 2000; (ii) the ability of the Company's customers and business partners to handle the transition to the Year 2000; (iii) the ability of the Company's vendors and service providers to handle the transition to the Year 2000; (iv) the Company's disclosure of its Year 2000 compliance efforts to investors and regulators; (v) the Company's potential exposure to losses from Year 2000 claims under its reinsurance contracts and insurance policies; (vi) the Company's ability to secure and maintain insurance coverages protecting the Company against Year 2000 losses; (vii) budget and resource issues; and (viii) development and implementation of a Contingency Plan. The evaluation phase of the plan, which was completed in December 1997, included an analysis of the Company's software and hardware systems, identification of hardware which needed to be upgraded or replaced, identification of software enhancements required to address year 2000 issues and identification of those customers, business partners, vendors and service providers that could have an impact on the Company's operations in the event that their systems were not year 2000 compliant. The Company's significant operational and financial software systems are provided by third party vendors who the Company has confirmed have also been focusing on addressing year 2000 issues. During 1998, the Company has implemented and tested year 2000 compliant systems for its corporate financial reporting system, its treaty reinsurance business, its facultative 28 reinsurance operations and its medical lines operations. The Company believes that all of its internal systems have reached a state of year 2000 readiness and expects to continue testing its systems during 1999. The Company has solicited its trading partners including agents and brokers, suppliers, financial institutions and others who could directly or indirectly affect the Company's operations as to their year 2000 compliance efforts. Presently, these trading partners are in various stages of completion of their own year 2000 remediation efforts. The third party vendors providing the Company's significant operational and financial software systems have represented to the Company that the software now in use is Year 2000 Compliant. The Company will continue to monitor the Year 2000 readiness of its own systems, as well as the readiness of its customers, business partners, vendors and service providers on an ongoing basis. It is presently not possible to quantify the aggregate cost to the Company with respect to external year 2000 issues, if any, although the Company does not expect such matters to have a material adverse effect on its operations. As the Company continues to monitor the status of external year 2000 issues, it expects to develop contingency plans for issues that may arise. In support of this objective, the Company has developed a worst case scenario relating to Year 2000 issues. This scenario indicates that Year 2000 risks relate to the Company's relationships with its trading partners where issues such as telephone availability, fax services and telecommunications including internet service usage could cause the Company to revise its business practices in the event of the non availability of such common services. The Company is presently developing alternative methods to conducting its business in the event that a worst case scenario or element thereof was to occur. This scenario considers it unlikely that all external trading relationships would become useless simultaneously. Therefore, the Company's contingency plan is based upon alternatives to the specific loss of up to two of the identified worst case items described. The Company intends to continue testing elements of its contingency plan throughout 1999. In the event that the Company's systems do not function as expected and the Company has to implement its contingency plan, the Company does not believe there will be a material impact on the Company's operations. Critical operational tasks which could be negatively impacted include: insured name clearance, quote issuance, binder issuance, policy contract issuance, claims processing, generation of management reports, accounting, and communications with clients. Critical operational task data currently being produced is backed-up daily and stored at an off-site facility and will be available for processing by either an outside third party vendor or by the Company on a manual basis or on off-the-shelf software which could be readily purchased. The Company is developing contingency plans for its primary operating units and critical computer operations to address issues that may arise due to an inability of the Company's systems or the systems of one or more of its business partners, to process data into the 21st century. Strategies have been developed to include identification of and management of resources which can be operated in reduced or minimal modes, appropriate recovery processes and use of alternate methods to process data. For example, insured name clearance can be accomplished using copies of data currently being compiled and stored off-premises, quote issuance can be performed manually, and binder issuance and policy issuance can also be performed manually, so long as the Company has access to photocopy systems and can maintain a log, either via spreadsheet or manual listing. If necessary, claims could be processed and paid manually and the data could be input into its systems once any problems are resolved. Premiums, commissions, and other financial data could be processed on a spreadsheet and checks typed on a manual basis. Alternatively, record keeping could be kept in spreadsheet format, and the Company may rely on the systems of one or more of its affiliated companies to perform some of the functions affected. As mentioned, the Company is working to make certain that its business partners are aware of the potential risks and that they are taking steps to make certain their systems are Year 2000 compliant. In the event a vendor, supplier or service provider cannot certify or establish Year 2000 compliance status to the Company by October 1, 1999, the Company will contract with alternative sources for products and services. Further, the failure of one of the Company's business partners to achieve compliance, or a finding that its systems do not function as expected, may have an impact on the Company. The Company has communicated with its business 29 partners to determine their extent of compliance and has learned that a variety of operating systems are being used by them. The Company believes that it is unlikely that the failure of one operating system to perform as expected will affect a significant portion of its business partners at any one time. The Company has also taken steps to ensure that it will have adequate insurance coverages for any year 2000 losses that it may incur by monitoring its coverages to ensure that there are no year 2000 restrictions or limitations on its policies, renewing its D&O and E&O coverages early without any limitations pertaining to year 2000, and by obtaining multi-year contracts that will extend beyond the year 2000 to ensure that its coverages are not restricted or canceled during 1999. In addition, it is the Company's intention to renew all of its other principal coverages to ensure that such coverages also do not contain year 2000 restrictions. The Company's vendor provided software systems were scheduled for replacement between 1996 and 1998 as the legacy systems previously operated could no longer support the Company's growing business. Year 2000 compliance was a consideration in each system replacement made by the Company. Specific remediation costs for hardware and software year 2000 issues have been less that $100,000. Such cost of the year 2000 remediation plan is not considered material to the Company's financial position. Forward Looking Statements Some of the statements included within this Annual Report on Form 10-K, including but not limited to Management's Discussion and Analysis of Financial Condition and Results of Operations, Condensed Consolidated Financial Statements and related notes thereto, which are not historical facts may be considered to be forward looking statements within the meaning of Section 29A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and therefore are subject to certain risks and uncertainties which could cause the actual results to differ materially from those suggested by such statements. Such risks and uncertainties include, but are not limited to the following: catastrophic losses or a material aggregation of such losses in the Company's insurance lines; changes in federal or state law affecting an employer's ability to self-insure or other adverse regulatory changes; the adequacy of the Company's reinsurance program; general economic conditions in this country or abroad; adverse developments in the securities markets and their impact on the Company's investment portfolio; the effects of competitive market pressures within the medical lines or property/casualty marketplaces; the effect of changes required by generally accepted accounting practices or statutory accounting practices; failure of the company's computer systems to perform in an appropriate manner following year 2000 remediation efforts; failure of the company's trading partners, customer or key vendors to make their computer systems year 2000 compliant in a timely manner; and other risks which are described from time to time in the company's filings with the Securities and Exchange Commission. The words "believes", "anticipates", "expects" and similar expressions are intended to identify forward looking statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market Risk of Financial Instruments The Company's principal assets and liabilities are financial instruments, which are subject to the market risk of potential losses from adverse changes in market rates and prices. The primary market risk exposures is interest rate risk on short-term, medium-term and long-term fixed rate instruments. The Company has no foreign currency exchange rate risk. . The Company generally selects investment assets with characteristics such as duration, yield, currency and liquidity to reflect the underlying characteristics of related insurance and contractholder liabilities. The Company selects medium-term, fixed rate investments to support interest- sensitive and experience-rated life and health liabilities subject to liquidity requirements, shorter- and longer-term investments to support generally shorter- and longer-term property and casualty and other life and health claim liabilities, and longer-term investments to support generally longer-term fully guaranteed products, primarily annuities. 30 Caution should be used in evaluating the Company's overall market risk from the information below, since actual results could differ materially because the information was developed using estimates and assumptions as described below, and because insurance contract liabilities and reinsurance recoverables on unpaid losses are not included in the hypothetical effects. The hypothetical effects of changes in market rates or prices on the fair values of financial instruments would have been as follows as of December 31, 1998. . An approximate $5 million net decrease in the fair value of financial instruments would have occurred if interest rates had increased by 100 basis points. The change in fair values was determined by estimating the present value of future cash flows using various models, primarily duration modeling. . An approximate $1 million decrease in the fair value of equity securities would have occurred if there had been a 10% decrease in the market prices of all equity securities. Item 8. Financial Statements and Supplementary Data The Company's consolidated financial statements and notes thereto, and supplementary data are filed as a part of this Annual Report on Form 10-K as indicated in the Index to Financial Statements and Financial Statement Schedules appearing on page F-1 of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 31 PART III Item 10. Directors and Executive Officers of the Registrant The information regarding directors and executive officers of the Registrant as required by Items 401 and 405 of Regulation S-K is set forth in Part I of this Form 10-K under the caption "EXECUTIVE OFFICERS OF THE COMPANY" and under the caption "ELECTION OF DIRECTORS" in the Company's definitive Proxy Statement for the Company's 1999 Annual Meeting of Stockholders scheduled to be held on May 12, 1999, and which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1998 (the "Proxy Statement"), and is hereby incorporated by this reference. Item 11. Executive Compensation The information required by Item 402 of Regulation S-K is set forth under the caption "COMPENSATION OF EXECUTIVE OFFICERS," "COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION," and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" in the Company's Proxy Statement, and is hereby incorporated by this reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by Item 403 of Regulation S-K is set forth under the captions "SECURITY OWNERSHIP OF MANAGEMENT" and "SECURITY OWNERSHIP OF CERTAIN OTHER STOCKHOLDERS" in the Company's Proxy Statement, and is hereby incorporated by this reference. Item 13. Certain Relationships and Related Transactions The information regarding certain relationships and related transactions as required by Item 404 of Regulation S-K is set forth in the Company's Proxy Statement under the captions "COMPENSATION OF EXECUTIVE OFFICERS" and "RELATED TRANSACTIONS," and is hereby incorporated by this reference. 32 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-k (a) 1. Financial Statements: See Index to Financial Statements on page F-1. 2. Financial Statement Schedules: See Index to Financial Statement Schedules on page F-1. All other schedules to the Consolidated Financial Statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted. 3. The following is a list of exhibits required to be filed as part of this Form 10-K by Item 601 of Regulation S-K: 3.1, 4.1 The Company's Restated Certificate of Incorporation, as amended, as presently in effect. Filed as Exhibits 3.1 and 4.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K"), and incorporated herein by this reference. 3.2, 4.2 Amended and Restated Bylaws of the Company, as presently in effect. Filed as Exhibits 3.2 and 4.2 to the Company's 1997 Form 10-K, and incorporated herein by this reference. 4.3 Stock Certificate of the Company. Filed as Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (the "June 1997 Form 10-Q"), and incorporated herein by this reference. 4.4 Rights Agreement. Filed as Exhibit 2 to the Company's Current Report on Form 8-K dated May 24, 1990, and incorporated herein by this reference. 4.5 First Amendment to Rights Agreement. Filed as Exhibit 1 to the Company's Current Report on Form 8-K dated January 16, 1992, and incorporated herein by this reference. 4.6 Second Amendment to Rights Agreement. Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 29, 1994, incorporated herein by this reference. 4.7 Third Amendment to Rights Agreement. Filed as Exhibit 4 to the Company's Current Report on Form 8-K dated September 28, 1995, and incorporated herein by this reference. 4.8 Fourth Amendment to Rights Agreement. Filed as Exhibit 1 to the Company's Current Report on Form 8-K dated July 23, 1997, and incorporated herein by this reference. 4.9 Fifth Amendment to Rights Agreement. Filed as Exhibit 1 to the Company's Current Report on Form 8-K dated January 28, 1998, and incorporated herein by this reference. 9 Not applicable. 10 Material Contracts. 10.1 Agreement of Employment between the Company and David L. Cargile effective as of November 1, 1996, including relocation loan arrangement and Amendment No. 1 thereto, filed as Exhibit 10.4(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K"), and filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K"); and Amendment No. 2 thereto, filed as Exhibit 10.1(i) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 ("March 1998 Form 10-Q"), and incorporated herein by this reference. 10.2 Agreement of Employment between the Company and Howard S. Singer effective as of November 1, 1996. Filed as Exhibit 10.3 to the Company's 1996 Form 10-K, and incorporated herein by this reference.
33 10.3 Agreement of Employment between the Company and Craig J. Kelbel effective as of November 1, 1996. Filed as Exhibit 10.4 to the Company's 1996 Form 10-K, and incorporated herein by this reference. 10.4 Agreement of Employment between the Company and Mark A. Carney effective as of September 6, 1997. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (the "September 1997 Form 10-Q"), and incorporated herein by this reference. 10.5(i) Severance Agreement dated May 24, 1994 between the Company and David L. Cargile. Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (the "June 1994 Form 10-Q"), and incorporated herein by this reference; and Amendment No. 1 to the Severance Agreement dated December 4, 1996, filed as Exhibit 10.5(vii) to the Company's 1996 Form 10-K, and incorporated herein by this reference; and Amendment No. 2 to the Severance Agreement dated August 29, 1997, filed as Exhibit 10.5(ii) to the Company's 1997 Form 10-K. 10.5(ii)* Amendment No. 3 dated December 30, 1998 to the Severance Agreement between the Company and David L. Cargile. 10.5(iii) Severance Agreement dated May 24, 1994 between the Company and Howard S. Singer. Filed as Exhibit 10.2 to the Company's June 1994 Form 10-Q, and incorporated herein by this reference; and Amendment No. 1 to the Severance Agreement dated December 4, 1996, filed as Exhibit 10.4(viii) to the Company's 1996 Form 10- K, and incorporated herein by this reference; and Amendment No. 2 to the Severance Agreement dated August 29, 1997, filed as Exhibit 10.5(iv) to the Company's 1997 Form 10-K, and incorporated herein by this reference. 10.5(iv)* Amendment No. 3 dated December 30, 1998 to the Severance Agreement between the Company and Howard S. Singer. 10.5(v) Severance Agreement dated May 24, 1994 between the Company and John T. Grush. Filed as Exhibit 10.4 to the Company's June 1994 Form 10-Q, and incorporated herein by this reference; and Amendment No. 1 to the Severance Agreement dated December 4, 1996, filed as Exhibit 10.5(ix) to the Company's 1996 Form 10-K, and incorporated herein by this reference; and Amendment No. 2 to the Severance Agreement dated August 29, 1997, filed as Exhibit 10.5(vi) to the Company's 1997 Form 10-K, and incorporated herein by this reference. 10.5(vi)* Amendment No. 3 dated December 30, 1998 to the Severance Agreement between the Company and John T. Grush. 10.5(vii) Severance Agreement dated May 24, 1994 between the Company and Craig J. Kelbel. Filed as Exhibit 10.14(v) to the Company's 1995 Form 10-K, and incorporated herein by this reference; and Amendment No. 1 to the Severance Agreement dated December 4, 1996, filed as Exhibit 10.5(x) to the Company's 1996 Form 10-K, and incorporated herein by this reference; and Amendment No. 2 to the Severance Agreement dated August 29, 1997, filed as Exhibit 10.5(viia) to the Company's 1997 Form 10-K, and incorporated herein by this reference. 10.5(viii)* Amendment No. 3 dated December 30, 1998 to the Severance Agreement between the Company and Craig T. Kelbel. 10.5(ix) Severance Agreement dated May 24, 1994 between the Company and Jose A. Velasco. Filed as Exhibit 10.6 to the Company's June 1994 Form 10-Q, and incorporated herein by this reference; and Amendment No. 1 to the Severance Agreement dated December 4, 1996, filed as Exhibit 10.5(xii) to the Company's 1996 Form 10-K, and incorporated herein by this reference; and Amendment No. 2 to the Severance Agreement dated August 29, 1997, filed as Exhibit 10.5(ix) to the Company's 1997 Form 10-K, and incorporated herein by this reference. 10.5(x)* Amendment No. 3 dated December 30, 1998 to the Severance Agreement between the Company and Jose A. Velasco.
34 10.5(xi) Severance Agreement dated July 23, 1997 between the Company and Charles M. Caporale. Filed as Exhibit 10.3 to the Company's September 1997 Form 10-Q, and incorporated herein by this reference. 10.5(xii)* Amendment No. 1 dated December 30, 1998 to the Severance Agreement between the Company and Charles M. Caporale. 10.5(xiii) Severance Agreement dated September 7, 1997 between the Company and Mark A. Carney. Filed as Exhibit 10.2 to the Company's September 1997 Form 10-Q, and incorporated herein by this reference. 10.5(xiv)* Amendment No. 1 dated December 30, 1998 to the Severance Agreement between the Company and Mark A. Carney. 10.5(xv) Severance Agreement dated December 4, 1996 between the Company and Edward D. Jones, III; and Amendment No. 1 to the Severance Agreement dated August 29, 1997. Filed as Exhibit 10.5(xii) to the Company's 1997 Form 10-K, and incorporated hereby this reference; and Amendment No. 2 to the Severance Agreement dated March 1, 1998, filed as Exhibit 10.5(xiii) to the Company's March 1998 Form 10-Q, and incorporated herein by this reference. 10.5(xvi)* Amendment No. 3 dated December 30, 1998 to the Severance Agreement between the Company and Edward D. Jones, III. 10.6 Lease Agreement dated May 28, 1985 between Center Tower Associates and US Benefits, Inc. Filed as Exhibit 10.13 to the Company's Form S-1 Registration Statement declared effective by the Securities and Exchange Commission ("Commission") on October 31, 1986, and incorporated herein by this reference; and First Amendment dated November 24, 1986 between Center Tower Associates and the Company as assignee of US Benefits, Inc., filed as Exhibit 10.26 to the Company's Form S-2 Registration Statement declared effective by the Commission on December 4, 1991 (the "S-2 Registration Statement"), and incorporated herein by this reference; and Second Amendment dated July 8, 1992, filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by this reference; and Third Amendment dated May 4, 1993, filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (the "1993 Form 10-K"), and incorporated herein by this reference; and Fourth and Fifth Amendments dated August 29, 1994 and October 1, 1995, respectively, filed as Exhibit 10.18(i) to the Company's 1995 Form 10-K, and incorporated herein by this reference. 10.7(i) Management Agreement No. 1 dated October 3, 1994 (with Addenda) between The Continental Insurance Company and USBenefits Insurance Services, Inc. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September, 1994, and incorporated herein by this reference; and Additional Addenda to Management Agreement No. 1, filed as Exhibit 10.19(i) to the Company's 1995 Form 10-K and incorporated herein by this reference. 10.7(ii) Addendum Eight and Addendum Nine, both dated April 24th, 1997, to Management Agreement No. 1 between The Continental Insurance Company and USBenefits Insurance Services, Inc. Filed as Exhibit 10.7(ii) to the Company's 1997 Form 10-K, and incorporated herein by this reference. 10.8(i) Quota Share Retrocession Agreement, executed May 21, 1986 and July 11, 1986, between The Continental Insurance Company (as successor to Harbor Insurance Company by assumption) and USF RE INSURANCE COMPANY, as amended by Amendments Numbered 1, 2, 3, 4, 5 and 6, dated September 10, 1986, September 24, 1986, September 28, 1987, March 24, 1988, May 30, 1989, and May 30, 1989, respectively. Filed as Exhibit 10.47 to the Company's S-2 Registration Statement, and incorporated herein by this reference; and Amendment Number 8 dated January 16, 1991, filed as Exhibit 10.21 to the Company's 1993 Form 10-K, and incorporated herein by this reference; and Amendment Number 9 dated October 3, 1994, filed as Exhibit 10.21(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by this reference.
