-----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, WbHH20t17VdT0brQjeP+NZXrNHEAmht+0hm+eb2P2wuC+jHvVVdUDtzE8nicVeiT R1JZ1iq4h7TdH0yz0oATBQ== 0001017062-99-001904.txt : 19991117 0001017062-99-001904.hdr.sgml : 19991117 ACCESSION NUMBER: 0001017062-99-001904 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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-Q SEC ACT: SEC FILE NUMBER: 001-12099 FILM NUMBER: 99751706 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-Q 1 FORM 10-Q FOR PERIOD ENDING 09/30/1999 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission file Number: 001-12099 ---------------- The Centris Group, Inc. (Exact name of Registrant as specified in its charter) DELAWARE 33-0097221 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number)
650 Town Center Drive, Suite 1600, Costa Mesa, CA 92626 (Address of principal executive offices) (Zip code) (714) 549-1600 (Registrant's telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since last report.) ---------------- 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 [_] Number of shares outstanding of each class of the Registrant's Common Stock as of November 11, 1999: Common Stock, par value $.01 per share:......................... 11,536,076 Common Stock Purchase Rights:................................... 11,536,076
================================================================================ INDEX Part I FINANCIAL INFORMATION Item 1. FINANCIAL INFORMATION Unaudited Condensed Consolidated Financial Statements: Balance Sheets as of September 30, 1999 and December 31, 1998........ 3 Statements of Income and Comprehensive Income for the Quarters and Nine Months Ended September 30, 1999 and 1998............................................................ 4 Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998............................................................ 5 Notes to Condensed Consolidated Financial Statements................. 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................ 11 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK........ 19 Part II OTHER INFORMATION Item 6. EXHIBITS and REPORTS ON FORM 8-K................................. 20 SIGNATURES................................................................. 21
2 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL INFORMATION Unaudited Condensed Consolidated Financial Statements: THE CENTRIS GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
September 30, December 31, 1999 1998 ------------- ------------ ASSETS ------ Investments, at market (amortized cost $75,730 at September 30, 1999, $292,181 at December 31, 1998)..................... $ 73,947 $292,463 Cash and invested cash.............................. 26,734 6,804 Restricted cash and short term investments.......... 33,484 29,799 Accrued investment income........................... 1,320 3,119 Assets held for transfer under pending reinsurance agreement.......................................... 96,405 99,369 Receivables: Reinsurance recoverable on losses and reserves.... 119,809 101,644 Premiums.......................................... 70,292 57,558 Prepaid reinsurance premiums........................ 13,153 14,507 Other assets........................................ 40,275 32,197 -------- -------- Total assets.................................... $475,419 $637,460 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Liabilities Insurance liabilities: Amounts due insurance companies................... $101,241 $109,516 Losses and loss adjustment expenses............... 141,734 200,908 Unearned premiums................................. 15,582 32,274 Pending transferable reinsurance.................... 96,405 99,369 Note payable to bank................................ 25,000 72,550 Accounts payable and accrued expenses............... 14,609 31,809 -------- -------- Total liabilities............................... 394,571 546,426 Stockholders' Equity................................ 80,848 91,034 -------- -------- Total liabilities and stockholders' equity...... $475,419 $637,460 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 THE CENTRIS GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Dollars in Thousands, except per share data)
Quarter Ended Nine Months Ended September 30, September 30, ---------------- ------------------ 1999 1998 1999 1998 ------- ------- -------- -------- Revenues: Premiums earned....................... $14,657 $28,448 $ 58,468 $ 84,796 Managed and withdrawal lines.......... 9,495 -- 39,167 -- Commissions and fees.................. 10,043 8,792 28,197 26,312 Net investment income................. 1,336 1,363 5,393 4,069 Realized investment gains............. 156 3,909 226 6,505 ------- ------- -------- -------- Total revenues...................... 35,687 42,512 131,451 121,682 ------- ------- -------- -------- Operating Expenses: Losses and loss adjustment expenses incurred............................. 19,882 22,746 57,708 63,966 Managed and withdrawal lines.......... 9,495 -- 39,167 -- Policy acquisition expenses........... 3,732 9,451 17,941 28,151 General and administrative expenses... 