35 10.8(ii)* Amendment Number 7 (entitled "Reinsurance Novation Agreement Endorsement"), effective as of January 1, 1990, to the Quota Share Retrocession Agreement between The Continental Insurance Company (as successor to Harbor Insurance Company by assumption) and USF RE INSURANCE COMPANY. 10.8(iii)* Amendments Numbered 10, 11 and 12, dated August 25, 1995, January 25, 1999 and January 25, 1999, respectively, to the Quota Share Retrocession Agreement between The Continental Insurance Company and USF RE INSURANCE COMPANY. 10.8(iv)* Amendment Number 13, executed February 18, 1999, to Quota Share Retrocession Agreement between The Continental Insurance Company and USF RE INSURANCE COMPANY assigning, as of January 1, 1999, all of USF RE INSURANCE COMPANY's rights and obligations under the Quota Share Retrocession Agreement to Seaboard Life Insurance Company (USA) and VASA North Atlantic Insurance Company. 10.8(v)* Amendment Number 14, dated February 10, 1999, to Quota Share Retrocession Agreement between The Continental Insurance Company and Seaboard Life Insurance Company (USA) and VASA North Atlantic Insurance Company, both successors to USF RE INSURANCE COMPANY by assignment, effective as of January 1, 1999. 10.9 Credit Agreement dated as of December 20, 1994 between the Company and Fleet National Bank of Connecticut (formerly known as Shawmut Bank Connecticut, N.A.), including Revolving Note and Pledge Agreement. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, and incorporated herein by this reference; and First and Second Amendments to the Credit Agreement, filed as Exhibit 10.1 to the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996 and September 30, 1996, respectively, and incorporated herein by this reference. 10.9(i)* Third Amendment to the Credit Agreement between the Company and Fleet National Bank (formerly known as Shawmut Bank Connecticut, N.A. and Fleet National Bank of Connecticut) dated as of September 30, 1998. 10.9(ii) Fourth Amendment to the Credit Agreement between the Company and Fleet National Bank dated as of October 26, 1998. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, and incorporated herein by this reference. 10.9(iii) Fifth Amendment to the Credit Agreement between the Company and Fleet National Bank dated as of December 28, 1998. Filed as Exhibit 10.01 to the Company's Current Report on Form 8-K dated January 14, 1999 ("January 1999 Form 8-K"), and incorporated herein by this reference. 10.10 The Company's Amended 1988 Employee Stock Plan. Filed as Exhibit 10.10 to the Company's 1997 Form 10-K, and incorporated herein by this reference. 10.11 The Company's Amended and Restated 1991 Employee Stock Option Plan. Filed as Exhibit 10.11 to the Company's 1997 Form 10-K, and incorporated herein by this reference. 10.12 Form of Stock Option Agreement under The Company's. Amended and Restated 1991 Employee Stock Option Plan. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (the "June 1996 Form 10-Q"), and incorporated herein by this reference. 10.14 The Company's 1991 Directors Stock Option Plan Amended and Restated. Filed as Exhibit 10.14 to the Company's 1997 Form 10-K; and corrected Directors 1991 Stock Option Plan, as Amended and Restated, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (the "June 1998 Form 10-Q"), and incorporated herein by this reference. 10.15 Form of Stock Option Agreement under The Company's 1991 Directors Stock Option Plan Amended and Restated. Filed as Exhibit 10.2 to the Company's June 1996 Form 10-Q, and incorporated herein by this reference; and corrected Directors Stock Option Agreement, filed as Exhibit 10.2 to the Company's June 1998 Form 10-Q, and incorporated herein by this reference.
36 10.22 The Company's Amended Incentive Compensation Program. Filed as Exhibit 10.26 to the Company's 1995 Form 10-K, and incorporated herein by this reference. 10.23 The Company's 1997 Long-Term Incentive-Performance Unit Plan, including form of Plan Agreement. Filed as Exhibit 10.23 to the Company's 1997 Form 10-K, and incorporated herein by this reference. 10.24 The Company's Non-Qualified Deferred Compensation Plan, including form of Plan Agreement. Filed as Exhibit 10.23 to the Company's 1996 Form 10-K, and incorporated herein by this reference. 10.25 Stock Purchase Agreement dated as of August 20, 1998 by and between the Company, Seaboard Life Insurance Company, Seaboard North American Holdings, Inc. and Eureko, B.V. Filed as Exhibit 2.01 to the Company's January 1999 Form 8-K, and incorporated herein by this reference. 11* The Centris Group, Inc. and Subsidiaries Computation of Earnings Per Share. 12 Not applicable. 18 Not applicable. 19 Not applicable. 21* Subsidiaries of The Centris Group, Inc.. 22 Not applicable. 23* Independent Auditors' Consent dated March , 1999. 24 Not applicable. 27* Financial Data Schedules.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1998. - -------- * Describes a document filed with the Annual Report on Form 10-K for the year ended December 31, 1998. 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 30, 1999 THE CENTRIS GROUP, INC. /s/ David L. Cargile By: _________________________________ David L. Cargile Chairman of the Board, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ David L. Cargile Chairman of the Board, Chief March 30, 1999 ____________________________________ Executive Officer and David L. Cargile President (Principal Executive Officer) /s/ John F. Kooken Director March 30, 1999 ____________________________________ John F. Kooken /s/ L. Steven Medgyesy Director March 30, 1999 ____________________________________ L. Steven Medgyesy /s/ Roxani M. Gillespie Director March 30, 1999 ____________________________________ Roxani M. Gillespie /s/ Charles L. Schultz Director March 30, 1999 ____________________________________ Charles L. Schultz /s/ Howard S. Singer Director and Executive Vice March 30, 1999 ____________________________________ President--Corporate Howard S. Singer Finance and Investor Relations /s/ Charles M. Caporale Senior Vice President, Chief March 30, 1999 ____________________________________ Financial Officer and Charles M. Caporale Treasurer (Principal Financial and Accounting Officer)
38 INDEX TO FINANCIAL STATEMENTS
Page ---- Independent auditors' report on consolidated financial statements......... F-2 Consolidated income statements for each of the years ended December 31, 1998, 1997 and 1996...................................................... F-3 Consolidated balance sheets as of December 31, 1998 and 1997.............. F-4 Consolidated statements of stockholders' equity for each of the years ended December 31, 1998, 1997 and 1996................................... F-5 Consolidated statements of cash flows for each of the years ended December 31, 1998, 1997 and 1996.................................................. F-6 Notes to consolidated financial statements................................ F-7 Other financial information: Report on management's responsibilities................................... F-27 Selected quarterly financial data (unaudited)............................. F-28 INDEX TO FINANCIAL STATEMENT SCHEDULES Independent auditors' report on schedules................................. S-1 Schedule I--Summary of investments........................................ S-2 Schedule II--Condensed financial information of registrant................ S-3 Schedule III--Supplementary insurance information......................... S-6 Schedule IV--Reinsurance.................................................. S-7
F-1 The Board of Directors and Stockholders The Centris Group, Inc.: We have audited the accompanying consolidated balance sheets of The Centris Group, Inc., and subsidiaries as of December 31, 1998 and 1997 and the related consolidated income statements, statements of stockholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 financial position of The Centris Group, Inc. and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG llp March 26, 1999 Los Angeles, California F-2 THE CENTRIS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS
Year Ended December 31, --------------------------- 1998 1997 1996 -------- -------- -------- (In thousands of dollars, except per share data) Revenues: Premiums earned.................................. $111,435 $109,513 $ 89,332 Commissions and fees............................. 34,829 33,335 26,722 Net investment income............................ 5,284 4,671 4,461 Realized investment gains........................ 16,768 10,213 2,126 -------- -------- -------- Total revenues................................. 168,316 157,732 122,641 -------- -------- -------- Operating expenses: Losses and loss adjustment expenses incurred..... 95,509 87,590 62,294 Policy acquisition expenses...................... 36,715 35,997 29,164 General and administrative expenses.............. 17,967 17,198 14,777 Interest expense................................. 2,151 2,373 2,610 -------- -------- -------- Total operating expenses....................... 152,342 143,158 108,845 -------- -------- -------- Income from continuing operations before income taxes............................................. 15,974 14,574 13,796 Income tax expense................................. 6,088 5,245 3,673 -------- -------- -------- Income from continuing operations.................. 9,886 9,329 10,123 -------- -------- -------- Discontinued operations: Income (loss) from operations of property/casualty segment less applicable income tax benefit of $(3,311) in 1998 and tax expenses of $1,538 in 1997 and $1,469 in 1996............ (3,647) 5,883 4,897 Loss on disposal of property/casualty segment less applicable income tax benefit of $(1,356).. (19,621) -- -- -------- -------- -------- (23,268) 5,883 4,897 -------- -------- -------- Net (loss) income.................................. $(13,382) $ 15,212 $ 15,020 ======== ======== ======== Basic income per share Income from continuing operations.................. $ .82 $ .78 $ .86 Discontinued operations............................ (1.93) .49 .42 -------- -------- -------- Net (loss) income.................................. $ (1.11) $ 1.27 $ 1.28 ======== ======== ======== Diluted income per share Income from continuing operations.................. $ .81 $ .77 $ .85 Discontinued operations............................ (1.90) .48 .41 -------- -------- -------- Net (loss) income.................................. $ (1.09) $ 1.25 $ 1.26 ======== ======== ========
See accompanying notes to consolidated financial statements F-3 THE CENTRIS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ------------------ 1998 1997 -------- -------- (in thousands of dollars) ASSETS: ------- Investments: Bonds, available for sale, at market (amortized cost $270,765 in 1998 and $177,262 in 1997).................. $272,159 $186,118 Equity securities, at market (cost $14,962 in 1998 and $15,003 in 1997)........................................ 13,850 15,564 Short-term and other investments, at cost which approximates market..................................... 6,454 22,142 -------- -------- Total investments...................................... 292,463 223,824 Cash and invested cash..................................... 15,789 11,122 Restricted cash and short-term investments................. 29,799 27,947 Accrued investment income.................................. 3,119 3,196 Assets held for transfer under pending reinsurance agreement................................................. 99,369 -- Receivables: Reinsurance recoverable on unpaid losses................. 51,398 25,939 Reinsurance losses and reserves.......................... 50,246 993 Premiums................................................. 57,558 26,012 Prepaid reinsurance premiums............................... 14,507 7,799 Deferred policy acquisition costs.......................... 2,436 4,495 Other assets............................................... 29,761 11,921 -------- -------- Total assets........................................... $646,445 $343,248 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: ------------------------------------- LIABILITIES: Insurance liabilities: Amounts due insurance companies........................ $118,501 $ 36,470 Losses and loss adjustment expenses.................... 200,908 116,801 Unearned premiums...................................... 32,274 30,249 Pending transferable reinsurance......................... 99,369 -- Note payable............................................. 72,550 32,500 Accounts payable and accrued expenses.................... 31,809 9,638 -------- -------- Total liabilities...................................... 555,411 225,658 -------- -------- STOCKHOLDERS' EQUITY: Common stock, $.01 par value; 40,000,000 shares authorized; 12,465,000 shares issued in 1998 and 1997, including 874,000 and 298,000 shares held in treasury in 1998 and 1997, respectively............................. 125 124 Paid in capital.......................................... 46,417 46,188 Accumulated other comprehensive income................... 183 6,121 Retained earnings........................................ 51,809 66,654 -------- -------- 98,534 119,087 Less treasury stock, at cost............................. (7,500) (1,497) -------- -------- Total stockholders' equity............................. 91,034 117,590 -------- -------- Commitments and contingencies Total liabilities and stockholders' equity............. $646,445 $343,248 ======== ========
See accompanying notes to consolidated financial statements F-4 THE CENTRIS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accumulated other Total Common Paid in Comprehensive Retained Treasury Stockholders' Comprehensive Stock Capital Income Earnings Stock Equity Income (loss) ------ ------- ------------- -------- -------- ------------- ------------- (in thousands of dollars) Balance at January 1, 1996................... $122 $44,428 $ 7,211 $ 39,273 $(2,973) $ 88,061 $ Net income.............. -- -- -- 15,020 -- 15,020 15,020 Exercise of stock options (371,000 shares)................ -- 1,014 -- -- 1,030 2,044 Dividends paid (.12 per share)........ -- -- -- (1,410) -- (1,410) Unrealized investment loss, net.............. -- -- (1,351) -- -- (1,351) (1,351) ---- ------- ------- -------- ------- -------- ------- Balance at December 31, 1996................... 122 45,442 5,860 52,883 (1,943) 102,364 13,669 Net income.............. -- -- -- 15,212 -- 15,212 15,212 Exercise of stock options (247,100 shares)................ 2 746 -- -- 446 1,194 Dividends paid (.12 per share)........ -- -- -- (1,441) -- (1,441) Unrealized investment gain, net.............. -- -- 261 -- -- 261 261 ---- ------- ------- -------- ------- -------- ------- Balance at December 31, 1997................... 124 46,188 6,121 66,654 (1,497) 117,590 29,142 Net loss................ -- -- -- (13,382) -- (13,382) (13,382) Exercise of stock options (42,500 shares)................ 1 229 -- -- 213 443 Treasury stock repurchased............ -- -- -- -- (6,216) (6,216) Dividends paid (.12 per share)........ -- -- -- (1,463) -- (1,463) Unrealized investment loss, net.............. -- -- (5,938) -- -- (5,938) (5,938) ---- ------- ------- -------- ------- -------- ------- Balance at December 31, 1998................... $125 $46,417 $ 183 $ 51,809 $(7,500) $ 91,034 $ 9,822 ==== ======= ======= ======== ======= ======== =======
See accompanying notes to consolidated financial statements F-5 THE CENTRIS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ----------------------------- 1998 1997 1996 --------- -------- -------- (in thousands of dollars) Cash Flows From Operating Activities: Net (loss) income............................. $ (13,382) $ 15,212 $ 15,020 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred policy acquisition costs...................................... 50,162 46,196 37,179 Deferred policy acquisition costs........... (48,103) (47,047) (37,993) Realized investment gains................... (16,768) (10,213) (2,126) Loss on disposition of discontinued operations................................. 19,621 -- -- Change in assets and liabilities net of effects from acquisition of businesses: Increase in premiums receivable........... (15,434) (9,171) (2,776) Increase in reinsurance receivables....... (15,806) (2,957) (5,378) Increase in losses and loss adjustment expenses................................. 45,311 22,132 15,775 Increase in unearned premiums............. 1,537 7,313 5,231 Other, net.................................. 1,676 4,624 2,095 Depreciation and amortization............... 1,305 363 502 Net transfers to restricted cash and short- term investments........................... (1,602) (4,176) 265 --------- -------- -------- Net cash provided by operating activities............................. 8,517 22,276 27,794 --------- -------- -------- Cash Flows From Investing Activities: Purchases of bonds............................ (223,568) (56,778) (46,453) Purchases of equity securities................ (15,476) (14,549) (6,544) Proceeds from sales and maturities of investment securities........................ 218,864 57,101 31,455 Acquisition of businesses, net of cash acquired..................................... (30,994) -- -- Net sales (purchases) of short-term investments.................................. 15,688 (4,031) (1,681) Purchases of property and equipment........... (1,178) (1,282) (2,238) --------- -------- -------- Net cash used in investing activities... (36,664) (19,539) (25,461) --------- -------- -------- Cash Flows From Financing Activities: Proceeds from note payable.................... 42,700 -- -- Payments on note payable...................... (2,650) (2,500) -- Dividends paid................................ (1,463) (1,441) (1,410) Payments to acquire treasury stock............ (6,216) -- -- Proceeds from issuance of common stock........ 443 1,194 2,044 --------- -------- -------- Net cash provided by (used in) financing activities............................. 32,814 (2,747) 634 --------- -------- -------- Net increase in cash and invested cash: 4,667 (10) 2,967 Cash and invested cash at beginning of year... 11,122 11,132 8,165 --------- -------- -------- Cash and invested cash at end of year......... $ 15,789 $ 11,122 $ 11,132 ========= ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest.................................... $ 2,090 $ 2,303 $ 2,498 Income taxes................................ $ 6,896 $ 4,366 $ 4,771 Supplemental schedule of noncash investing activities: Detail of businesses acquired in purchase transaction Fair value of assets acquired............... $ 245,820 $ 10,712 $ -- Cash paid................................... 36,613 (1,729) -- --------- -------- -------- Liabilities assumed..................... $ 209,927 $ 8,983 $ -- ========= ======== ========
See accompanying notes to consolidated financial statements. F-6 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1--Summary of Significant Accounting Policies (A) Organization and Principles of Consolidation The consolidated financial statements include the accounts of The Centris Group, Inc., a Delaware corporation (the "Company"), and its wholly owned subsidiaries. The Company's USBenefits Insurance Services, Inc. subsidiary ("USBenefits") is the managing general underwriter and marketing organization for medical lines coverages issued by The Continental Insurance Company ("Continental"), one of the CNA Insurance Companies. The Company's USF Insurance Company (USFIC) subsidiary is focused on program opportunities and utilizes managing general agents to produce business in the "Specialty Insurance" segment. The Company's INTERRA, Inc. ("INTERRA") manages and underwrites catastrophic accident and health risks nationally and internationally. The Company's discontinued operations represents the USF RE Insurance Company ("USF RE") subsidiary which writes property/casualty reinsurance. (See Note 3.) On December 31, 1998, the Company acquired Seaboard Life Insurance Company (USA) ("Seaboard Life") and VASA North America, Inc. and its subsidiaries from Seaboard Life Insurance Company, a Canadian federal insurance company, and its parent Seaboard North American Holdings, Inc., a British Columbia corporation owned by Eureko, B.V. of the Netherlands. Seaboard Life is licensed in 41 states and the District of Columbia. The acquisition of VASA North America, Inc. includes the following subsidiaries: VASA Insurance Group, Inc.; VASA Brougher, Inc. ("VBI"); VASA North Atlantic Insurance Company ("VNAIC") an Indiana stock insurance company, and Select Benefits, Inc. VNAIC is a property/casualty insurer licensed in 36 states and the District of Columbia and VASA Brougher, Inc. is a medical stop-loss managing general underwriter. All significant intercompany balances and transactions have been eliminated in consolidation. (B) Recognition of Revenue Management fees, brokerage commissions, insurance and reinsurance premiums are generally recognized as revenues over the terms of the related policies. Premiums are reported net of ceded earned premiums. The Company earns management fees and brokerage commissions for production of medical lines business and claims handling services. Refunds of brokerage commissions due to cancellations and other refund obligations are considered in the estimates of such fees and commissions. Additionally, unallocated loss adjustment expense reserves are recorded for claim settlement obligations occurring outside the coverage period. Substantially all commissions and fees and premiums earned from continuing operations for 1998, 1997 and 1996 respectively, arise from the Company's relationship with Continental and its affiliate. Such contracts may be terminated as of any year-end. (C) Investments Securities are purchased to support the investment strategies of the Company, which are based on many factors including, but not limited to, total rate of return, maturity, credit risk, tax considerations, regulatory requirements and market economics. The Company has the ability to hold all bonds to maturity. However, securities in the portfolio may be sold from time to time based upon the Company's investment strategies and market opportunities. Bonds and equity securities are held as "available for sale" and carried at market value as of the balance sheet date. Market values are principally obtained from a national quotation service. Declines in the market value of any security below cost, that is deemed other than temporary, will be charged to earnings. Unrealized gains and losses, net of income taxes, are reported as a separate component of stockholders' equity and as a component of comprehensive net income on the statement of stockholders' equity. Market values of F-7 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) bonds are primarily a function of current interest rates, and vary from period to period. Realized gains or losses on sales of investments are computed on a specific identification basis. (D) Short-Term and Other Investments, Cash and Invested Cash Short-term and other investments, cash and invested cash consist of bank deposits and money market mutual funds with original maturities of 90 days or less. Premiums collected but not yet remitted to insurance companies are restricted by law as to use. Such amounts are reported as restricted cash and short-term investments, which at December 31, 1998 and 1997 consisted primarily of money market mutual funds and U.S. Government obligations. (E) Policy Acquisition Costs The insurers' costs of acquiring new business are deferred to the extent estimated to be recoverable from future income, including investment income, and amortized to operations ratably over the terms of the related policies. Acquisition costs include commissions, premium taxes and certain underwriting expenses related to production of insurance and reinsurance business. (F) Losses and Loss Adjustment Expenses The liability for losses is determined on the basis of claim adjusters' and ceding insurers' reports and other estimates, including those for incurred but not reported losses. The liability for loss adjustment expenses is established by estimating future expenses to be incurred in the settlement of claims provided for in the liability for losses. Both estimates are dependent upon future events, the outcomes of which can be affected by economic, legal, political and social factors. The Company does not discount estimated future expenses to their present values. Management believes that the estimated liability for losses and loss adjustment expenses at December 31, 1998 is adequate to cover the ultimate liability; however, such estimates may be more or less than the amount ultimately paid when the claims are settled. (G) Reinsurance Reinsurance receivables (including amounts related to claims incurred, both reported and not reported) and prepaid reinsurance premiums are reported as assets. In the normal course of business, the Company seeks to reduce the loss that may arise from events which may cause unfavorable underwriting results by reinsuring certain levels of risk with other insurance enterprises. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. However, such estimates may be more or less than the amount ultimately collected when claims are settled. (H) Depreciation and Amortization Depreciation and amortization are provided on the straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the lesser of the lease terms or useful lives of the improvements. Intangibles are amortized over their estimated useful lives. (I) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting basis and the tax basis of the Company's assets and liabilities, as well as expected F-8 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) benefits of utilizing net operating loss carryforwards. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled, and reflected in the financial statements in the period of enactment. (J) Income per Share and Capital Structure Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share" and SFAS No. 129, "Capital Structure". (K) Stock-Based Compensation Effective December 31,1996, the Company adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Management has elected to continue use of the accounting methods prescribed by Accounting Principles Board Opinion No. 25 and expand its disclosure of stock- based compensation as permitted by SFAS No. 123. Accordingly, no related compensation cost has been recognized. (L) Comprehensive Income The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income" as of January 1, 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components (such as changes in net unrealized investment gains and losses) in a financial statement that is displayed with the same prominence as other financial statements. In accordance with the adoption of SFAS No. 130, the Company now reports comprehensive net income on its statement of stockholders' equity. All prior period statements of stockholders' equity have been restated to reflect application of this statement. Additionally, the Company has provided supplemental comprehensive earnings per share computations. (M) Business Segments The Company adopted the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" as of December 31, 1998. SFAS No. 131 establishes standards for reporting financial and descriptive information about operating segments in a complete set of financial statements. In accordance with the adoption of SFAS No. 131, the Company provides segment based income statements as well as information on segment based assets. The Company divides its business into Medical Lines and Specialty Lines insurance operating segments and Holding Company operations. Medical lines products include medical stop-loss coverage for self-funded employers, provider excess coverage for hospitals and other medical providers and group life insurance. The Specialty lines operation underwrites both standard and surplus lines insurance risks. (N) Fair Value of Financial Instruments The Company discloses the fair value of financial instruments and the methods and assumptions used to establish fair value, as required by SFAS No. 107, "Disclosures about the Fair Value of Financial Instruments". (O) Management's Estimates The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-9 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (P) Future Application of Accounting Standards In December 1997 the American Institute of Certified Public Accountants (the "AICPA") issued Statement of Position ("SOP") 97-3 "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments", which provides guidance for determining when an insurance or other enterprise should recognize a liability for guaranty-fund and other insurance related assessments and guidance for measuring the liability. The statement becomes effective in 1999 and allows for early application. The Company does not expect the adoption of this statement to have a material effect on its financial position or results of operations. (Q) Certain Reclassifications Certain reclassifications of 1997 and 1996 amounts have been made to conform with the 1998 presentation. Note 2--Acquisitions On December 31, 1998, the Company purchased 100% of the outstanding shares of common stock of Seaboard Life Insurance Company (USA) and VASA North America, Inc. and its subsidiaries ("VNA") from Seaboard Life Insurance Company, a Canadian federal insurance company, and its parent Seaboard North American Holdings, Inc., a British Columbia corporation owned by Eureko, B.V. of the Netherlands for approximately $37 million. The purchase price approximated the tangible net book value of the acquired companies. In connection with the acquisition of Seaboard Life, the seller separately negotiated a reinsurance agreement for its Individual Life and Annuity business. The Company has classified the liabilities relating to this agreement as pending transferrable reinsurance and classified the related assets as assets held for transfer. The reinsurance agreement is pending approval from the insurance authorities in Indiana and California. If the transaction does not close by April 30, 1999, the respective assets and liabilities will be transferred to the seller. Included in the purchase price was a $19.8 million principal repayment to ABN AMRO Bank N.V. in settlement of an outstanding promissory note. The Company financed the acquisition through borrowings under its existing credit agreement with Fleet National Bank. The transaction was accounted for as a purchase. The operations of VNA include VBI, a medical stop-loss managing general underwriter and VNAIC, a property/casualty insurer. The Company is indemnified from any underwriting loss or gain on business written through December 31, 1998 under the provisions of the purchase agreement. The majority of the acquired group's business is medical stop-loss and group term life insurance for self-insured employers. The acquisition provides the Company with the ability to transfer its medical stop-loss and provider excess business lines into the new insurance carriers. No value was placed on the underlying income produced by VBI. The purchase price equalled the audited statutory book value of Seaboard Life and VNAIC. Within the acquired group there are three revenue producing entities--VBI, a managing general underwriter of medical stop loss, Seaboard Life and VNAIC. The Company originally offered to acquire only the insurance carriers, Seaboard Life and VNAIC, and acquired VBI as a closing condition. For the period ended December 31, 1998, the consolidated acquired companies produced $73,655,000 of earned premium, $30,407,000 of commission income and a net loss of $14,138,000. There is no income statement effect to the Company from the 1998 activity as the transaction was completed December 31, 1998. The Purchase agreement contains provisions which require the Company to terminate the operations of VBI, which produced the majority of the business in the group. The Company has been paid $4,500,000 in the form of a credit included in the purchase price to terminate the operations of this business. The Company expects to renew approximately 25% of the business previously produced by VBI through its own subsidiary USBenefits, excluding small group operations, which accounted for 40% of the original book of business. Any business remaining in VBI will be runoff to extinction without any income statement impact to the Company. The acquired renewal rights are not a guarantee that the Company will automatically secure new business. Renewals arising from the acquisition will be underwritten using the USBenefits policy rate manual which utilizes F-10 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) significantly different criteria for the pricing and acceptance of business. Renewals are not guaranteed as customers retain the ability to select from a spectrum of prices and terms available in the medical stop-loss marketplace. In view of these factors, there is not sufficient continuity of the acquired entities operations prior to or after the transaction so that disclosure of pro-forma financial information would be material to an understanding of future operations of the Company. Note 3--Discontinued Operations The Company has signed a letter of intent with Folksamerica Holdings for the sale of its property/casualty insurance subsidiary, USF RE, for $92,500,000. Terms of the sale include a cash payment of $71,750,000 and a $20,750,000 5- year interest bearing note, with a provision for adjustment on loss development. Accordingly, the Company discontinued its property/casualty segment effective December 31, 1998. All prior year amounts have been restated to reflect the discontinued operations. Results of operations for the discontinued property/casualty insurance operations (in thousands of dollars) are as follows:
Year Ended December 31, --------------------------- 1998 1997 1996 -------- -------- -------- Revenues........................................ $ 71,823 $ 56,740 $ 40,478 Income (loss) before income taxes............... $ (6,958) $ 7,421 $ 6,366 Provision (benefit) for income taxes............ (3,311) 1,538 1,469 -------- -------- -------- Net income (loss)............................... $ (3,647) $ 5,883 $ 4,897 ======== ======== ======== Total investments............................. $202,911 $191,933 $165,902 Total assets.................................. $225,407 $218,184 $187,319 Losses and loss adjustment expenses........... $104,423 $ 77,191 $ 61,634 Total liabilities............................. $116,798 $105,871 $ 83,827 Net assets.................................... $108,609 $112,313 $103,492
Note 4--Stock Split On February 3, 1998, the Company announced that its Board of Directors had authorized a two-for-one split of its common stock in the form of a 100% stock dividend to stockholders of record as of February 18, 1998. Certificates reflecting the stock split were issued February 27, 1998. All references in the financial statements and related notes thereto to number of shares, per share amounts and market prices of the Company's common stock have been adjusted retroactively for all periods presented to reflect this change in capital structure. Note 5--Investments Bonds valued at approximately $18.4 million were on deposit with various governmental authorities at December 31, 1998. F-11 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The amortized cost and estimated market values of bonds (in thousands of dollars) at December 31, 1998 and 1997 are as follows:
Gross Gross Amortized Unrealized Unrealized Market December 31, 1998 Cost Gains Losses Value ----------------- --------- ---------- ---------- --------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies...... $212,376 $1,497 $(493) $213,380 Foreign bonds................... 8,965 15 -- 8,980 Obligations of states and political subdivisions......... 26,059 392 (236) 26,215 Corporate bonds................. 23,365 219 -- 23,584 -------- ------ ----- -------- Total......................... $270,765 $2,123 $(729) $272,159 ======== ====== ===== ========
Gross Gross Amortized Unrealized Unrealized Market December 31, 1997 Cost Gains Losses Value ----------------- --------- ---------- ---------- -------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies......... $ 36,430 $ 775 $-- $ 37,205 Foreign bonds...................... 510 19 -- 529 Obligations of states and political subdivisions...................... 98,007 5,584 -- 103,591 Corporate bonds.................... 42,315 2,529 (51) 44,793 -------- ------ ---- -------- Total............................ $177,262 $8,907 $(51) $186,118 ======== ====== ==== ========
The amortized cost and estimated market value of bonds at December 31, 1998, by contractual maturity, are shown below (in thousands of dollars). Expected maturities will differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Market Maturity Dates Cost Value -------------- --------- -------- 1999.................................................... $ 13,216 $ 12,004 2000-2003............................................... 151,151 152,012 2004-2008............................................... 86,073 87,545 2009-Thereafter......................................... 20,325 20,598 -------- -------- Total................................................. $270,765 $272,159 ======== ========
Information regarding bond sales (in thousands of dollars) follows:
Proceeds From Sales Year Ended and Gross Gross December 31, Maturities Gains Losses ------------ ---------- ------- ------ 1998............................................ $191,709 $11,130 $-- 1997............................................ 31,224 624 47 1996............................................ 24,656 809 80
Information regarding equity dispositions (in thousands of dollars) follows:
Proceeds Year ended From Gross Gross December 31, Sales Gains Losses ------------ -------- ------ ------ 1998............................................... $27,155 $6,327 $180 1997............................................... 25,878 9,824 142 1996............................................... 6,799 1,757 120
F-12 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information regarding gross unrealized gains and losses on equity securities (in thousands of dollars) follows:
Gross Gross Year Ended Unrealized Unrealized December 31, Gains Losses ------------ ---------- ---------- 1998................................................ $ 90 $1,202 1997................................................ 1,268 707 1996................................................ 4,766 692
Net investment income (in thousands of dollars) consists of the following:
Year Ended December 31, --------------------- 1998 1997 1996 ------- ------ ------ Interest on bonds................................... $10,589 $9,685 $8,618 Short-term investment interest...................... 3,137 2,568 2,349 Dividends on equity securities...................... 274 278 346 ------- ------ ------ 14,000 12,531 11,313 Less: Investment expenses............................... 1,520 1,440 1,166 ------- ------ ------ Net investment income............................. 12,480 11,091 10,147 Less: Discontinued operations........................... 7,196 6,420 5,686 ------- ------ ------ Net investment income............................. $ 5,284 $4,671 $4,461 ======= ====== ======
Note 6--Reinsurance The property and casualty insurance companies cede a portion of their business to other insurance companies, under multiple reinsurance agreements. Reinsurance contracts do not relieve the Company from its obligations to policyholders. A contingent liability exists for the amount of all reinsurance recoverable in the event that any of the reinsuring companies are unable to pay. All amounts are deemed collectible and no allowance has been established. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risks arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from a reinsurer's insolvency. At December 31, 1998, reinsurance recoverables and prepaid premiums of $33,855,000 were unsecured. The Company holds letters of credit totaling $13,054,000 under certain reinsurance agreements that can be drawn on for amounts that remain unpaid for more than 120 days. F-13 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The effect of reinsurance on premiums written and earned and the effect of ceding arrangements (in thousands of dollars) follows:
Year Ended December 31, ---------------------------------------------------------- 1998 1997 1996 ------------------ ------------------ ------------------ Premiums Premiums Premiums Premiums Premiums Premiums Written Earned Written Earned Written Earned -------- -------- -------- -------- -------- -------- Continuing operations: Direct.................. $ 28,314 $ 22,278 $ 13,791 $ 11,986 $ 10,122 $ 10,279 Reinsurance assumed..... 105,115 105,115 103,674 103,674 84,179 84,179 Reinsurance ceded....... (23,517) (15,958) (7,323) (6,147) (4,898) (5,126) -------- -------- -------- -------- -------- -------- Net..................... $109,912 $111,435 $110,142 $109,513 $ 89,403 $ 89,332 ======== ======== ======== ======== ======== ======== Losses and loss adjustment expenses ceded.................. $ 10,898 $ 6,404 $ 3,000 ======== ======== ======== Liabilities for losses and loss adjustment expenses ceded......... $ 16,841 $ 7,667 $ 5,080 ======== ======== ======== Commissions ceded....... $ 6,985 $ 2,406 $ 1,316 ======== ======== ======== Discontinued operations: Direct.................. $ -- $ -- $ -- $ -- $ -- $ -- Reinsurance assumed..... 78,705 83,204 72,478 66,970 55,923 50,535 Reinsurance ceded....... (18,361) (19,202) (17,070) (16,950) (17,348) (15,743) -------- -------- -------- -------- -------- -------- Net..................... $ 60,344 $ 64,002 $ 55,408 $ 50,020 $ 38,575 $ 34,792 ======== ======== ======== ======== ======== ======== Losses and loss adjustment expenses ceded.................. $ 10,398 $ 4,598 $ 9,844 ======== ======== ======== Liabilities for losses and loss adjustment expenses ceded......... $ 19,319 $ 18,272 $ 17,185 ======== ======== ======== Commissions ceded....... $ 3,448 $ 3,632 $ 2,828 ======== ======== ======== Total: Direct.................. $ 28,314 $ 22,278 $ 13,791 $ 11,986 $ 10,122 $ 10,279 Reinsurance assumed..... 183,819 188,319 176,152 170,644 140,102 134,714 Reinsurance ceded....... (41,877) (35,160) (24,393) (23,097) (22,246) (20,869) -------- -------- -------- -------- -------- -------- Net..................... $170,256 $175,437 $165,550 $159,533 $127,978 $124,124 ======== ======== ======== ======== ======== ======== Losses and loss adjustment expenses ceded.................. $ 21,296 $ 11,002 $ 12,844 ======== ======== ======== Liabilities for losses and loss adjustment expenses ceded......... $ 36,160 $ 25,939 $ 22,265 ======== ======== ======== Commissions ceded....... $ 10,433 $ 6,038 $ 4,144 ======== ======== ========
F-14 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 7--Reserve for Losses and Loss Adjustment Expenses The table below summarizes the activity for losses and loss adjustment expenses (LAE), net of reinsurance recoverable, (in thousands of dollars) for each year ended December 31, 1998, 1997 and 1996, respectively. Information is presented for continuing operations (medical and specialty line segments), discontinued operations (property/casualty segment) and in total. Reserves are established for losses that have occurred as of each balance sheet date, whether or not reported to the Company. Insurance and reinsurance companies establish reserves for losses incurred, but not yet paid, in order to match such losses with the related premiums earned. The process of establishing loss reserves is subject to uncertainties that are a normal, recurring aspect of the insurance business which requires the use of informed judgments and estimates. Estimating loss reserves is a process where many factors can ultimately affect the final settlement of a claim and, therefore, the ultimate reserve that is needed. In addition, time can be a critical part of reserving determinations, since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amounts may be. In the 1998 period, increases in estimated losses and LAE for claims arising in prior years in the continuing operations information arise from the 1997 medical stop loss policy year and the run-off of a book of business acquired in the Global transaction in 1997. Medical line reserves pertaining to business written through December 31, 1998, of $34.6 million are included in the expected sale of USF RE to Folksamerica. In conjunction with the sale, the Company expects to purchase a $5 million cover on its medical lines reserves which, when combined with 1998 USF RE medical lines reserve increases of $11.1 million result in an expectation that future periods will not be impacted by prior period loss reserve development. Within the Company's medical lines segment, increases in the severity and frequency of specific and aggregate claims on business written in the second half of 1996 and the first half of 1997 resulted in additions of $8,000,000 to medical lines reserves in the 1997 third quarter. Within the discontinued operations information presented, the increase in losses and LAE for claims occurring in prior years is attributable to development in the discontinued property/casualty segment (USF RE) of the non- proportional assumed liability, auto physical damage and commercial automobile liability lines of business. As part of the expected sale of USF RE, all reserves related to business written through December 31, 1998 will be transferred to Folksamerica. Loss and loss adjustment expense reserve development is reviewed on a regular basis, incorporating analyses of current trends, market changes in the Company's business segments and historical experience to analyze the Company's actuarial assumptions. As additional experience and other data become available, the Company's actuarial estimates may be revised and impact earnings. F-15 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- Continuing Operations: Balance at beginning of period................... $ 36,043 $ 26,298 $ 23,813 Less reinsurance recoverables................... 7,667 5,080 3,747 -------- -------- -------- Reserve for losses and LAE at beginning of period, net..................................... 28,376 21,218 20,066 Portfolio transfer on acquisition................ 23,557 7,348 -- Incurred losses and LAE: Provision for losses and LAE for claims occurring in the current year.................. 84,364 81,578 57,291 Increase in estimated losses and LAE for claims occurring in prior years....................... 12,485 8,310 5,457 Loss and LAE payments for claims occurring during: The current year................................ (46,625) (65,521) (37,773) Prior years..................................... (38,218) (24,557) (23,823) -------- -------- -------- Reserve for losses and LAE at end of period, net. 63,939 28,376 21,218 Plus reinsurance recoverables.................... 32,079 7,667 5,080 -------- -------- -------- Balance at end of period......................... $ 96,018 $ 36,043 $ 26,298 ======== ======== ======== Discontinued Operations: Balance at beginning of period................... $ 80,758 $ 68,371 $ 55,081 Less reinsurance recoverables................... 18,272 17,204 12,727 -------- -------- -------- Reserve for losses and LAE at beginning of period, net..................................... 62,486 51,167 42,354 Portfolio transfer on acquisition................ -- -- -- Incurred losses and LAE: Provision for losses and LAE for claims occurring in the current year.................. 49,101 35,390 26,194 Increase in estimated losses and LAE for claims occurring in prior years....................... 11,926 (207) (769) Loss and LAE payments for claims occurring during: The current year................................ (14,785) (9,913) (5,514) Prior years..................................... (23,157) (13,951) (11,098) -------- -------- -------- Reserve for losses and LAE at end of period, net. 85,571 62,486 51,167 Plus reinsurance recoverables.................... 19,319 18,272 17,204 -------- -------- -------- Balance at end of period......................... $104,890 $ 80,758 $ 68,371 ======== ======== ======== Total: Balance at beginning of period................... $116,801 $ 94,669 $ 78,894 Less reinsurance recoverables................... 25,939 22,284 16,474 -------- -------- -------- Reserve for losses and LAE at beginning of period, net..................................... 90,862 72,385 62,420 Portfolio transfer on acquisition................ 23,557 7,348 -- Incurred losses and LAE: Provision for losses and LAE for claims occurring in the current year.................. 133,465 116,968 83,485 Increase in estimated losses and LAE for claims occurring in prior years....................... 24,411 8,103 4,688 Loss and LAE payments for claims occurring during: The current year................................ (61,410) (75,434) (43,287) Prior years..................................... (61,375) (38,508) (34,921) -------- -------- -------- Reserve for losses and LAE at end of period, net. 149,510 90,862 72,385 Plus reinsurance recoverables.................... 51,398 25,939 22,284 -------- -------- -------- Balance at end of period......................... $200,908 $116,801 $ 94,669 ======== ======== ========
F-16 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 8--Note Payable On December 28, 1998, the Company amended its reducing, revolving, variable interest rate Credit Agreement with Fleet National Bank to provide an additional $40 million for the purchase of Seaboard Life Insurance Company (USA) and VASA North America, Inc. and subsidiaries. Amounts bear interest at LIBOR plus a margin, currently .75%. At December 31, 1998, $72,550,000 was outstanding. The amended Credit Agreement includes a required commitment reduction of $25,000,000 on the earlier to occur of (a) the completion of the sale of USF RE or (b) June 30, 1999. The Company believes that proceeds from the expected sale of USF RE, or an extraordinary dividend from USF RE in the event of a run-off scenario, will be used to meet the 1999 obligation. Under its terms, the outstanding balance is reduced quarterly, with aggregate annual reductions (in thousands of dollars) as follows:
Commitment Year Reductions ---- ---------- 1999.......................................................... $25,000 2000.......................................................... 5,000 2001.......................................................... 10,000 2002.......................................................... 10,000 2003.......................................................... 22,550 ------- Total....................................................... $72,550 =======
Interest on amounts outstanding at December 31, 1998 is paid at an effective rate of 6.875% through March 23, 1999. The Credit Agreement also contains restrictive covenants which include restrictions on other debt, mergers, acquisitions and investment portfolio quality. Additionally, the Credit Agreement requires the Company to maintain certain levels of financial ratios, statutory surplus and pretax statutory net income, minimum consolidated tangible net worth, risk based capital ratio and A.M. Best Company rating and contains call provisions in the event of non- compliance. The Credit Agreement is secured by a pledge of all the capital stock of USF RE, Seaboard Life and VNAIC. The Company notified its lender, Fleet National Bank, that it would not meet one of its debt covenants related to the surplus level of Seaboard Life and VNAIC. The covenant was based on best estimates of the surplus of these companies when it was adopted in November, 1998. An audit of these companies, as required by the Stock Purchase Agreement to determine the purchase price, revealed that statutory surplus was less than expected in the covenant calculation. The Company expects to increase the surplus of Seaboard Life by a capital contribution in the first quarter of 1999 to cure this item and has received a waiver from Fleet National Bank for this item as of December 31, 1998. The Company also notified its lender that it is in non-compliance with one of its debt covenants related to the maintenance of a minimum level of stockholders' equity of the Company. The charge of $19,621,000 taken by the Company in connection with discontinuing the property/casualty segment through the expected sale of USF RE, caused the Company's equity to drop below 100,000,000. The Company believes that its 1999 operating results will be adequate to cure this item and has been informed that it will receive a waiver for this item upon completion of the definitive agreement for the sale of USF RE. In the event that the Company's actual results are below 1999 estimates, it has the option of paying down the debt utilizing the remaining expected free cash of $45,000,000 from the sale of USF RE and/or renegotiating this individual covenant. In the event that Company expectations to cure non- compliance with this covenant are not met, Fleet National Bank retains the option to call the note as prescribed in the Credit Agreement. The Company has received no indication that Fleet National Bank intends to call the debt. The Company was otherwise in compliance with its debt covenants at December 31, 1998. See Footnote 8 to the Company's Consolidated Financial Statements appearing elsewhere in this Form 10-K for additional discussion. F-17 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 9--Income Taxes Income tax expense (benefit) (in thousands of dollars) consists of:
Year Ended December 31, 1998 ------------------------ Federal State Total ------- ------ ------- Current......................................... $ 3,994 $1,087 $ 5,081 Current state tax benefit arising from losses disposal....................................... (1,356) (1,356) Deferred........................................ (2,249) (55) (2,304) ------- ------ ------- Total......................................... $ 1,745 $ (324) $ 1,421 ======= ====== ======= Year Ended December 31, 1997 ------------------------ Federal State Total ------- ------ ------- Current......................................... $ 7,350 $ 978 $ 8,328 Deferred........................................ (1,757) 212 (1,545) ------- ------ ------- Total......................................... $ 5,593 $1,190 $ 6,783 ======= ====== ======= Year Ended December 31, 1996 ------------------------ Federal State Total ------- ------ ------- Current......................................... $ 5,849 $ 452 $ 6,301 Deferred........................................ (1,154) (5) (1,159) ------- ------ ------- Total......................................... $ 4,695 $ 447 $ 5,142 ======= ====== =======