7,787 4,440 15,929 13,113 Interest.............................. 407 524 2,583 1,626 ------- ------- -------- -------- Total operating expenses............ 41,303 37,161 133,328 106,856 ------- ------- -------- -------- (Loss) income from continuing operations before income taxes.................... (5,616) 5,351 (1,877) 14,826 Income tax expense.................... 110 1,981 1,439 5,676 ------- ------- -------- -------- (Loss) income from continuing operations............................. (5,726) 3,370 (3,316) 9,150 Loss from discontinued operations....... (4,000) (4,554) (4,000) (1,599) ------- ------- -------- -------- Net (loss) income................... $(9,726) $(1,184) $ (7,316) $ 7,551 ======= ======= ======== ======== Basic income per share: (Loss) income from continuing operations........................... $ (0.49) $ 0.28 $ (0.29) $ 0.75 Discontinued operations............... (0.35) (0.38) (0.34) (0.13) ------- ------- -------- -------- Net (loss) income................... $ (0.84) $ (0.10) $ (0.63) $ 0.62 ======= ======= ======== ======== Diluted income per share: (Loss) income from continuing operations........................... $ (0.49) $ 0.28 $ (0.28) $ 0.74 Discontinued operations............... (0.34) (0.38) (0.34) (0.13) ------- ------- -------- -------- Net (loss) income................... $ (0.83) $ (0.10) $ (0.62) $ 0.61 ======= ======= ======== ======== Comprehensive (loss) Income............. $(6,373) $(1,653) $ (4,658) $ 7,114 ======= ======= ======== ========
See accompanying notes to condensed consolidated financial statements. 4 THE CENTRIS GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
Nine Months Ended September 30, ------------------ 1999 1998 -------- -------- Cash (used in) provided by operating activities............. $(14,300) $ 10,567 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed maturity investments................... (7,031) (58,920) Purchases of equity securities............................ (5,432) (14,226) Net proceeds from divestiture............................. 65,355 -- Proceeds from sales of investment securities.............. 30,135 64,428 Net purchases of short term investments................... 1,514 (1,847) Purchases of property and equipment....................... (1,232) (1,214) -------- -------- Cash provided by (used in) by investing activities...... 83,309 (11,779) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment on note payable................................... (47,550) (2,650) Dividends paid............................................ (1,035) (1,105) Repurchase of shares and exercise of stock options........ (494) (3,936) -------- -------- Cash (used in) financing activities..................... (49,079) (7,691) -------- -------- Net increase (decrease) in cash and invested cash........... 19,930 (8,903) Cash and invested cash at beginning of period............... 6,804 11,122 -------- -------- Cash and invested cash at end of period..................... $ 26,734 $ 2,219 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid............................................. $ 2,573 $ 1,602 ======== ======== Income taxes paid, net.................................... $ 1,221 $ 6,674 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 THE CENTRIS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. General The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 1998 included in the 1998 Annual Report to Stockholders of The Centris Group, Inc. (the "Company"). 2. Pending Merger On October 12, 1999, the Company announced that it had entered into a definitive agreement pursuant to which the Company will be acquired by a wholly owned subsidiary of HCC Insurance Holdings, Inc. (HCC). The transaction will take the form of a cash tender offer by the subsidiary of HCC for all outstanding shares of the Company at $12.50 per share. Following completion of a successful tender offer, HCC plans to merge the Company with the HCC subsidiary, and pay $12.50 per share for any remaining untendered shares, subject to applicable appraisal rights. In addition, options to purchase the Company's stock will be converted into the right to receive $12.50 per share, less the applicable option exercise price. Completion of the tender offer and subsequent merger requires certain regulatory approvals from the insurance departments of three states. If the acquisition is terminated, HCC has the right, under certain circumstances, either to receive a $6 million breakup fee (plus expenses up to $1 million) or to exercise an option to acquire up to 19.9% of the Company's common stock. HCC also obtained an option to acquire, under certain circumstances, up to approximately 13% of the Company's outstanding common stock, which is beneficially owned by certain senior officers and directors of the Company, including the right to vote such stock in favor of the merger. The tender offer is subject to customary terms and conditions, including tender of at least a majority of the Company's shares of Common Stock. The tender offer is expected to be completed by Year end, 1999. The Boards of Directors of the Company and HCC have both unanimously approved the transaction. 