Actual tax expense differs from "expected" tax expense computed by applying the federal statutory rate to income before taxes (in thousands of dollars) as follows:
Year Ended December 31, ---------------------- 1998 1997 1996 ------ ------ ------ Continuing operations: "Expected" federal tax expense.................. $5,591 $5,101 $4,829 Tax exempt interest--net........................ (687) (615) (913) Change in valuation allowance................... -- -- (576) State tax, net of federal benefit............... 1,147 881 834 Other........................................... 37 (122) (501) ------ ------ ------ Actual income tax expense from continuing operations..................................... $6,088 $5,245 $3,673 ------ ------ ------ Income tax expense (benefit) attributable to loss from operations of discontinued segment... (3,311) 1,538 1,469 State tax benefit from loss on disposal of segment........................................ (1,356) -- -- ------ ------ ------ Total tax expense............................. $1,421 $6,283 $5,142 ====== ====== ======
Tax benefits arising from the loss on disposal of discontinued operations are limited due to the effect of loss disallowance rules applicable to the divestiture of USF RE which takes the form of a sale of stock. F-18 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 1998 and 1997 are presented below (in thousands of dollars):
December 31, 1998 1997 ------------ ------- ------- Deferred tax assets: Loss and loss adjustment expense reserves................ $ 6,395 $ 4,862 Unearned premiums........................................ 1,209 1,572 Net operating loss carryforwards......................... 8,286 444 Other.................................................... 624 464 ------- ------- Total deferred tax assets.............................. 16,514 7,342 Less valuation allowance............................... (8,286) (444) ------- ------- Net deferred tax assets................................ 8,228 6,898 ------- ------- Deferred tax liabilities: Intangibles.............................................. (486) (536) Depreciation............................................. (173) (237) Policy acquisition costs................................. (853) (1,573) Net unrealized gain...................................... (106) (3,297) Acquired receivables..................................... (228) (228) Other.................................................... (5) (65) ------- ------- Total deferred tax liabilities......................... (1,851) (5,936) ------- ------- Net deferred income taxes.............................. $ 6,377 $ 962 ======= =======
Based on the Company's current and historical earnings, management believes it is more likely than not that the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. However, there can be no assurance that the Company will generate any earnings or any specific level of continuing earnings in future years. Valuation allowances established for uncertainties associated with the utilization of future tax benefits are revised when changes in circumstances indicate that it is more likely than not the reversal of such temporary differences will be realized. Certain tax planning strategies could be implemented to supplement income from operations to fully realize recorded tax benefits. Net operating loss carryforwards of $23,675,000 are available to offset future federal taxable income of subsidiaries through 2005. Note 10--Stockholders' Equity The Company is authorized to issue 40,000,000 shares of common stock and 10,000,000 shares of preferred stock. In September 1998, the Company's Board of Directors authorized the repurchase of up to $5 million worth of its common stock. In October 1998, the Company's Board of Directors authorized the repurchase of up to an additional $5 million worth of its common stock under the Company's existing stock repurchase program. The authorization enables the Company to make repurchases from time to time in either public or private transactions. As of December 31, 1998, the Company has repurchased 619,000 shares at a cost of $6.2 million. The Company has a Stockholder Rights Agreement which provides that in the event any person becomes the beneficial owner of 10% or more of the outstanding common stock of the Company, each right (other than F-19 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) rights held by the 10% stockholder) will be exercisable at a predetermined price after the close of business on the tenth business day following such event. Each right entitles the holder thereof to purchase for the then exercise price the number of shares of common stock which have a market value equal to two times the exercise price. The Plan further provides that if, on or after the occurrence of the previously mentioned event, the Company is merged with or into any other corporation, or 50% or more of the Company's assets or earning power are sold, each right (other than rights held by the 10% stockholder) will be exercisable to purchase, for the exercise price, shares of common stock of the surviving corporation or purchaser which have a market value equal to two times the exercise price. The rights expire on May 24, 2000, and can be redeemed by the Board of Directors at $.0005 per right at any time before the first date on which they first become exercisable. Note 11--Regulatory Matters Presently, the Insurance Department of the Commonwealth of Massachusetts is conducting an examination of the statutory financial statements of USF RE for the years ended December 31, 1993 to 1997. The Company has received a preliminary notice that the examination will result in an adjustment of approximately $16,400,000 to policyholder's surplus for the year ended December 31, 1997 as a result of availability of more recent information showing loss reserve development. The Company believes it has recognized all such development in its 1998 financial statements. At December 31, 1998 and 1997, combined statutory surplus of the insurance carriers including USF RE was $150,934,000 and $112,657,000, respectively. Seaboard Life and VNAIC do not impact the consolidated income statements of the Company as their acquisition was completed effective December 31, 1998. Consolidated statutory net (loss) income for USF RE was $(637,000), $5,937,000, and $8,022,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Statutory amounts are determined on the basis of regulations promulgated by the National Association of Insurance Commissioners, which is a comprehensive basis of accounting other than Generally Accepted Accounting Principles. The more significant of these statutory accounting practices are: (1) premiums are taken into income over the terms of the policies, whereas the related acquisition and commission costs are expensed when incurred; (2) certain assets designated as "nonadmitted assets" are charged to surplus; (3) bonds are carried at amortized costs irrespective of the Company's investment portfolio activity; (4) adjustments reflecting the equity in earnings of subsidiaries are carried to the surplus account as unrealized capital gains or losses rather than income; (5) deferred federal income tax effects for tax return timing differences are not provided; (6) gains and losses from retrospective reinsurance contracts are recognized immediately through the income statement and (7) a provision is made for unearned premiums and losses recoverable, in excess of funds held, on business reinsured with companies not qualified by license, through a charge to surplus. Each of the Company's insurance company subsidiaries experienced unusual values in the NAIC insurance regulatory information system ("IRIS") tests. USFIC had three unusual values on tests that measured surplus aid to surplus, two year overall operating ratio and one year reserve development to surplus. Over the last two years USFIC has been negatively impacted by medical lines underwriting results, which it assumes from USF RE as part of the intercompany pooling arrangement between the two insurers. With effect from January 1, 1999, that agreement has been cancelled and management expects the two year operating ratio and one year reserve development tests to return to more normal results. Seaboard Life experienced 6 out of 13 unusual results on its IRIS tests all but two related to surplus levels. Seaboard Life's operating results under its previous owner produced a net loss for the 1998 year so these unusual values were not unexpected. The Company expects to increase Seaboard's surplus during the first quarter of 1999. The Company believes such action, combined with returning Seaboard to profitability, is expected to return these test results to more usual values. The insurance subsidiaries are limited in the amount of dividends they can pay to the Company without approval of the Insurance Commissioner of the state of domicile. Such limitation is the greater of net income or F-20 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10% of policyholders' surplus of the preceding year. During 1999 Seaboard Life, VNAIC and USFIC the insurance carriers may pay dividends of $5,709,000 to the Company without such prior approval. In the event that the sale of USF RE is not completed, additional dividends of $9,365,000 would be available from USF RE. The insurance carriers have not paid any dividends since being acquired by the Company in 1983. Note 12--Employee Compensation and Benefits The Centris Group, Inc. Employees Savings Plan is a qualified voluntary contributory 401(k) savings plan covering substantially all employees. Under the Company's plan eligible employees may contribute up to 15% of their compensation on a pre-tax basis up to the IRS allowable limit. The Company makes matching contributions to the plan on a pro-rata basis for all participants up to a maximum of 6% of each individual's compensation. For 1998, 1997 and 1996 such matching contributions were $483,000, $475,000 and $388,000, respectively. The Centris Group, Inc. non-qualified deferred compensation plans, adopted January 1, 1997, provide 401(k) excess salary deferrals, annual bonus deferrals and long-term incentive-performance unit plan deferrals for key employees. Under the plans, eligible employees may elect to defer a percentage of compensation, which when aggregated with amounts deferred under the qualified plan may not exceed 15% of pre-tax compensation. The Company makes matching contributions which, when aggregated with the Company's qualified plan, shall not exceed 6% of the participants compensation. For 1998 and 1997 such matching contributions were $60,149 and $73,000, respectively. The Centris Group, Inc. long-term incentive-performance unit plan, adopted January 1, 1997, provides for cash payment awards which qualify as performance based compensation under Section 162 of the Internal Revenue Code. Performance units are granted to key employees at the beginning of a performance period, while the actual number of performance units awarded is determined after the performance period. Performance units granted in 1998 had a unit value of $10. The performance period is three years in length, with the first performance period beginning January 1, 1997 and ending on December 31, 1999. Awards are based upon the Company meeting pre-determined return on equity (ROE) targets at the end of each fiscal year, and for purposes of the plan, ROE is the average return on equity for the three-year period. The Company must meet a minimum level of ROE over the three year period before awards, which require Board of Directors approval, will be granted. The Company has not met the ROE targets since plan adoption, accordingly no amounts are accrued under the plan. Awards granted under the plan are automatically deferred to the non- qualified deferred compensation plan. The value of awards is accrued when reasonable estimates can be made based upon the provisions of the plan and actual results. The Company has two fixed stock option plans under which options to purchase shares of the Company's common stock may be granted. As of December 31, 1998 options to purchase up to 1,300,000 shares have been authorized under the 1991 Employee Stock Option Plan. Options to purchase up to 140,000 shares have been authorized under the 1991 Director Stock Option Plan. Such plans allow the Company to grant incentive stock options (ISO's), nonqualified stock options (NQSO's), stock appreciation rights (SAR's) and restricted shares to key employees and directors at prices not lower than the market value at date of grant. Generally, current options granted vest 25% per year over four years from the date of grant and have a maximum term of ten years. Options are exercisable through periods ending May 28, 2001. The Company has adopted the disclosure-only provisions of SFAS No.123, "Accounting for Stock-based Compensation," but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its fixed stock option plans. Accordingly, no related compensation cost has been recognized. If the Company had elected to recognize compensation cost for its Employee and Director plans based on the fair value at the grant dates for awards under those plans, net income and earnings per share adjusted to reflect the F-21 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) February 27, 1998 two-for-one stock split would have been reported as the proforma amounts noted below (in thousands of dollars, except per share information) consistent with the method prescribed by SFAS No.123:
Year Ended December 31, ------------------------- 1998 1997 1996 -------- ------- ------- Net Income As reported.................................... $(13,382) $15,212 $15,020 Pro forma...................................... $(13,988) $14,958 $14,762 Diluted income per share As reported.................................... $ (1.09) $ 1.25 $ 1.26 Pro forma...................................... $ (1.14) $ 1.23 $ 1.24
The fair value of each option grant subsequent to December 15, 1994 used to compute proforma net income and earnings per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for 1998 and 1997: dividend yield of 1.4%, expected volatility of 20%, a risk free interest rate of 6% and an expected holding period of 4 years. Weighted average assumptions used for 1996 were: dividend yield of 1.4%, expected volatility of 15%, a risk free interest rate of 5%; and an expected holding period of 4 years. The pro forma net income figures disclosed above may not be representative of the effects on reported net income to be reported in future years. The status of all options granted, adjusted to reflect the February 27, 1998 two-for-one stock split, is as follows:
December 31, 1998 --------------------------------------------------------------- 1998 1997 1996 -------------------- -------------------- --------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- --------- --------- --------- ---------- --------- Outstanding--beginning of year................ 975,200 $ 8.48 911,300 $ 7.02 1,205,200 $6.78 Granted................. 495,400 12.46 321,000 10.08 30,000 8.50 Exercised............... (42,500) 8.21 (247,100) 5.18 (311,000) 5.87 Canceled................ -- -- (10,000) 8.04 (12,900) 8.85 --------- ------ --------- ------ ---------- ----- Outstanding--end of year................... 1,428,100 $ 9.87 975,200 $ 8.48 911,300 $7.02 ========= ====== ========= ====== ========== ===== Options exercisable at year end............... 772,200 $ 8.16 639,200 $ 7.68 630,800 $6.57 ========= ====== ========= ====== ========== ===== Weighted-average fair value of options granted during the year................... $ 3.02 $ 2.32 $1.44 ====== ====== =====
The following table summarizes information about fixed stock options outstanding adjusted to reflect the February 27, 1998 two-for-one stock split at December 31, 1998:
Options Outstanding Options Exercisable -------------------------------------- --------------------- Weighted- Weighted- Number Weighted-Average Average Number Average Range of Outstanding Remaining Exercise Exercisable Exercise Exercise Prices at 12/31/98 Contractual Life Price at 12/31/98 Price --------------- ----------- ---------------- --------- ----------- --------- $4.50 to $7....... 319,400 3 Years $ 6.77 319,400 $ 6.77 $8 to $10.16...... 335,800 2 Years 8.74 315,800 8.70 $10.17 to $13.69.. 772,900 9 Years 11.64 137,000 10.19 --------- ------- Total........... 1,428,100 772,200 ========= =======
F-22 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 13--Segment Information Certain information about the Company's operations by industry segment is summarized as follows (in thousands of dollars):
Year Ended December 31, -------------------------- 1998 1997 1996 -------- -------- -------- Medical lines Revenues: Premiums earned............................... $105,116 $103,479 $ 84,179 Commissions and fees.......................... 34,829 33,335 26,722 Net investment income......................... 4,002 3,605 3,312 -------- -------- -------- Total revenues.............................. 143,947 140,419 114,213 Operating expenses: Losses and loss adjustment expenses........... 90,622 82,760 58,095 Policy acquisition expense.................... 35,489 35,003 28,526 General and administrative expenses........... 13,970 13,328 10,111 -------- -------- -------- Total operating expenses.................... 140,081 131,091 96,732 -------- -------- -------- Income before income taxes...................... $ 3,866 $ 9,328 $ 17,481 ======== ======== ======== Specialty lines Revenues: Premiums earned............................... $ 6,319 $ 6,034 $ 5,153 Net investment income......................... 1,182 1,004 1,091 -------- -------- -------- Total revenues.............................. 7,501 7,038 6,244 Operating expenses: Losses and loss adjustment expenses........... 4,887 4,830 4,199 Policy acquisition expense.................... 1,226 994 638 General and Administrative expense............ 807 1,129 2,111 -------- -------- -------- Total operating expenses.................... 6,920 6,953 6,948 -------- -------- -------- Income (loss) before income taxes............... $ 581 $ 85 $ (704) ======== ======== ======== Holding company Revenues: Net investment income......................... $ 100 $ 62 $ 58 Realized capital gains........................ 16,768 10,213 2,126 -------- -------- -------- Total revenues.............................. 16,868 10,275 2,184 Operating expenses: General and Administrative expenses........... 3,190 2,741 2,555 Interest expense.............................. 2,151 2,373 2,610 -------- -------- -------- Total operating expenses.................... 5,341 5,114 5,165 -------- -------- -------- Income (loss) before income taxes............... $ 11,527 $ 5,161 $ (2,981) ======== ======== ========
F-23 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Ended December 31, -------------------------- 1998 1997 1996 -------- -------- -------- Continuing operations Revenues: Premiums earned................................ $111,435 $109,513 $ 89,332 Commissions and fees........................... 34,829 33,335 26,722 Net investment income.......................... 5,284 4,671 4,461 Realized investment gains...................... 16,768 10,213 2,126 -------- -------- -------- Total revenues............................... 168,316 157,732 122,641 Operating expenses: Losses and loss adjustment expenses............ 95,509 87,590 62,294 Policy acquisition expense..................... 36,715 35,997 29,164 General and Administrative expense............. 17,967 17,198 14,777 Interest expense............................... 2,151 2,373 2,610 -------- -------- -------- Total operating expenses..................... 152,342 143,158 108,845 -------- -------- -------- Income before income taxes....................... $ 15,974 $ 14,574 $ 13,796 ======== ======== ======== Identifiable Assets: Medical lines.................................... 373,864 110,749 87,228 Specialty lines.................................. 42,139 34,242 31,128 Holding company.................................. 5,035 5,569 4,528 Discontinued operations.......................... 225,407 192,688 165,859 -------- -------- -------- Total........................................ $646,445 $343,248 $288,743 ======== ======== ========
Note 14--Commitments and Contingencies The Company leases certain facilities and equipment under long-term operating leases which expire at various dates through 2007. Total rent expense, including month-to-month rentals, was $1,749,000 in 1998, $1,635,000 in 1997 and $1,273,000 in 1996. Future minimum noncancelable lease commitments (in thousands of dollars) are as follows:
Year Ending December 31, ------------------------ 1999.......................................................... 1,779 2000.......................................................... 1,829 2001.......................................................... 1,823 2002.......................................................... 1,643 2003.......................................................... 1,649 Thereafter.................................................... 5,485 ------- $14,208 =======
F-24 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 15--Income per Share Reconciliation of income and outstanding shares and related per share amounts adjusted to reflect the February 27, 1998 two-for-one stock split, is presented below (in thousands of dollars, except per share data):
Year Ended December 31, ------------------------- 1998 1997 1996 -------- ------- ------- Income (Numerator) Income (loss) applicable to common stock for Basic and Diluted income per share: Income from continuing operations............. $ 9,886 $ 9,329 $10,123 Discontinued operations....................... (23,268) 5,883 4,897 -------- ------- ------- Net (loss) income............................. $(13,382) $15,212 $15,020 Change in net unrealized investment gains, net of tax....................................... (5,938) 261 (1,351) -------- ------- ------- Comprehensive (loss) income applicable to common stock................................. $(19,320) $15,473 $13,669 ======== ======= ======= Weighted Average Shares (Denominator) Basic Shares.................................... 12,037 11,980 11,732 Effect of dilutive securities stock options... 241 174 218 -------- ------- ------- Diluted Shares.................................. 12,278 12,154 11,950 ======== ======= ======= Basic Income Per Share Income from continuing operations............... $ .82 $ .78 $ .86 Discontinued operations......................... (1.93) .49 .42 -------- ------- ------- Net (loss) income............................... $ (1.11) $ 1.27 $ 1.28 ======== ======= ======= Comprehensive net (loss) income................. $ (1.61) $ 1.29 $ 1.17 ======== ======= ======= Diluted Income Per Share Income from continuing operations............... $ .81 $ .77 $ .85 Discontinued operations......................... (1.90) .48 .41 -------- ------- ------- Net (loss) income............................... $ (1.09) $ 1.25 $ 1.26 ======== ======= ======= Comprehensive net (loss) income................. $ (1.57) $ 1.27 $ 1.14 ======== ======= =======
F-25 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 16--Comprehensive Income The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income" during 1998. Comprehensive income represents a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. The Company's Comprehensive Income is comprised of net income plus the tax effected increase or decrease in unrealized gains occurring during the period. The Company now reports the change in net unrealized investment gains, after tax, on its statements of stockholders' equity to arrive at comprehensive net income. All prior period statements of stockholders' equity have been restated to reflect application of this statement. The components of the change in net unrealized investment gains, after tax, (in thousands of dollars) are as follows:
Year Ended December 31, -------------------------- 1998 1997 1996 -------- ------- ------- Net realized investment gains................... $ 16,768 $10,213 $ 2,126 Income tax expense applicable to net realized investment gains............................... (5,869) (3,575) (744) -------- ------- ------- Net realized investment gains, after tax........ 10,899 6,638 1,382 Net unrealized investment gains arising during the year, after tax(a)......................... 4,961 6,899 2,733 Net unrealized gains reclassed to realized gains for investments sold........................... (10,899) (6,638) (1,382) -------- ------- ------- Change in net unrealized investment gains, after tax............................................ $ (5,938) $ 261 $ 1,351 ======== ======= =======
- -------- (a) Net of income tax expense of $2.7 million, $3.7 million and $1.5 million for the years ended December 31, 1998, 1997 and 1996, respectively. F-26 THE CENTRIS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Report on Managements' Responsibilities The accompanying consolidated financial statements were prepared by the Company, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles, appropriate in the circumstances, and necessarily include some amounts that are based upon the Company's best estimates and judgment. Financial information presented elsewhere in this Annual Report is consistent with these accompanying consolidated financial statements. The accounting systems and controls of the Company are designed to provide 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. The Company's consolidated financial statements have been audited by KPMG LLP, independent certified public accountants, whose audits thereon were made in accordance with generally accepted auditing standards and included a review of internal accounting controls to the extent necessary to design audit procedures aimed at gathering sufficient evidence to assess their opinion on the fairness or presentation of the consolidated financial statements. The auditors have full access to each member of management in conducting their audits, and their report is contained elsewhere in this Annual Report. The Audit Committee of the Board of Directors, comprised solely of non- employee, independent directors meets regularly with management and the independent accountants to review the work and procedures of each. The independent accountants have free access to the Audit Committee, without management being present, to discuss the results of their work and their opinions on the adequacy of the Company's accounting controls and the quality of the Company's financial reporting. The Board of Directors, upon the recommendation of the Audit Committee, appoints the independent public accountants, subject to annual stockholder approval. /s/ David L. Cargile /s/ Charles M. Caporale David L. Cargile Charles M. Caporale Chairman of the Board, President Senior Vice President, Treasurer and Chief Executive Officer and Chief Financial Officer F-27 SELECTED QUARTERLY FINANCIAL DATA (Unaudited) Selected quarterly financial data for 1998, 1997 and 1996 (in thousands of dollars, except per share data) is shown in the following table. The quarterly financial data includes, in the opinion of management, all recurring adjustments necessary for a fair presentation of the results of operations for the interim periods.
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ------- ------- ------- -------- 1998 Revenues(a)............................... $37,961 $41,208 $42,513 $ 46,634 Income from continuing operations before income taxes(a).......................... 4,300 5,174 5,351 1,149 Net (loss) income......................... 4,234 4,501 (1,184) (20,933) Change in net unrealized gains, after tax. 661 (629) (469) (5,501) ------- ------- ------- -------- Comprehensive net (loss) income........... $ 4,895 $ 3,872 $(1,653) $(26,434) ======= ======= ======= ======== Basic earnings per share: Continuing operations................... $ .35 $ .42 $ .44 $ .10 ======= ======= ======= ======== Net income.............................. $ .35 $ .37 $ ( .10) $ (1.80) ======= ======= ======= ======== Comprehensive income.................... $ .40 $ .32 $ ( .14) $ (2.27) ======= ======= ======= ======== Diluted earnings per share: Continuing operations................... $ .35 $ .41 $ .44 $ .10 ======= ======= ======= ======== Net income.............................. $ .34 $ .36 $ (.10) $ (1.78) ======= ======= ======= ======== Comprehensive income.................... $ .39 $ .31 $ (.14) $ (2.25) ======= ======= ======= ======== 1997 Revenues(a)............................... $35,750 $36,410 $44,249 $ 41,323 Income from continuing operations before income taxes(a).......................... 3,184 2,817 4,312 4,261 Net (loss) income......................... 3,660 3,748 4,026 3,778 Change in net unrealized gains, after tax.................................... (2,139) 4,327 (3,789) 1,862 ------- ------- ------- -------- Comprehensive net (loss) income........... $ 1,521 $ 8,075 $ 237 $ 5,640 ======= ======= ======= ======== Basic earnings per share: Continuing operations................... $ .27 $ .24 $ .36 $ .35 ======= ======= ======= ======== Net income.............................. $ .31 $ .32 $ .33 $ .32 ======= ======= ======= ======== Comprehensive income.................... $ .13 $ .68 $ .02 $ .48 ======= ======= ======= ======== Diluted earnings per share: Continuing operations................... $ .26 $ .23 $ .35 $ .35 ======= ======= ======= ======== Net income.............................. $ .30 $ .31 $ .33 $ .31 ======= ======= ======= ======== Comprehensive income.................... $ .12 $ .66 $ .02 $ .46 ======= ======= ======= ========
F-28 SELECTED QUARTERLY FINANCIAL DATA (Unaudited)--(Continued)
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1996 Revenues(a).................................. $30,095 $28,529 $30,480 $33,537 Income from continuing operations before income taxes(a)............................. 3,540 2,911 2,954 4,391 Net (loss) income............................ 3,808 3,585 3,709 3,918 Change in net unrealized gains, after tax.. (3,165) (558) 682 1,690 ------- ------- ------- ------- Comprehensive net (loss) income.............. $ 643 $ 3,027 $ 4,391 $ 5,608 ======= ======= ======= ======= Basic earnings per share: Continuing operations...................... $ .31 $ .24 $ .25 $ .37 ======= ======= ======= ======= Net income................................. $ .33 $ .30 $ .32 $ .33 ======= ======= ======= ======= Comprehensive income....................... $ .06 $ .25 $ .38 $ .47 ======= ======= ======= ======= Diluted earnings per share: Continuing operations...................... $ .30 $ .24 $ .25 $ .37 ======= ======= ======= ======= Net income................................. $ .32 $ .30 $ .31 $ .33 ======= ======= ======= ======= Comprehensive income....................... $ .05 $ .25 $ .37 $ .47 ======= ======= ======= =======
- -------- (a) Amounts have been reclassified to reflect the Company's property/casualty reinsurance operations as discontinued operations. F-29 INDEPENDENT AUDITORS' REPORT Under date of March 26, 1999, we reported on the consolidated balance sheets of The Centris Group, Inc. and Subsidiaries as of December 31, 1998 and 1997, and related consolidated income statements, statements of stockholders' equity and comprehensive income and cash flows for each of the years in the three- year period ended December 31, 1998 as contained in the 1998 Annual Report to Stockholders. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in the accompanying index. These consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statement schedules based on our audits. In our opinion, such schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Los Angeles, California March 26, 1999 S-1 THE CENTRIS GROUP, INC. AND SUBSIDIARIES SCHEDULE I--SUMMARY OF INVESTMENTS December 31, 1998
Amount At Which Shown On Balance Cost(/1/) Value(/1/) Sheet(/1/) --------- ---------- ----------- (Dollars in thousands) Fixed maturities: Bonds: United States Government agencies and authorities............................ $212,376 $213,380 $213,380 States, municipalities and political subdivisions........................... 26,059 26,215 26,215 Foreign governments..................... 8,965 8,980 8,980 All other corporate bonds............... 23,365 23,584 23,584 -------- -------- -------- Total fixed maturities................ 270,765 272,159 272,159 ======== ======== ======== Equity securities: Preferred stocks: Industrial and miscellaneous............ 1,514 1,514 1,514 Common stocks: Industrial and miscellaneous............ 13,448 12,336 12,336 -------- -------- -------- Total................................. 14,962 13,850 13,850 ======== ======== ======== Other invested assets..................... -- -- -- Short-term investments.................... 6,454 6,454 6,454 -------- -------- -------- Total investments..................... $292,181 $292,463 $292,463 ======== ======== ========
- -------- (1) Cost represents the amortized cost of investments to the Company. Value represents current market value. Amount at which investments are shown on the balance sheet represents current market value as required by SFAS No. 115. S-2 THE CENTRIS GROUP, INC. AND SUBSIDIARIES SCHEDULE II--CONDENSED INCOME STATEMENTS THE CENTRIS GROUP (Parent Company Only)
Year Ended December 31, -------------------------- 1998 1997 1996 -------- ------- ------- (Dollars in thousands) Revenues: Dividends from subsidiaries...................... $ 14,839 $ 4,000 $ 4,000 Other............................................ 100 62 58 -------- ------- ------- Total revenues................................. 14,939 4,062 4,058 Operating expenses: Other general and administrative................. 20,797 990 896 Interest......................................... 2,151 2,373 2,610 -------- ------- ------- Total operating expenses....................... 22,948 3,363 3,506 -------- ------- ------- Income (loss) before income taxes.................. (8,009) 699 552 Income tax benefits................................ (1,244) (1,420) (1,652) -------- ------- ------- Income (loss) before equity in earnings of subsidiaries...................................... (6,765) 2,119 2,204 Equity in earnings of subsidiaries................. (6,617) 13,093 12,816 -------- ------- ------- Net income......................................... $(13,382) $15,212 $15,020 ======== ======= =======
S-3 THE CENTRIS GROUP, INC. AND SUBSIDIARIES SCHEDULE II--CONDENSED BALANCE SHEETS THE CENTRIS GROUP (Parent Company Only)
December 31, ------------------ 1998 1997 -------- -------- (Dollars in thousands) ASSETS ------ Cash........................................................ $ 488 $ 1,548 Investment in and due from affiliates....................... 180,950 146,164 Other assets................................................ 4,547 4,021 -------- -------- Total assets............................................ $185,985 $151,733 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Note payable................................................ $ 72,550 $ 32,500 Accounts payable and accrued expenses....................... 22,401 1,643 -------- -------- Total liabilities....................................... 94,951 34,143 -------- -------- Stockholders' equity: Common stock.............................................. 125 124 Paid-in capital........................................... 46,417 46,188 Net unrealized investment gain............................ 183 6,121 Retained earnings......................................... 51,809 66,654 -------- -------- 98,534 119,087 Less treasury stock, at cost.............................. (7,500) (1,497) -------- -------- Total stockholders' equity.............................. 91,034 117,590 -------- -------- Total liabilities and stockholders' equity.............. $185,985 $151,733 ======== ========
S-4 THE CENTRIS GROUP, INC. AND SUBSIDIARIES SCHEDULE II--CONDENSED STATEMENTS OF CASH FLOWS THE CENTRIS GROUP, INC. (Parent Company Only)
Year Ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income.............................. $(13,382) $ 15,212 $ 15,020 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Increase (decrease) in accounts payable and accrued expenses............................ 1,137 (361) (224) Increase in other assets..................... (526) (132) (1,464) Loss on disposition of discontinued operations.................................. 19,621 -- -- Equity in income of and change in due from affiliates.................................. (3,470) (10,286) (14,140) -------- -------- -------- Net cash provided by operating activities.. 3,380 4,433 (808) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from note payable..................... 42,700 -- -- Payment on notes payable....................... (2,650) (2,500) -- Payments to acquire treasury stock............. (6,216) -- -- Proceeds from issuance of common stock......... 443 1,194 2,044 Dividends paid................................. (1,463) (1,441) (1,410) -------- -------- -------- Net cash provided by (used in) financing activities................................ 32,814 (2,747) 634 CASH FLOWS FROM INVESTING ACTIVITIES: Increase in investment in affiliates........... (37,254) (779) -- -------- -------- -------- Net (decrease) increase in cash................ (1,060) 907 (174) Cash at beginning of year...................... 1,548 641 815 -------- -------- -------- Cash at end of year............................ $ 488 $ 1,548 $ 641 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest....................................... $ 2,090 $ 2,303 $ 2,498 Income taxes................................... $ 6,896 $ 4,366 $ 4,771
S-5 THE CENTRIS GROUP, INC. AND SUBSIDIARIES SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
Amortization Benefits, of Deferred Future policy claims, deferred policy benefits, losses, Net losses and policy Other Net acquisition claims and loss Unearned Premium investment settlement acquisition operating premiums Segment costs expenses premiums revenue income expenses costs expenses written ------- ----------- ----------------- -------- ------- ---------- ---------- ------------ --------- -------- (Dollars in thousands) 1998 ---- Medical lines...... $ -- 75,056 565 105,115 4,002 90,622 35,489 13,968 105,114 Specialty lines.... (636) 20,962 13,188 6,320 1,182 4,887 1,226 807 4,798 ------ ------- ------ ------- ------ ------- ------ ------ ------- Continuing Ops. ... (636) 96,018 13,753 111,435 5,184 95,509 36,715 14,775 109,912 Discontinued Ops. . 3,072 104,890 18,521 64,002 7,196 62,366 13,447 2,968 60,344 ------ ------- ------ ------- ------ ------- ------ ------ ------- Total............. $2,436 200,908 32,274 175,437 12,380 157,875 50,162 17,743 170,256 ====== ======= ====== ======= ====== ======= ====== ====== ======= 1997 ---- Medical lines...... $ -- 24,177 110 103,479 3,604 82,678 36,832 10,842 103,479 Specialty lines.... 301 11,866 7,152 6,034 1,005 4,912 954 1,826 6,663 ------ ------- ------ ------- ------ ------- ------ ------ ------- Continuing Ops. ... 301 36,043 7,262 109,513 4,609 87,590 37,786 12,668 110,142 Discontinued Ops. . 4,194 80,758 22,987 50,020 6,420 37,481 8,410 3,429 55,408 ------ ------- ------ ------- ------ ------- ------ ------ ------- Total............. $4,495 116,801 30,249 159,533 11,029 125,071 46,196 16,097 165,550 ====== ======= ====== ======= ====== ======= ====== ====== ======= 1996 ---- Medical lines...... $ -- 17,836 65 84,179 3,312 58,076 30,556 8,218 84,174 Specialty lines.... 302 8,462 5,346 5,153 1,091 4,218 583 2,029 5,229 ------ ------- ------ ------- ------ ------- ------ ------ ------- Continuing Ops. ... 302 26,298 5,411 89,332 4,403 62,294 31,139 10,247 89,403 Discontinued Ops. . 3,342 68,371 17,525 34,792 5,686 25,879 6,040 2,193 38,575 ------ ------- ------ ------- ------ ------- ------ ------ ------- Total............. $3,644 94,669 22,936 124,124 10,089 88,173 37,179 12,440 127,978 ====== ======= ====== ======= ====== ======= ====== ====== =======
S-6 THE CENTRIS GROUP, INC. AND SUBSIDIARIES SCHEDULE IV--REINSURANCE
Insurance Premiums Earned 1998 1997 1996 ------------------------- ------- ------- ------- (Dollars in thousands) Medical Lines: Gross amount (direct).............................. -- -- -- Ceded to other companies........................... -- 195 -- Assumed from other companies....................... 105,115 103,674 84,179 Net amount......................................... 105,115 103,479 84,179 Percentage of amount assumed to net................ 100.0% 100.2% 100.0% Specialty Lines: Gross amount (direct).............................. 22,278 11,986 10,279 Ceded to other companies........................... 15,958 5,952 5,126 Assumed from other companies....................... -- -- -- Net amount......................................... 6,320 6,034 5,153 Percentage of amount assumed to net................ -- -- -- Discontinued Operations: Gross amount (direct).............................. -- -- -- Ceded to other companies........................... 19,202 16,950 15,743 Assumed from other companies....................... 83,204 66,970 50,535 Net amount......................................... 64,002 50,020 34,792 Percentage of amount assumed to net................ 130.0% 133.9% 145.2% Total: Gross amount (direct).............................. 22,278 11,986 10,279 Ceded to other companies........................... 35,160 23,097 20,869 Assumed from other companies....................... 188,319 170,644 134,714 Net amount......................................... 175,437 159,533 124,124 Percentage of amount assumed to net................ 107.3% 107.0% 108.5%
S-7 EX-10.5(II) 2 AMEND #3 TO SEVERANCE AGREEMENT - D. CARGILLE EXHIBIT 10.5(ii) AMENDMENT NO. 3 TO SEVERANCE AGREEMENT BETWEEN THE CENTRIS GROUP, INC. (FORMERLY US FACILITIES CORPORATION) AND DAVID L. CARGILE Whereas, The Centris Group, Inc., a Delaware corporation (the "Company"), and David L. Cargile (the "Executive") entered into a Severance Agreement dated May 24, 1994, and to an Amendment No. 1 thereto dated December 4, 1996, and to an Amendment No. 2 thereto dated August 29, 1997 (collectively referred to herein as the "Agreement"), which relates to the termination of Executive's employment with the Company under certain circumstances; and Whereas, the Company and the Executive desire to amend Section 4(e) to clarify the definition of events which constitute a "Change in Control" for purposes of this Agreement; Now, Therefore, in consideration of the Company's payment to Executive of $1.00 and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Executive hereby agree to enter into this Amendment to the Agreement as follows: 1. Section 4(e) of the Agreement shall be completely replaced by a new Section 4(e), which shall read in full as follows: (e) For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date, of any of the following events: (i) At any time during the term of this Agreement, any "Person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations of the Securities and Exchange Commission (the "SEC") thereunder, each as in effect on the Effective Date of this Agreement (including any such Persons that may be deemed to be acting in concert with respect to the Company or the acquisition, ownership or voting of Company securities) becomes, directly or indirectly, the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act and the regulations of the SEC thereunder, each as in effect on the Effective Date of this Agreement), without 1 the approval of the Board of Directors of the Company, of outstanding securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities (except that if such person subsequently acquires more than 25% of the combined voting power of the Company's then outstanding securities, a "Change in Control" shall be deemed to occur at that time); provided, however, that the concept of any Person becoming the owner of 10% or more of the combined voting shares shall not include: (A) the Company, any wholly owned subsidiary of the Company, any employee benefit plan of the Company or of a subsidiary of the Company, or any Person holding voting shares for or pursuant to the terms of any such employee benefit plan; or (B) any Person if such Person would not otherwise be a 10% stockholder but for a reduction in the number of outstanding voting shares resulting from a stock repurchase program or other similar plan instituted by the Company or from a self-tender offer of the Company, which stock repurchase plan or Company self-tender offer commenced on or after the Effective Date of this Agreement; provided, however, that the concept of becoming the owner of 10% or more of the combined voting shares shall include such Beneficial Owner after the first date upon which (x) such Person, since the date of commencement of such stock repurchase plan or Company self-tender offer, shall have acquired Beneficial Ownership of, in the aggregate, additional voting shares of the Company representing 1% or more of the voting shares then outstanding, and (y) such Person, together with all affiliates and associates of such Person, shall Beneficially Own 10% or more of the voting shares of the Company then outstanding. In calculating the percentage of outstanding voting shares that are Beneficially Owned by a Person for purposes of this subsection, voting shares that are Beneficially Owned by such Person shall be deemed outstanding, and voting shares that are not Beneficially Owned by such Person and that are subject to issuance upon the exercise or conversion of outstanding conversion rights, exchange rights, warrants or options shall not be deemed outstanding. Under all circumstances, the Board of Directors shall have the absolute and unfettered authority to make the final determination as to whether any Person is or is not to be considered a 10% Stockholder for purposes of that term in this Agreement, which determination shall be conclusive for all purposes and shall be binding upon the Company and upon the Executive; (ii) At any time during the term of this Agreement the composition of the Board of Directors of the Company is changed due to a solicitation in opposition to management's nominees, such that persons who were directors of the Company as of the date of this Amendment, or persons nominated or elected by a majority of such persons who were directors as of the date of this Amendment, do not continue to comprise a majority of the members of such Board of Directors of the Company; 2 (iii) At any time during the term of this Agreement the stockholders of the Company approve a merger or consolidation of the Company with, or a reorganization transaction involving the Company and, any other entity, other than a merger, consolidation or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) At any time during the term of this Agreement the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of more than 50% of its consolidated assets. 2. Apart from this Amendment, the terms of the Agreement as entered into on May 24, 1994 and as amended by Amendment No. 1 on December 4, 1996 and by Amendment No. 2 on August 29, 1997 shall otherwise in all respects remain as originally written to the extent that such terms do not conflict with or are inconsistent with this Amendment. In Witness Whereof, this Amendment No. 3 has been executed by a duly authorized officer of the Company and by the Executive as of the 30th day of December, 1998. Company: The Centris Group, Inc. ------- By ______________________________________ Jose A. Velasco Senior Vice President, Chief Administrative Officer, Secretary and General Counsel Executive: --------- _________________________________________ David L. Cargile 3 EX-10.5(IV) 3 AMEND #1 TO SEVERANCE AGREEMENT - H. SINGER EXHIBIT 10.5(iv) AMENDMENT NO. 3 TO SEVERANCE AGREEMENT BETWEEN THE CENTRIS GROUP, INC. (FORMERLY US FACILITIES CORPORATION) AND HOWARD S. SINGER Whereas, The Centris Group, Inc., a Delaware corporation (the "Company"), and Howard S. Singer (the "Executive") entered into a Severance Agreement dated May 24, 1994, and to an Amendment No. 1 thereto dated December 4, 1996, and to an Amendment No. 2 thereto dated August 29, 1997 (collectively referred to herein as the "Agreement"), which relates to the termination of Executive's employment with the Company under certain circumstances; and Whereas, the Company and the Executive desire to amend Section 4(e)(i) to clarify the definition of events which constitute a "Change in Control" for purposes of this Agreement; Now, Therefore, in consideration of the Company's payment to Executive of $1.00 and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Executive hereby agree to enter into this Amendment to the Agreement as follows: 1. Section 4(e) of the Agreement shall be completely replaced by a new Section 4(e), which shall read in full as follows: (e) For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date, of any of the following events: (i) At any time during the term of this Agreement, any "Person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations of the Securities and Exchange Commission (the "SEC") thereunder, each as in effect on the Effective Date of this Agreement (including any such Persons that may be deemed to be acting in concert with respect to the Company or the acquisition, ownership or voting of Company securities) becomes, directly or indirectly, the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act and the regulations of the SEC thereunder, each as in effect on the Effective Date of this Agreement), without the approval of the Board of Directors of the Company, of outstanding securities 1. of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities (except that if such person subsequently acquires more than 25% of the combined voting power of the Company's then outstanding securities, a "Change in Control" shall be deemed to occur at that time); provided, however, that the concept of any Person becoming the owner of 10% or more of the combined voting shares shall not include: (A) the Company, any wholly owned subsidiary of the Company, any employee benefit plan of the Company or of a subsidiary of the Company, or any Person holding voting shares for or pursuant to the terms of any such employee benefit plan; or (B) any Person if such Person would not otherwise be a 10% stockholder but for a reduction in the number of outstanding voting shares resulting from a stock repurchase program or other similar plan instituted by the Company or from a self-tender offer of the Company, which stock repurchase plan or Company self-tender offer commenced on or after the Effective Date of this Agreement; provided, however, that the concept of becoming the owner of 10% or more of the combined voting shares shall include such Beneficial Owner after the first date upon which (x) such Person, since the date of commencement of such stock repurchase plan or Company self-tender offer, shall have acquired Beneficial Ownership of, in the aggregate, additional voting shares of the Company representing 1% or more of the voting shares then outstanding, and (y) such Person, together with all affiliates and associates of such Person, shall Beneficially Own 10% or more of the voting shares of the Company then outstanding. In calculating the percentage of outstanding voting shares that are Beneficially Owned by a Person for purposes of this subsection, voting shares that are Beneficially Owned by such Person shall be deemed outstanding, and voting shares that are not Beneficially Owned by such Person and that are subject to issuance upon the exercise or conversion of outstanding conversion rights, exchange rights, warrants or options shall not be deemed outstanding. The Board of Directors shall have the absolute and unfettered authority to make the final determination as to whether any Person is or is not to be considered a 10% Stockholder for purposes of that term in this Agreement, which determination shall be conclusive for all purposes and shall be binding upon the Company and upon the Executive; (ii) At any time during the term of this Agreement the composition of the Board of Directors of the Company is changed due to a solicitation in opposition to management's nominees, such that persons who were directors of the Company as of the date of this Amendment, or persons nominated or elected by a majority of such persons who were directors as of the date of this Amendment, do not continue to comprise a majority of the members of such Board of Directors of the Company; 2. (iii) At any time during the term of this Agreement the stockholders of the Company approve a merger or consolidation of the Company with, or a reorganization transaction involving the Company and, any other entity, other than a merger, consolidation or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) At any time during the term of this Agreement the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of more than 50% of its consolidated assets. 2. Apart from this Amendment, the terms of the Agreement as entered into on May 24, 1994 and as amended by Amendment No. 1 on December 4, 1996 and by Amendment No. 2 on August 29, 1997 shall otherwise in all respects remain as originally written to the extent that such terms do not conflict with or are inconsistent with this Amendment. In Witness Whereof, this Amendment No. 3 has been executed by a duly authorized officer of the Company and by the Executive as of the 30th day of December, 1998. Company: The Centris Group, Inc. ------- By ______________________________________ David L. Cargile President and Chief Executive Officer Executive: --------- _________________________________________ Howard S. Singer 3. EX-10.5(VI) 4 AMEND #3 TO SEVERANCE AGREEMENT - J. GRUSH EXHIBIT 10.5(vi) Amendment No. 3 To Severance Agreement Between The Centris Group, Inc. (formerly US Facilities Corporation) And John T. Grush Whereas, The Centris Group, Inc., a Delaware corporation (the "Company"), and John T. Grush (the "Executive") entered into a Severance Agreement dated May 24, 1994, and to an Amendment No. 1 thereto dated December 4, 1996, and to an Amendment No. 2 thereto dated August 29, 1997 (collectively referred to herein as the "Agreement"), which relates to the termination of Executive's employment with the Company under certain circumstances; and Whereas, the Company and the Executive desire to amend Section 4(e)(i) to clarify the definition of events which constitute a "Change in Control" for purposes of this Agreement; Now, Therefore, in consideration of the Company's payment to Executive of $1.00 and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Executive hereby agree to enter into this Amendment to the Agreement as follows: 1. Section 4(e) of the Agreement shall be completely replaced by a new Section 4(e), which shall read in full as follows: (e) For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date, of any of the following events: (i) At any time during the term of this Agreement, any "Person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations of the Securities and Exchange Commission (the "SEC") thereunder, each as in effect on the Effective Date of this Agreement (including any such Persons that may be deemed to be acting in concert with respect to the Company or the acquisition, ownership or voting of Company securities) becomes, directly or indirectly, the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act and the regulations of the SEC thereunder, each as in effect on the Effective Date of this Agreement), without the approval of the Board of Directors of the Company, of outstanding securities 1. of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities (except that if such person subsequently acquires more than 25% of the combined voting power of the Company's then outstanding securities, a "Change in Control" shall be deemed to occur at that time); provided, however, that the concept of any Person becoming the owner of 10% or more of the combined voting shares shall not include: (A) the Company, any wholly owned subsidiary of the Company, any employee benefit plan of the Company or of a subsidiary of the Company, or any Person holding voting shares for or pursuant to the terms of any such employee benefit plan; or (B) any Person if such Person would not otherwise be a 10% stockholder but for a reduction in the number of outstanding voting shares resulting from a stock repurchase program or other similar plan instituted by the Company or from a self-tender offer of the Company, which stock repurchase plan or Company self-tender offer commenced on or after the Effective Date of this Agreement; provided, however, that the concept of becoming the owner of 10% or more of the combined voting shares shall include such Beneficial Owner after the first date upon which (x) such Person, since the date of commencement of such stock repurchase plan or Company self-tender offer, shall have acquired Beneficial Ownership of, in the aggregate, additional voting shares of the Company representing 1% or more of the voting shares then outstanding, and (y) such Person, together with all affiliates and associates of such Person, shall Beneficially Own 10% or more of the voting shares of the Company then outstanding. In calculating the percentage of outstanding voting shares that are Beneficially Owned by a Person for purposes of this subsection, voting shares that are Beneficially Owned by such Person shall be deemed outstanding, and voting shares that are not Beneficially Owned by such Person and that are subject to issuance upon the exercise or conversion of outstanding conversion rights, exchange rights, warrants or options shall not be deemed outstanding. The Board of Directors shall have the absolute and unfettered authority to make the final determination as to whether any Person is or is not to be considered a 10% Stockholder for purposes of that term in this Agreement, which determination shall be conclusive for all purposes and shall be binding upon the Company and upon the Executive; (ii) At any time during the term of this Agreement the composition of the Board of Directors of the Company is changed due to a solicitation in opposition to management's nominees, such that persons who were directors of the Company as of the date of this Amendment, or persons nominated or elected by a majority of such persons who were directors as of the date of this Amendment, do not continue to comprise a majority of the members of such Board of Directors of the Company; 2. (iii) At any time during the term of this Agreement the stockholders of the Company approve a merger or consolidation of the Company with, or a reorganization transaction involving the Company and, any other entity, other than a merger, consolidation or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) At any time during the term of this Agreement the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of more than 50% of its consolidated assets. 2. Apart from this Amendment, the terms of the Agreement as entered into on May 24, 1994 and as amended by Amendment No. 1 on December 4, 1996 and by Amendment No. 2 on August 29, 1997 shall otherwise in all respects remain as originally written to the extent that such terms do not conflict with or are inconsistent with this Amendment. In Witness Whereof, this Amendment No. 3 has been executed by a duly authorized officer of the Company and by the Executive as of the 30th day of December, 1998. Company: The Centris Group, Inc. ------- By ______________________________________ David L. Cargile President and Chief Executive Officer Executive: --------- _________________________________________ John T. Grush 3. EX-10.5(VIII) 5 AMEND #3 TO SEVERANCE AGREEMENT - C. KELBEL EXHIBIT 10.5(viii) AMENDMENT NO. 3 TO SEVERANCE AGREEMENT BETWEEN THE CENTRIS GROUP, INC. (FORMERLY US FACILITIES CORPORATION) AND CRAIG J. KELBEL WHEREAS, THE CENTRIS GROUP, INC., a Delaware corporation (the "Company"), and CRAIG J. KELBEL (the "Executive") entered into a Severance Agreement dated May 24, 1994, and to an Amendment No. 1 thereto dated December 4, 1996, and to an Amendment No. 2 thereto dated August 29, 1997 (collectively referred to herein as the "Agreement"), which relates to the termination of Executive's employment with the Company under certain circumstances; and WHEREAS, the Company and the Executive desire to amend Section 4(e)(i) to clarify the definition of events which constitute a "Change in Control" for purposes of this Agreement; NOW, THEREFORE, in consideration of the Company's payment to Executive of $1.00 and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Executive hereby agree to enter into this Amendment to the Agreement as follows: 1. Section 4(e) of the Agreement shall be completely replaced by a new Section 4(e), which shall read in full as follows: (e) For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date, of any of the following events: (i) At any time during the term of this Agreement, any "Person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations of the Securities and Exchange Commission (the "SEC") thereunder, each as in effect on the Effective Date of this Agreement (including any such Persons that may be deemed to be acting in concert with respect to the Company or the acquisition, ownership or voting of Company securities) becomes, directly or indirectly, the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act and the regulations of the SEC thereunder, each as in effect on the Effective Date of this Agreement), without the approval of the Board of Directors of the Company, of outstanding securities 1. of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities (except that if such person subsequently acquires more than 25% of the combined voting power of the Company's then outstanding securities, a "Change in Control" shall be deemed to occur at that time); provided, however, that the concept of any Person becoming the owner of 10% or more of the combined voting shares shall not include: (A) the Company, any wholly owned subsidiary of the Company, any employee benefit plan of the Company or of a subsidiary of the Company, or any Person holding voting shares for or pursuant to the terms of any such employee benefit plan; or (B) any Person if such Person would not otherwise be a 10% stockholder but for a reduction in the number of outstanding voting shares resulting from a stock repurchase program or other similar plan instituted by the Company or from a self-tender offer of the Company, which stock repurchase plan or Company self-tender offer commenced on or after the Effective Date of this Agreement; provided, however, that the concept of becoming the owner of 10% or more of the combined voting shares shall include such Beneficial Owner after the first date upon which (x) such Person, since the date of commencement of such stock repurchase plan or Company self-tender offer, shall have acquired Beneficial Ownership of, in the aggregate, additional voting shares of the Company representing 1% or more of the voting shares then outstanding, and (y) such Person, together with all affiliates and associates of such Person, shall Beneficially Own 10% or more of the voting shares of the Company then outstanding. In calculating the percentage of outstanding voting shares that are Beneficially Owned by a Person for purposes of this subsection, voting shares that are Beneficially Owned by such Person shall be deemed outstanding, and voting shares that are not Beneficially Owned by such Person and that are subject to issuance upon the exercise or conversion of outstanding conversion rights, exchange rights, warrants or options shall not be deemed outstanding. The Board of Directors shall have the absolute and unfettered authority to make the final determination as to whether any Person is or is not to be considered a 10% Stockholder for purposes of that term in this Agreement, which determination shall be conclusive for all purposes and shall be binding upon the Company and upon the Executive; (ii) At any time during the term of this Agreement the composition of the Board of Directors of the Company is changed due to a solicitation in opposition to management's nominees, such that persons who were directors of the Company as of the date of this Amendment, or persons nominated or elected by a majority of such persons who were directors as of the date of this Amendment, do not continue to comprise a majority of the members of such Board of Directors of the Company; 2. (iii) At any time during the term of this Agreement the stockholders of the Company approve a merger or consolidation of the Company with, or a reorganization transaction involving the Company and, any other entity, other than a merger, consolidation or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) At any time during the term of this Agreement the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of more than 50% of its consolidated assets. 2. Apart from this Amendment, the terms of the Agreement as entered into on May 24, 1994 and as amended by Amendment No. 1 on December 4, 1996 and by Amendment No. 2 on August 29, 1997 shall otherwise in all respects remain as originally written to the extent that such terms do not conflict with or are inconsistent with this Amendment. In Witness Whereof, this Amendment No. 3 has been executed by a duly authorized officer of the Company and by the Executive as of the 30th day of December, 1998. Company: THE CENTRIS GROUP, INC. ------- By ______________________________________ DAVID L. CARGILE President and Chief Executive Officer Executive: --------- _________________________________________ CRAIG J. KELBEL 3. EX-10.5(X) 6 AMEND #3 TO SEVERANCE AGREEMENT - J. VELASCO EXHIBIT 10.5(x) Amendment No. 3 To Severance Agreement Between The Centris Group, Inc. (formerly US Facilities Corporation) And Jose A. Velasco Whereas, The Centris Group, Inc., a Delaware corporation (the "Company"), and Jose A. Velasco (the "Executive") entered into a Severance Agreement dated May 24, 1994, and to an Amendment No. 1 thereto dated December 4, 1996, and to an Amendment No. 2 thereto dated August 29, 1997 (collectively referred to herein as the "Agreement"), which relates to the termination of Executive's employment with the Company under certain circumstances; and Whereas, the Company and the Executive desire to amend Section 4(e)(i) to clarify the definition of events which constitute a "Change in Control" for purposes of this Agreement; Now, Therefore, in consideration of the Company's payment to Executive of $1.00 and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Executive hereby agree to enter into this Amendment to the Agreement as follows: 1. Section 4(e) of the Agreement shall be completely replaced by a new Section 4(e), which shall read in full as follows: (e) For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date, of any of the following events: (i) At any time during the term of this Agreement, any "Person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations of the Securities and Exchange Commission (the "SEC") thereunder, each as in effect on the Effective Date of this Agreement (including any such Persons that may be deemed to be acting in concert with respect to the Company or the acquisition, ownership or voting of Company securities) becomes, directly or indirectly, the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act and the regulations of the SEC thereunder, each as in effect on the Effective Date of this Agreement), without 1 the approval of the Board of Directors of the Company, of outstanding securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities (except that if such person subsequently acquires more than 25% of the combined voting power of the Company's then outstanding securities, a "Change in Control" shall be deemed to occur at that time); provided, however, that the concept of any Person becoming the owner of 10% or more of the combined voting shares shall not include: (A) the Company, any wholly owned subsidiary of the Company, any employee benefit plan of the Company or of a subsidiary of the Company, or any Person holding voting shares for or pursuant to the terms of any such employee benefit plan; or (B) any Person if such Person would not otherwise be a 10% stockholder but for a reduction in the number of outstanding voting shares resulting from a stock repurchase program or other similar plan instituted by the Company or from a self-tender offer of the Company, which stock repurchase plan or Company self-tender offer commenced on or after the Effective Date of this Agreement; provided, however, that the concept of becoming the owner of 10% or more of the combined voting shares shall include such Beneficial Owner after the first date upon which (x) such Person, since the date of commencement of such stock repurchase plan or Company self-tender offer, shall have acquired Beneficial Ownership of, in the aggregate, additional voting shares of the Company representing 1% or more of the voting shares then outstanding, and (y) such Person, together with all affiliates and associates of such Person, shall Beneficially Own 10% or more of the voting shares of the Company then outstanding. In calculating the percentage of outstanding voting shares that are Beneficially Owned by a Person for purposes of this subsection, voting shares that are Beneficially Owned by such Person shall be deemed outstanding, and voting shares that are not Beneficially Owned by such Person and that are subject to issuance upon the exercise or conversion of outstanding conversion rights, exchange rights, warrants or options shall not be deemed outstanding. The Board of Directors shall have the absolute and unfettered authority to make the final determination as to whether any Person is or is not to be considered a 10% Stockholder for purposes of that term in this Agreement, which determination shall be conclusive for all purposes and shall be binding upon the Company and upon the Executive; (ii) At any time during the term of this Agreement the composition of the Board of Directors of the Company is changed due to a solicitation in opposition to management's nominees, such that persons who were directors of the Company as of the date of this Amendment, or persons nominated or elected by a majority of such persons who were directors as of the date of this Amendment, do not continue to comprise a majority of the members of such Board of Directors of the Company; 2 (iii) At any time during the term of this Agreement the stockholders of the Company approve a merger or consolidation of the Company with, or a reorganization transaction involving the Company and, any other entity, other than a merger, consolidation or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) At any time during the term of this Agreement the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of more than 50% of its consolidated assets. 2. Apart from this Amendment, the terms of the Agreement as entered into on May 24, 1994 and as amended by Amendment No. 1 on December 4, 1996 and by Amendment No. 2 on August 29, 1997 shall otherwise in all respects remain as originally written to the extent that such terms do not conflict with or are inconsistent with this Amendment. In Witness Whereof, this Amendment No. 3 has been executed by a duly authorized officer of the Company and by the Executive as of the 30th day of December, 1998. Company: The Centris Group, Inc. ------- By ______________________________________ David L. Cargile President and Chief Executive Officer Executive: --------- _________________________________________ Jose A. Velasco 3 EX-10.5(XII) 7 AMEND #3 TO SEVERANCE AGREEMENT - C. CAPORALE EXHIBIT 10.5(xii) AMENDMENT NO. 1 TO SEVERANCE AGREEMENT BETWEEN THE CENTRIS GROUP, INC. (FORMERLY US FACILITIES CORPORATION) AND CHARLES M. CAPORALE WHEREAS, THE CENTRIS GROUP, INC., a Delaware corporation (the "Company"), and CHARLES M. CAPORALE (the "Executive") entered into a Severance Agreement dated July 23, 1997 (the "Agreement"), which relates to the termination of Executive's employment with the Company under certain circumstances; and WHEREAS, the Company and the Executive desire to amend Section 4(e)(i) to clarify the definition of events which constitute a "Change in Control" for purposes of this Agreement; NOW, Therefore, in consideration of the Company's payment to Executive of $1.00 and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Executive hereby agree to enter into this Amendment to the Agreement as follows: 1. Section 4(e) of the Agreement shall be completely replaced by a new Section 4(e), which shall read in full as follows: (e) For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date, of any of the following events: (i) At any time during the term of this Agreement, any "Person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations of the Securities and Exchange Commission (the "SEC") thereunder, each as in effect on the Effective Date of this Agreement (including any such Persons that may be deemed to be acting in concert with respect to the Company or the acquisition, ownership or voting of Company securities) becomes, directly or indirectly, the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act and the regulations of the SEC thereunder, each as in effect on the Effective Date of this Agreement), without the approval of the Board of Directors of the Company, of outstanding securities of the Company representing 10% or more of the combined voting power of the 1 Company's then outstanding securities (except that if such person subsequently acquires more than 25% of the combined voting power of the Company's then outstanding securities, a "Change in Control" shall be deemed to occur at that time); provided, however, that the concept of any Person becoming the owner of 10% or more of the combined voting shares shall not include: (A) the Company, any wholly owned subsidiary of the Company, any employee benefit plan of the Company or of a subsidiary of the Company, or any Person holding voting shares for or pursuant to the terms of any such employee benefit plan; or (B) any Person if such Person would not otherwise be a 10% stockholder but for a reduction in the number of outstanding voting shares resulting from a stock repurchase program or other similar plan instituted by the Company or from a self-tender offer of the Company, which stock repurchase plan or Company self-tender offer commenced on or after the Effective Date of this Agreement; provided, however, that the concept of becoming the owner of 10% or more of the combined voting shares shall include such Beneficial Owner after the first date upon which (x) such Person, since the date of commencement of such stock repurchase plan or Company self-tender offer, shall have acquired Beneficial Ownership of, in the aggregate, additional voting shares of the Company representing 1% or more of the voting shares then outstanding, and (y) such Person, together with all affiliates and associates of such Person, shall Beneficially Own 10% or more of the voting shares of the Company then outstanding. In calculating the percentage of outstanding voting shares that are Beneficially Owned by a Person for purposes of this subsection, voting shares that are Beneficially Owned by such Person shall be deemed outstanding, and voting shares that are not Beneficially Owned by such Person and that are subject to issuance upon the exercise or conversion of outstanding conversion rights, exchange rights, warrants or options shall not be deemed outstanding. The Board of Directors shall have the absolute and unfettered authority to make the final determination as to whether any Person is or is not to be considered a 10% Stockholder for purposes of that term in this Agreement, which determination shall be conclusive for all purposes and shall be binding upon the Company and upon the Executive; (ii) At any time during the term of this Agreement the composition of the Board of Directors of the Company is changed due to a solicitation in opposition to management's nominees, such that persons who were directors of the Company as of the date of this Amendment, or persons nominated or elected by a majority of such persons who were directors as of the date of this Amendment, do not continue to comprise a majority of the members of such Board of Directors of the Company; 2 (iii) At any time during the term of this Agreement the stockholders of the Company approve a merger or consolidation of the Company with, or a reorganization transaction involving the Company and, any other entity, other than a merger, consolidation or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) At any time during the term of this Agreement the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of more than 50% of its consolidated assets. 2. Apart from this Amendment, the terms of the Agreement as entered into on July 23, 1997 shall otherwise in all respects remain as originally written to the extent that such terms do not conflict with or are inconsistent with this Amendment. In Witness Whereof, this Amendment No. 1 has been executed by a duly authorized officer of the Company and by the Executive as of the 30th day of December, 1998. Company: The Centris Group, Inc. ------- By ______________________________________ David L. Cargile President and Chief Executive Officer Executive: --------- _________________________________________ Charles M. Caporale 3 EX-10.5(XIV) 8 AMEND #1 TO SEVERANCE AGREEMENT - M. CARNEY EXHIBIT 10.5(xiv) AMENDMENT NO. 1 TO SEVERANCE AGREEMENT BETWEEN THE CENTRIS GROUP, INC. (FORMERLY US FACILITIES CORPORATION) AND MARK A. CARNEY WHEREAS, THE CENTRIS GROUP, INC., a Delaware corporation (the "Company"), and MARK A. CARNEY (the "Executive") entered into a Severance Agreement dated September 6, 1997 (the "Agreement"), which relates to the termination of Executive's employment with the Company under certain circumstances; and Whereas, the Company and the Executive desire to amend Section 4(e)(i) to clarify the definition of events which constitute a "Change in Control" for purposes of this Agreement; Now, Therefore, in consideration of the Company's payment to Executive of $1.00 and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Executive hereby agree to enter into this Amendment to the Agreement as follows: 1. Section 4(e) of the Agreement shall be completely replaced by a new Section 4(e), which shall read in full as follows: (e) For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date, of any of the following events: (i) At any time during the term of this Agreement, any "Person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations of the Securities and Exchange Commission (the "SEC") thereunder, each as in effect on the Effective Date of this Agreement (including any such Persons that may be deemed to be acting in concert with respect to the Company or the acquisition, ownership or voting of Company securities) becomes, directly or indirectly, the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act and the regulations of the SEC thereunder, each as in effect on the Effective Date of this Agreement), without the approval of the Board of Directors of the Company, of outstanding securities of the Company representing 10% or more of the combined voting power of the 1. Company's then outstanding securities (except that if such person subsequently acquires more than 25% of the combined voting power of the Company's then outstanding securities, a "Change in Control" shall be deemed to occur at that time); provided, however, that the concept of any Person becoming the owner of 10% or more of the combined voting shares shall not include: (A) the Company, any wholly owned subsidiary of the Company, any employee benefit plan of the Company or of a subsidiary of the Company, or any Person holding voting shares for or pursuant to the terms of any such employee benefit plan; or (B) any Person if such Person would not otherwise be a 10% stockholder but for a reduction in the number of outstanding voting shares resulting from a stock repurchase program or other similar plan instituted by the Company or from a self-tender offer of the Company, which stock repurchase plan or Company self-tender offer commenced on or after the Effective Date of this Agreement; provided, however, that the concept of becoming the owner of 10% or more of the combined voting shares shall include such Beneficial Owner after the first date upon which (x) such Person, since the date of commencement of such stock repurchase plan or Company self-tender offer, shall have acquired Beneficial Ownership of, in the aggregate, additional voting shares of the Company representing 1% or more of the voting shares then outstanding, and (y) such Person, together with all affiliates and associates of such Person, shall Beneficially Own 10% or more of the voting shares of the Company then outstanding. In calculating the percentage of outstanding voting shares that are Beneficially Owned by a Person for purposes of this subsection, voting shares that are Beneficially Owned by such Person shall be deemed outstanding, and voting shares that are not Beneficially Owned by such Person and that are subject to issuance upon the exercise or conversion of outstanding conversion rights, exchange rights, warrants or options shall not be deemed outstanding. The Board of Directors shall have the absolute and unfettered authority to make the final determination as to whether any Person is or is not to be considered a 10% Stockholder for purposes of that term in this Agreement, which determination shall be conclusive for all purposes and shall be binding upon the Company and upon the Executive; (ii) At any time during the term of this Agreement the composition of the Board of Directors of the Company is changed due to a solicitation in opposition to management's nominees, such that persons who were directors of the Company as of the date of this Amendment, or persons nominated or elected by a majority of such persons who were directors as of the date of this Amendment, do not continue to comprise a majority of the members of such Board of Directors of the Company; 2. (iii) At any time during the term of this Agreement the stockholders of the Company approve a merger or consolidation of the Company with, or a reorganization transaction involving the Company and, any other entity, other than a merger, consolidation or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) At any time during the term of this Agreement the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of more than 50% of its consolidated assets. 2. Apart from this Amendment, the terms of the Agreement as entered into on September 6, 1997 shall otherwise in all respects remain as originally written to the extent that such terms do not conflict with or are inconsistent with this Amendment. In Witness Whereof, this Amendment No. 1 has been executed by a duly authorized officer of the Company and by the Executive as of the 30th day of December, 1998. Company: THE CENTRIS GROUP, INC. ------- By ______________________________________ DAVID L. CARGILE President and Chief Executive Officer Executive: --------- _________________________________________ MARK A. CARNEY 3. EX-10.5(XVI) 9 AMEND #3 TO SEVERANCE AGREEMENT - E. JONES, III EXHIBIT 10.5(xvi) AMENDMENT NO. 3 TO SEVERANCE AGREEMENT BETWEEN THE CENTRIS GROUP, INC. (FORMERLY US FACILITIES CORPORATION) AND EDWARD D. JONES, III WHEREAS, THE CENTRIS GROUP, INC., a Delaware corporation (the "Company"), and EDWARD D. JONES, III (the "Executive") entered into a Severance Agreement dated December 4, 1996, and to an Amendment No. 1 thereto dated August 29, 1997, and to an Amendment No. 2 thereto dated March 1, 1998 (collectively referred to herein as the "Agreement"), which relates to the termination of Executive's employment with the Company under certain circumstances; and WHEREAS, the Company and the Executive desire to amend Section 4(e)(i) to clarify the definition of events which constitute a "Change in Control" for purposes of this Agreement; NOW, THEREFORE, in consideration of the Company's payment to Executive of $1.00 and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Executive hereby agree to enter into this Amendment to the Agreement as follows: 1. Section 4(e) of the Agreement shall be completely replaced by a new Section 4(e), which shall read in full as follows: (e) For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date, of any of the following events: (i) At any time during the term of this Agreement, any "Person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations of the Securities and Exchange Commission (the "SEC") thereunder, each as in effect on the Effective Date of this Agreement (including any such Persons that may be deemed to be acting in concert with respect to the Company or the acquisition, ownership or voting of Company securities) becomes, directly or indirectly, the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act and the regulations of the SEC thereunder, each as in effect on the Effective Date of this Agreement), without the approval of the Board of Directors of the Company, of outstanding securities 1. of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities (except that if such person subsequently acquires more than 25% of the combined voting power of the Company's then outstanding securities, a "Change in Control" shall be deemed to occur at that time); provided, however, that the concept of any Person becoming the owner of 10% or more of the combined voting shares shall not include: (A) the Company, any wholly owned subsidiary of the Company, any employee benefit plan of the Company or of a subsidiary of the Company, or any Person holding voting shares for or pursuant to the terms of any such employee benefit plan; or (B) any Person if such Person would not otherwise be a 10% stockholder but for a reduction in the number of outstanding voting shares resulting from a stock repurchase program or other similar plan instituted by the Company or from a self-tender offer of the Company, which stock repurchase plan or Company self-tender offer commenced on or after the Effective Date of this Agreement; provided, however, that the concept of becoming the owner of 10% or more of the combined voting shares shall include such Beneficial Owner after the first date upon which (x) such Person, since the date of commencement of such stock repurchase plan or Company self-tender offer, shall have acquired Beneficial Ownership of, in the aggregate, additional voting shares of the Company representing 1% or more of the voting shares then outstanding, and (y) such Person, together with all affiliates and associates of such Person, shall Beneficially Own 10% or more of the voting shares of the Company then outstanding. In calculating the percentage of outstanding voting shares that are Beneficially Owned by a Person for purposes of this subsection, voting shares that are Beneficially Owned by such Person shall be deemed outstanding, and voting shares that are not Beneficially Owned by such Person and that are subject to issuance upon the exercise or conversion of outstanding conversion rights, exchange rights, warrants or options shall not be deemed outstanding. The Board of Directors shall have the absolute and unfettered authority to make the final determination as to whether any Person is or is not to be considered a 10% Stockholder for purposes of that term in this Agreement, which determination shall be conclusive for all purposes and shall be binding upon the Company and upon the Executive; (ii) At any time during the term of this Agreement the composition of the Board of Directors of the Company is changed due to a solicitation in opposition to management's nominees, such that persons who were directors of the Company as of the date of this Amendment, or persons nominated or elected by a majority of such persons who were directors as of the date of this Amendment, do not continue to comprise a majority of the members of such Board of Directors of the Company; 2. (iii) At any time during the term of this Agreement the stockholders of the Company approve a merger or consolidation of the Company with, or a reorganization transaction involving the Company and, any other entity, other than a merger, consolidation or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) At any time during the term of this Agreement the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of more than 50% of its consolidated assets. 2. Apart from this Amendment, the terms of the Agreement as entered into on December 4, 1996 and as amended by Amendment No. 1 on August 29, 1997 and by Amendment No. 2 on March 1, 1998 shall otherwise in all respects remain as originally written to the extent that such terms do not conflict with or are inconsistent with this Amendment. IN WITNESS WHEREOF, this Amendment No. 3 has been executed by a duly authorized officer of the Company and by the Executive as of the 30th day of December, 1998. Company: THE CENTRIS GROUP, INC. ------- By ______________________________________ DAVID L. CARGILE President and Chief Executive Officer Executive: --------- _________________________________________ EDWARD D. JONES, III 3. EX-10.8(II) 10 AMEND. NO. 7 TO QUOTA SHARE RETROCESSION AGMT. EXHIBIT 10.8(II) AMENDMENT NUMBER 7 REINSURANCE NOVATION AGREEMENT ENDORSEMENT ------------------------------------------ This Agreement is made and entered into by and among HARBOR INSURANCE COMPANY (the "Ceding Company"), THE CONTINENTAL INSURANCE COMPANY (the "Assuming Company") and USF REINSURANCE CO. (the "Reinsurer") as of the 1st day of January, 1990. WHEREAS, the Ceding Company and the Reinsurer entered into a Accident and Health Reinsurance Contract (Contract Number Harbor 250) dated 1st day of January, 1986 the "Contract" whereby the Reinsurer acts as a reinsurer of the Ceding Company; and WHEREAS, the Ceding Company and the Assuming Company have entered into an Assumption Reinsurance and Administration Agreement effective January 1, 1990 (the "Assumption Reinsurance Agreement") whereby the Assuming Company has assumed all of the gross policy obligations of the Ceding Company under the policies which are the subject of the Contract; and WHEREAS, the parties wish to substitute the Assuming Company for the Ceding Company as a party to the Contract; NOW, THEREFORE, in consideration of the covenants and agreements contained herein, the Ceding Company, the Assuming Company and the Reinsurer agree as follows: 1. As of the Effective Date (as defined below), the Assuming Company shall assume all of the liabilities and obligations of the Ceding Company under the contract and shall be substituted for the Ceding Company, in the Ceding Company's name, place and stead, as the cedant thereon so as to effect a novation of the Contract and release the Ceding Company from any and all liabilities or obligations thereunder. 2. As of the Effective Date, the Assuming Company shall be entitled to all of the rights of the Ceding Company under the Contract and shall be entitled to enforce all such rights in the name, place and stead of the Ceding Company. 3. The Effective Date of this Endorsement shall be 12:01 a.m. Pacific Standard Time on the 1st day of January, 1990, (the "Effective Date"). IN WITNESS WHEREOF, the parties have entered into this Endorsement as of the first day and year written above. HARBOR INSURANCE COMPANY BY: /s/ [SIGNATURE ILLEGIBLE]^^ --------------------------------- VICE PRESIDENT THE CONTINENTAL INSURANCE COMPANY BY: /s/ [SIGNATURE ILLEGIBLE]^^ --------------------------------- VICE PRESIDENT USF REINSURANCE CO. BY: /s/ [SIGNATURE ILLEGIBLE]^ --------------------------------- EX-10.8(III) 11 AMEND. NO. 10, 11 TO QUOTA SHARE RETROCESSION AGMT. EXHIBIT 10.8 (III) AMENDMENT NUMBER 12 ------------------- to the ------ QUOTA SHARE RETROCESSION AGREEMENT between THE CONTINENTAL INSURANCE COMPANY, (one of the CNA Insurance Companies) and USF RE INSURANCE COMPANY (hereinafter referred to as "Retrocessionaire") The Quota Share Retrocession Agreement ("Agreement") between The Continental Insurance Company and USF RE INSURANCE COMPANY, dated May 21, 1986, and as amended to date, is hereby further amended, effective as of June 1, 1996, as follows: ARTICLE IV - RETROCESSIONAIRE'S LIABILITY is deleted in its entirety and - ---------- ---------------------------- replaced with the following: The Retrocedent shall cede and the Retrocessionaire shall accept a Quota Share of the Retrocedent's net retained primary liability on all business covered hereunder, subject to maximum cession limits as follows: 1. under any medical stop-loss policy issued or renewed on or after June 1, 1996 of 50% of the Retrocedent's net retained primary liability to maximum cession limits of $2,500,000 for specific excess medical stop-loss coverages and $1,000,000 for aggregate excess medical stop-loss coverages; and 2. under any one provider excess reimbursement policy issued or renewed on or after January 1, 1994 of 50% of Retrocedent's net retained primary liability to maximum cession limits of $2,500,000. It is understood and agreed that the maximum cession limits stated above shall apply separately to provider excess reimbursement, specific excess medical stop loss coverage and aggregate stop-loss or advance funding aggregate reinsurances. "Net retained primary liability," as used herein, shall mean the Retrocedent's liability for the full policy limits of $5,000,000 for provider excess reimbursement and specific excess coverages and $2,000,000 for aggregate excess coverage on account of loss, or series of losses as respects each individual excess reinsurance, each aggregate stop-loss reinsurance, and each advance funding aggregate reinsurance, as provided for in reinsurance agreements which are bound, issued, or renewed during the currency of this Agreement. It is agreed that the Retrocedent shall retain 50% of the net retained primary liabilities, as defined above, for its own net account. It is further agreed that the obligations as of the parties for reinsurance agreements in force prior to June 1, 1996, shall be governed by the terms of this Agreement as in effect when such reinsurance agreements were issued or renewed. IN WITNESS WHEREOF this Amendment has been executed in Chicago, IL this 19/th/ day of January 1999. THE CONTINENTAL INSURANCE COMPANY By: /s/ [SIGNATURE ILLEGIBLE]^^ ---------------------------------- Title: SVP ------------------------------- and in Costa Mesa, California, this 25/th/ day of January, 1999. USF RE INSURANCE COMPANY By: /s/ [SIGNATURE ILLEGIBLE]^^ ---------------------------------- Title: President 2 AMENDMENT NUMBER 11 ------------------- to the ------ QUOTA SHARE RETROCESSION AGREEMENT between THE CONTINENTAL INSURANCE COMPANY, (one of the CNA Insurance Companies) and USF RE INSURANCE COMPANY (hereinafter referred to as "Retrocessionaire") The Quota Share Retrocession Agreement ("Agreement") between The Continental Insurance Company and USF RE INSURANCE COMPANY, dated May 21, 1986, and as amended to date, is hereby further amended, effective as of January 1, 1994, as follows: ARTICLE I - BUSINESS COVERED is deleted in its entirety and replaced with the - --------- ---------------- following: The Retrocedent agrees to retrocede and the Retrocessionaire agrees to accept, by way of retrocession on the terms and conditions hereinafter appearing, a Quota Share of the Retrocedent's net retained primary liability (in the amount specified in Article IV hereof) under all insurance policies, contracts and agreements underwritten by USBenefits Insurance Services, Inc., on behalf of the Retrocedent (hereinafter referred to as "reinsurance agreements"), which are classified as either: (1) Medical Stop-loss insurance, being reinsurance agreements issued to self-insured employers providing specific excess protection and/or aggregate stop-loss or advance funding aggregate protection, including any continuation of coverage or extension of coverage endorsements issued in conjunction therewith, and including the credit risk associated with the Advance Funding Aggregate Plan, or (2) Provider Excess Reimbursement insurance issued to hospitals and other providers of medical services under capitated fee arrangements to limit the financial liability of the medical service provider under its managed care arrangements with managed care organizations on a per participant (member) and/or aggregate basis. Such provider excess reimbursement insurance shall be limited to a maximum of $5,000,000 per member, per policy year. ARTICLE VII - PREMIUM AND COMMISSION as amended by Amendment Number 8 dated - ----------- ---------------------- January 16, 1991 shall remain the same with respect to Medical Stop-loss insurance. For Provider Excess Reimbursement insurance, a new subparagraph "c" is added to read as follows: c) For Provider Excess Reimbursement insurance premiums, 41 %, which includes a ceding override of 5%. ARTICLE VIII - RETROCESSION AND PROFIT COMMISSION COSTS is deleted in its - ------------ ---------------------------------------- entirety and replaced with the following: It is agreed that the Retrocessionaire shall pay to the Retrocecedent its share of the actual premiums paid by the Retrocedent for excess of loss retrocession protection which limits the Retrocedent's liability as respects business retroceded hereunder, calculated in the same proportion as the cession to the Retrocessionaire hereunder bears to the net retained primary liability of the Retrocedent. Such costs shall be calculated on an underwriting year basis. It is agreed by the Retrocedent and the Retrocessionaire that the actual amounts payable under the paragraph above, as respects each treaty year that this Agreement is in force, may not be finalized during such treaty year or during the term of this Agreement. In such case, the parties hereto agree that any additional or return costs shall be paid by the debtor party immediately when such final actual costs are ascertained and accounted for. The Agreement is further amended to include Provider Excess Reimbursement insurance, in accordance with sub-paragraph (2) of Article I, wherever reference is made to individual excess reinsurance protection and/or aggregate stop-loss protection. Except to the extent it is inconsistent with the amendments set forth above, all other terms and conditions of the Agreement apply to the Provider Excess Reimbursement insurance. 2 IN WITNESS WHEREOF this Amendment has been executed in Chicago, IL, this 19/th/ day of January, 1999. THE CONTINENTAL INSURANCE COMPANY By: /s/ [SIGNATURE ILLEGIBLE]^^ ---------------------------------- Title: SVP ------------------------------- and in Costa Mesa, California, this 25/th/ day of January, 1999. USF RE INSURANCE COMPANY By: /s/ [SIGNATURE ILLEGIBLE]^^ ---------------------------------- Title: President 3 AMENDMENT NUMBER 10 to the QUOTA SHARE RETROCESSION between THE CONTINENTAL INSURANCE COMPANY (hereinafter referred to as "Retrocedent") and USF RE INSURANCE COMPANY (hereinafter referred to as "Retrocessionaire") The Quota Share Retrocession Agreement between The Continental Insurance Company and USF RE INSURANCE COMPANY, dated May 21, 1986, and as amended to date, is hereby further amended effective January 1, 1995, as follows: ARTICLE IV - RETROCESSIONAIRE'S LIABILITY is deleted in its entirety and - ---------- ---------------------------- replaced with the following: The Retrocedent shall cede and the Retrocessionaire shall accept a Quota Share of the Retrocedent's net retained primary liability on all business covered hereunder, subject to maximum cession limits under any one reinsurance agreement (medical stop-loss policy) issued or renewed on or after January 1, 1995, of 50% of the Retrocedent's net retained primary liability to maximum cession limits of $500,000 for specific excess medical stop-loss coverages and $1,000,000 for aggregate excess medical stop-loss coverages. It is understood and agreed that the maximum cession limits stated above shall apply separately to individual excess reinsurance and aggregate stop-loss or advance funding aggregate reinsurances. "Net retained primary liability," as used herein, shall mean the Retrocedent's liability for the full policy limits of $1,000,000 for specific excess coverages and $2,000,000 for aggregate excess coverage on account of loss, or series of losses as respects each individual excess reinsurance, each aggregate stop-loss reinsurance, and each advance funding aggregate reinsurance, as provided for in reinsurance agreements which are bound, issued, or renewed during the currency of this Agreement. It is agreed that the Retrocedent shall retain 50% of its net retained primary liabilities, as defined above, for its own net account. It is further agreed that the obligations as of the parties for reinsurance agreements in force prior to January 1, 1995, shall be governed by the terms of this Agreement as in effect when such reinsurance agreements were issued or renewed. IN WITNESS WHEREOF, this Amendment has been executed in Chicago, IL, this 25/th/ day of August, 1995. THE CONTINENTAL INSURANCE COMPANY By: /s/ [SIGNATURE ILLEGIBLE]^^ -------------------------------------------- Title: GROUP VICE PRESIDENT ----------------------------------------- and in Costa Mesa, California, this 23rd day of August, 1995. USF RE INSURANCE By: /s/ [SIGNATURE ILLEGIBLE]^^ -------------------------------------------- Title: President 2 EX-10.8(IV) 12 AMEND. NO. 14 TO QUOTA SHARE RETROCESSION AGMT. EXHIBIT 10.8(IV) AMENDMENT NUMBER 13 ------------------- to the ------ QUOTA SHARE RETROCESSION AGREEMENT between THE CONTINENTAL INSURANCE COMPANY, (one of the CNA Insurance Companies) and USF RE INSURANCE COMPANY (hereinafter referred to as "USF RE") The Quota Share Retrocession Agreement ("Agreement") between The Continental Insurance Company and USF RE INSURANCE COMPANY, dated May 21, 1986, as amended to date, is hereby further amended, as follows: For all business first written or renewed on or after January 1, 1 999, USF RE desires to assign all of its rights and obligations under this Agreement with respect to the medical stop-loss insurance business to SEABOARD LIFE INSURANCE COMPANY (USA) ("SLIC") and with respect to the Provider Excess Reimbursement business to VASA NORTH ATLANTIC INSURANCE COMPANY, ("VNAIC") effective January 1,1999. USF RE desires to retain all of its rights and obligations under this Agreement with respect to medical stop-loss and Provider Excess Reimbursement business written or renewed with an effective date on or prior to December 31, 1998. Retrocedent is agreeable to the assignment by USF RE and the substitution of SLIC and VNAIC for business written or renewed on or after January 1,1999. Therefore, Retrocedent, USF RE and SLlC and VNAIC agree as follows: 1. SLIC shall assume all of the rights, liabilities and obligations of USF RE under the Agreement for new and renewal medical stop-loss business written on or after 12:01 a.m., EST, January 1,1999 and shall be substituted for USF RE as Retrocessionaire on such business, 2. VNAIC shall assume all of the rights, liabilities and obligations of USF RE under the Agreement for new and renewal Provider Excess Reimbursement business written on or after 12:01 a.m., EST, January 1, 1999 and shall be substituted for USF RE as Retrocessionaire on such business. 3. USF RE's participation as Retrocessionaire in this Agreement shall be terminated on a run-off basis effective Midnight, PST, December 31,1998 for both medical stop-loss and Provider Excess Reimbursement business in force as of that date. For purposes of this Agreement, the term run-off basis shall be defined to mean that USF RE shall retain all of the rights, liabilities and obligations under the Agreement for new and renewal medical stop-loss and Provider Excess Reimbursement business with an effective date of December 31, 1998 or prior. Specifically, USF RE shall be entitled to all premium payments and shall remain liable for all losses attributable to such business until the extinction of all liabilities under the medical stop-loss and Provider Excess Reimbursement policies. IN WITNESS WHEREOF, this Amendment has been executed in Chicago, IL, this 18/th/ day of February, 1999. THE CONTINENTAL INSURANCE COMPANY By: /s/ [SIGNATURE ILLEGIBLE]^^ ------------------------------------- Title: SVP ---------------------------------- and in Costa Mesa, California, this 18th day of FEBRUARY, 1999. USF RE INSURANCE COMPANY By: /s/ [SIGNATURE ILLEGIBLE]^^ ------------------------------------- Title: President SEABOARD LIFE INSURANCE COMPANY (USA) By: /s/ [SIGNATURE ILLEGIBLE]^^ ------------------------------------- Title: Senior President VASA NORTH ATLANTIC INSURANCE COMPANY By: /s/ [SIGNATURE ILLEGIBLE]^^ ------------------------------------ Title: Senior President 2 EX-10.8(V) 13 AMEND. NO. 14 TO QUOTA SHARE RETROCESSION AGMT. EXHIBIT 10.8(V) AMENDMENT NUMBER 14 ------------------- to the QUOTA SHARE RETROCESSION AGREEMENT between THE CONTINENTAL INSURANCE COMPANY, (one of the CNA Insurance Companies) and SEABOARD LIFE INSURANCE COMPANY (USA) AND VASA NORTH ATLANTIC INSURANCE COMPANY (hereinafter referred to jointly as "Retrocessionaire") The Quota Share Retrocession Agreement ("Agreement") between The Continental Insurance Company and USF RE INSURANCE COMPANY, dated May 21, 1986, as amended to date, and assigned by USE RE INSURANCE COMPANY to SEABOARD LIFE INSURANCE COMPANY (USA) and VASA NORTH ATLANTIC INSURANCE COMPANY, is hereby further amended, effective as of January 1, 1999, as follows: ARTICLE IV - RETROCESSIONAIRE'S LIABILITY is deleted in its entirety and - ---------- --------------------------- replaced with the following: The Retrocedent shall cede and the Retrocessionaire shall accept a Quota Share of the Retrocedent's net retained primary liability on all business covered hereunder, subject to maximum cession limits as follows: 1. under any medical stop-loss policy issued or renewed on or after January 1, 1999 of 75% of the Retrocedent's net retained primary liability to maximum cession limits of $3,750,000 for specific excess medical stop-loss coverages and 1,500,000 for aggregate excess medical stop-loss coverages; and 2. under any one provider excess reimbursement policy issued or renewed on or after January 1, 1999 of 75% of Retrocedent's net retained primary liability to maximum cession limits of $3,750,000. It is understood and agreed that the maximum cession limits stated above shall apply separately to provider excess reimbursement, specific excess medical stop loss coverage and aggregate stop-loss or advance funding aggregate reinsurances. "Net retained primary liability," as used herein, shall mean the Retrocedent's liability for the full policy limits of $5,000,000 for provider excess reimbursement policies and specific excess coverages and $2,000,000 for aggregate excess coverage on account of loss, or series of losses as respects each individual excess reinsurance, each aggregate stop-loss reinsurance, and each advance funding aggregate reinsurance, as provided for in reinsurance agreements which are bound, issued, or renewed during the currency of this Agreement. It is agreed that the Retrocedent shall retain 25% of the net retained primary liabilities, as defined above, for its own net account. It is further agreed that Retrocessionaire shall retrocede sixty-six and two thirds percent (66.67%) of its 75% quota share participation hereunder to other retrocessionaires who shall be reinsurers (reinsurer or reinsurers) acceptable to both Retrocessionaire and Retrocedent. The obligations of the parties for reinsurance agreements in force prior to January 1, 1999, shall be governed by the terms of this Agreement as in effect when such reinsurance agreement were issued or renewed. ARTICLE VII - PREMIUM AND COMMISSION is deleted in its entirety and replaced - ----------- ---------------------- with the following: The premiums payable to the Retrocessionaire shall be calculated on the same gross original net written premiums received by the Retrocedent for reinsurance agreements ceded hereunder. The term "gross original net written premiums" shall mean the gross original written premiums, less return premiums and cancellations. The Retrocessionaire shall allow Retrocedent a ceding commission not to exceed 39%, which includes a front fee of 4.7% for Medical stop-loss insurance and a ceding commission not to exceed 40%, which includes a front fee of 5% for Provider Excess Reimbursement insurance. It is understood and agreed that this ceding commission includes provision for all taxes, board and bureau fees, and all other expenses whatsoever which are the obligations of the Retrocedent, except losses, loss adjustment expenses, extra contractual obligations, as specified in Article VI, and the actual costs of excess retrocessions and underwriting manager's profit commissions, as specified in Article VIII, below. It is understood and agreed with respect to the Medical Stop-Loss insurance business, that, to the extent that the difference between the ceding commission allowed by reinsurers to Retrocessionaire falls short of the sum of the following three components: (1) the fee allocated to USBenefits Insurance Services, Inc. (14.3%); (2) the fee allocated to Retrocedent (4.7%); and (3) the actual average commission rate paid to producing agents/TPAs, Retrocessionaire shall be responsible for the 2 shortfall. To the extent that the difference between the ceding commission allowed by reinsurers to Retrocessionaire exceeds the sum of (1) and (2) above, and (3) the lesser of the, actual average commission rate paid to the producing agents/TPAs or 13% such excess shall: (a) first be paid and allocated to Retrocedent to the extent of the first 0.3% points of such excess, which will result in Retrocedent's front fee being 5% (rather than 4.7%); (b) then be paid and allocated to Retrocessionaire to the extent of the next 0.3% points of such excess; and (c) any further excess (meaning Retrocedent's front fee has effectively reached 5% and USBenefits' fee has effectively reached 14.6%) will be shared equally by Retrocedent and Retrocessionaire. It is further understood and agreed with respect to the Provider Excess Reimbursement insurance, that, to the extent that the difference between the ceding commission allowed by reinsurers to Retrocessionaire falls short of the sum of the following three components: (1) the fee allocated to USBenefits Insurance Services, Inc. (15%); (2) the fee allocated to Retrocedent (5%); and (3) the actual average commission rate paid to producing agents, Retrocessionaire shall be responsible for the shortfall. To the extent that the difference between the ceding commission allowed by reinsurers to Retrocessionaire exceeds the sum of (1) and (2) above, and (3) the lesser of the actual average commission rate paid to the producing agents or 13.5%, such excess shall be shared equally by Retrocedent and Retrocessionaire. IN WITNESS WHEREOF, this Amendment has been executed in Chicago, IL this 19/th/ day of January, 1999. THE CONTINENTAL INSURANCE COMPANY By: /s/ [SIGNATURE ILLEGIBLE]^^ ---------------------------------- Title: SVP ------------------------------- and in Costa Mesa, California, this 10th day of February, 1999. SEABOARD LIFE INSURANCE COMPANY (USA) 3 By: /s/ [SIGNATURE ILLEGIBLE]^^ ---------------------------------- Title: Senior President VASA NORTH ATLANTIC INSURANCE COMPANY By: /s/ [SIGNATURE ILLEGIBLE]^^ ---------------------------------- Title: Senior President 4 EX-10.9(I) 14 THIRD AMENDMENT TO THE CREDIT AGRMT W/ FLEET NAT'L EXHIBIT 10.9(i) THIRD AMENDMENT TO THE CREDIT AGREEMENT Dated as of September 30, 1998 This THIRD AMENDMENT dated as of September 30, 1998 (this "Third Amendment") is between THE CENTRIS GROUP, INC., a Delaware corporation, formerly known as US Facilities Corporation (the "Borrower"), and FLEET NATIONAL BANK, a national banking association, formerly known as Shawmut Bank Connecticut, N.A. and Fleet National Bank of Connecticut (the "Bank"), PRELIMINARY STATEMENTS. The Borrower and the Bank entered into a Credit Agreement dated as of December 20, 1994, which agreement was amended by a First Amendment dated as of March 29, 1996 and a Second Amendment dated as of July 1, 1996 (as amended the "Credit Agreement"). The Borrower has requested the Bank to amend the Credit Agreement to defer until December 31, 2002 the Mandatory Quarterly Commitment Reduction now required to occur on September 30, 1998. The Bank is agreeable to the Borrower's request. Accordingly, the Borrower and the Bank agree as follows: Section 1. Amendments to the Credit Agreement. Effective as of the ---------------------------------- effective date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, the Credit Agreement is hereby amended as follows: Subsection (b) of Section 2.5 (Mandatory Quarterly Reduction of Commitment) --------------------------------------------------------------------------- of the Credit Agreement is replaced with the following: (b) Commencing on March 31, 1997 and continuing on each succeeding June 30, September 30 (except September 30, 1998), December 31 and March 31 thereafter until the Revolving Loan Termination Date, the Commitment of the Bank to make Revolving Loans shall be reduced automatically by the amounts set forth in the following table:
Mandatory Quarterly Period/Date Commitment/Principal Reduction ----------- --------------------------------- January 1, 1997 - December 31, 1997 $625,000 January 1, 1998 - December 31, 1998 $1,325,000 (no reduction shall be required on September 30, 1998) January 1, 1999 - September 30, 2002 $1,700,000 December 31, 2002 $3,025,000
Section 2. Conditions of Effectiveness. This Third Amendment shall become --------------------------- effective when, and only when, the Bank shall have received a counterpart of this Third Amendment executed by the Borrower and shall have additionally received, in form and substance satisfactory to the Bank: (a) A certificate of a Senior Officer of the Borrower stating that: (i) the representations and warranties contained in Article 5 of the Credit Agreement are correct on and as of the date of such certificate as though made on and as of such date (or, if such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); (ii) no Event of Default or Default has occurred and is continuing or would result from the signing of this Third Amendment or the transactions contemplated thereby; and (iii) there has been no material adverse change in the financial condition, operations, Properties, business or business prospects of the Borrower and its Subsidiaries, if any, since December 31, 1997. (b) All information and documents relating to the Borrower, as the Bank may reasonably request, all in form and substance satisfactory to the Bank and its special counsel. Section 3. Representations and Warranties of the Borrower. The Borrower ---------------------------------------------- represents as follows: (a) The execution, delivery and performance by the Borrower of this Third Amendment have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of its shareholders; (ii) violate any provisions of its articles of incorporation or by-laws; (iii) violate any provision of, or require any filing, registration, consent or approval under, any law, rule, regulation (including without limitation, Regulation U and X), order, writ, judgement, injunction, decree, determination or award presently in effect having applicability to and binding upon the Borrower or any Subsidiary; (iv) result in a breach of or constitute a default or require any consent under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower or any Subsidiary is a party or by which it or its Properties may be bound; or (v) result in, or require, the creation or imposition of any Lien upon or with respect to any of the Properties now owned or hereafter acquired by the Borrower. (b) No authorization, consent, approval, order, license or permit from, or filing, registration or qualification with, or exemption by, any governmental or public body or authority, or any subdivision thereof, or any other Person, including without limitation, the California or Massachusetts Insurance Commissioner, is required to authorize, or is required in connection with the execution, delivery and performance by the Borrower of, or the legality, validity, binding effect or enforceability of, this Third Amendment. - 2 - (c) This Third Amendment constitutes the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally and by general principles of equity. (d) No actions, suits or proceedings or investigations (other than routine examinations performed by insurance regulatory authorities) are pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any Subsidiary, or any Property of any of them before any court, governmental agency or arbitrator, which if determined adversely to the Borrower or any Subsidiary would in any one case or in the aggregate, materially adversely affect the financial condition, operations, Properties, business or, to the knowledge of the Borrower, prospects of the Borrower and its Subsidiaries taken as a whole or the ability of the Borrower to perform its obligations under the Credit Agreement, as amended by this Third Amendment. (e) No information, exhibit or report furnished in writing by or on behalf of the Borrower or any officer or director of the Borrower to the Bank in connection with the negotiation of, or pursuant to the terms of, this Third Amendment contained when made any material misstatement of fact or omitted to state a material fact necessary to make the statements contained therein not misleading. Section 4. Reference to and Effect on the Credit Agreement. ------------------------------------------------ (a) Upon the effectiveness of this Third Amendment, on and after the date hereof, each reference in the Credit Agreement to "this Credit Agreement", "hereunder", "hereof", "herein" or words of like import shall mean and be a reference to the Credit Agreement as amended thereby. (b) Except as specifically amended above, the Credit Agreement shall remain in full force and effect and is hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Third Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Bank under the Credit Agreement, nor constitute a waiver of any provision of the Credit Agreement. Section 5. Costs, Expenses and Taxes. The Borrower agrees to pay on ------------------------- demand all costs and expenses of the Bank in connection with the preparation, execution and delivery of this Third Amendment and the other instruments and documents to be delivered hereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Bank with respect thereto and with respect to advising the Bank as to its rights and responsibilities hereunder and thereunder. In addition, the Borrower shall pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this Third Amendment and the other instruments and documents to be delivered hereunder, and agrees to save the Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. -3- Section 6. Execution in Counterparts. This Third Amendment may be executed ------------------------- in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. Section 7. Governing Law. This Third Amendment shall be governed by, and ------------- construed in accordance with, laws of the State of Connecticut. Section 8. Defined Terms. Capitalized terms used herein which are not ------------- expressly defined herein shall have the meanings ascribed to them in the Credit Agreement. IN WITNESS WHEREOF, the parties have caused this Third Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. THE CENTRIS GROUP, INC. /s/ C.M. Caporale By --------------------------------- Name: C.M. Caporale Title: SVP, CFO & Treasurer FLEET NATIONAL BANK /s/ D.A. Albenesi By --------------------------------- Name: D.A. Albenesi Title: Vice President EX-11 15 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 THE CENTRIS GROUP, INC. AND SUBSIDIARIES Computation of Earnings Per Share Reconciliation of income and outstanding shares and related per share amounts adjusted to reflect the February 27, 1998 two-for-one stock split, is presented below (in thousands of dollars, except per share data):
Year Ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Income (Numerator) Income (loss) applicable to common stock for Basic and Diluted income per share: Income from continuing operations $ 9,886 $ 9,329 $10,123 Discontinued operations (23,268) 5,883 4,897 --------- ------- ------- Net (loss) income $(13,382) $15,212 $15,020 Change in net unrealized investment gains, net of tax (5,938) 261 (1,351) --------- ------- ------- Comprehensive (loss) income applicable to common stock $(19,320) $15,473 $13,669 ========= ======= ======= Weighted Average Shares (Denominator) Basic Shares 12,037 11,980 11,732 Effect of dilutive securities stock options 241 174 218 --------- ------- ------- Diluted Shares 12,278 12,154 11,950 ========= ======= ======= Basic Income Per Share Income from continuing operations $ .82 $ .78 $ .86 Discontinued operations (1.93) .49 .42 -------- ------- ------- Net (loss) income $ (1.11) $ 1.27 $ 1.28 ======== ======= ======= Comprehensive net (loss) income $ (1.61) $ 1.29 $ 1.17 ======== ======= ======= Diluted Income Per Share Income from continuing operations $ .81 $ .77 $ .85 Discontinued operations (1.90) .48 .41 -------- ------- ------- Net (loss) income $ (1.09) $ 1.25 $ 1.26 ======== ======= ======= Comprehensive net (loss) income $ (1.57) $ 1.27 $ 1.14 ======== ======= =======
EX-21 16 SUBSIDIARIES OF THE CENTRIS GROUP, INC. EXHIBIT 21 SUBSIDIARIES OF THE CENTRIS GROUP, INC. AS OF DECEMBER 31, 1997 [LOGO GOES HERE] The Centris Group, Inc. The Centris Group, Inc. A Delaware Corporation (Holding Company) USF RE INSURANCE COMPANY USBenefits Insurance Interra, Inc. Seaboard Life A Massachusetts Corporation Services, Inc. An Indiana Corporation Insurance Company(USA) (Wholly-Owned Subsidiary of A California Corporation (Wholly-Owned Subsidiary of An Indiana Corporation The Centris Group, Inc.) (Wholly-Owned Subsidiary of The Centris Group, Inc.) (Wholly-Owned Subsidiary of The Centris Group, Inc.) The Centris Group, Inc.) US Holdings, Inc. Interra Reinsurance Centris Underwriting Centris Risk A Delaware Corporation Group, Inc. Agencies, Inc. Management, Inc. (Wholly-Owned Subsidiary of An Indiana Corporation An Indiana Corporation An Indiana Corporation USF RE INSURANCE COMPANY) (Wholly-Owned Subsidiary (Wholly-Owned Subsidiary (Wholly-Owned Subsidiary of Interra, Inc.) of Interra, Inc.) of Interra, Inc.) USF Insurance Company A Pennsylvania Corporation (Wholly-Owned Subsidiary of US Holdings, Inc.)
VASA North America, Inc. An Indiana Corporation (Wholly-Owned Subsidiary of The Centris Group, Inc.) Select Benefits, Inc. VASA Insurance Group, Inc. An Indiana Corporation An Indiana Corporation (Wholly-Owned Subsidiary of (Wholly-Owned Subsidiary of VASA North America, Inc.) VASA North America, Inc.) VASA Brougher, Inc. An Indiana Corporation (Wholly-Owned Subsidiary of VASA Insurance Group, Inc.) VASA North Atlantic Insurance Company An Indiana Corporation (93.75% Owned by VASA Ins. Group, Inc.) (6.25% Owned by VASA Brougher, Inc.)
EX-23 17 INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23 The Board of Directors The Centris Group, Inc. We consent to incorporation by reference in Registration Statements (No. 33- 41086 and No. 33-46841), both on Form S-8, of The Centris Group, Inc., of our report dated March 26, 1999, relating to the consolidated balance sheets of The Centris Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated income statements, statements of stockholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1998, and all related schedules, which report appears in the December 31, 1997annual report on Form 10-K of The Centris Group, Inc. and subsidiaries. /s/ KPMG LLP Los Angeles, California March 30, 1999 EX-27 18 FINANCIAL DATA SCHEDULE - ARTICLE 5
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 0 0 0 0 0 0 292,463 45,588 57,588 2,436 646,445 200,908 32,274 0 0 72,550 0 0 0 0 646,445 111,435 5,284 16,768 34,829 95,509 36,715 20,118 15,974 6,088 9,886 (23,268) 0 0 (13,382) (1.11) (1.09) 129,657 133,465 24,411 61,410 61,375 164,748 24,411
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