3. Changes in Capital Structure 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 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. On August 16, 1999, the Company announced that it was reactivating the stock buyback program authorized by its Board of Directors in October 1998, and under this re-actived program the Company acquired 106,700 shares prior to entering into the merger agreement with HCC. No further activity under this program is expected. 4. Reinsurance Agreement In connection with the December 31, 1998 acquisition from Eureko, B.V. of the Netherlands ("the Seller") of Seaboard Life Insurance Company (USA) (now known as Centris Life Insurance Company ("CLIC")), part of the acquisition of The VASA Group companies, the Seller separately negotiated a reinsurance agreement with 6 THE CENTRIS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Life Reassurance Corporation of America ("Life Re") covering CLIC's Individual Life and Annuity business, which business was to be retroactively reinsured on a 100% indemnity basis effective as of July 1, 1998. The Company has classified the liabilities relating to this agreement as "pending transferable reinsurance" and has classified the related assets as "assets held for transfer". Any income earned or loss incurred from the Individual Life and Annuity business line is credited to or charged to such reinsurer. For the third quarter and nine-month periods of 1999, losses of $(534,000) and income of $2,304,000, respectively, were credited to the reinsurer and are excluded from the Company's results of operations. On October 22,1999, CLIC and Life Re closed the reinsurance transaction. Terms of the closing include a requirement for a final accounting to be prepared prior to March 31, 2000. Pertinent financial aspects of this transaction will be reflected in the records of CLIC during the fourth quarter of 1999 upon receipt of all required financial information by CLIC. The closure of the reinsurance transaction will not have an effect on the consolidated balance sheets of the Company. 5. Discontinued Operations The Company announced discontinuance of its property/casualty reinsurance segment as of December 31, 1998 and recorded a $19,621,000 provision for anticipated future costs associated with such discontinuance (the "Provision"). On June 29, 1999, the Company completed the sale to Folksamerica Holding Company, Inc. ("Folksamerica") of its property/casualty reinsurance subsidiary, USF RE INSURANCE COMPANY ("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 note that bears interest at 6.4% annually. The note is subject to downward adjustment based on future adverse loss development and is included in other assets net of an allowance of $10,900,000. Through September 30, 1999, transaction fees, the excess of subsidiary equity on the date of sale, unrealized investment portfolio losses, investment banking fees, severance costs, legal fees, asset retirements and net losses from discontinued operations totaling $15,779,000 reduced the Provision. In the third quarter of 1999, the Company increased the Provision by $5,700,000 due to additional loss experience occurring in the medical lines segment related to policy year 1998. This income statement charge is reflected in loss and loss adjustment expenses in the medical lines segment. Also in the third quarter the Company increased the Provision by $4,000,000 through an additional income statement charge from discontinued operations to provide for certain matters that may be in excess of the note receivable from Folksamerica previously described. Included in this amount is the write-off of reinsurance recoverables related to the insolvency of New Cap Re, an unrelated reinsurer. Results of operations for the discontinued property/casualty reinsurance operations (in thousands of dollars) are as follows:
Quarter Ended Nine Months September 30, Ended September 30, ---------------- ------------------- 1999 1998 1999 1998 ------- ------- -------- --------- Revenues............................... $ -- $17,876 $ 27,837 $50,817 ======= ======= ======== ======= Loss before income taxes............... $(4,000) $(7,483) $(11,384) $(4,083) Benefit for income taxes............... -- (2,929) (2,332) (2,484) ------- ------- -------- ------- Net Loss............................... $(4,000) $(4,554) $ (9,052) $(1,599) ======= ======= ======== =======
7 THE CENTRIS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. Managed and Withdrawal Lines In connection with the December 31, 1998 acquisition of the VASA Group companies, the Company agreed to run off the remaining VASA Group medical stop-loss, group term life insurance and other medical lines business in exchange for a fee that was included within the purchase price. The seller is providing loss protection for the run-off of this business so that the Company will have neither an underwriting gain nor incur an underwriting loss on such business. Such items are reported as "Managed and withdrawal lines" revenues and expenses in the Company's income statement. During the nine-month period ended September 30, 1999, receivables due from the seller of $7,929,000 related to this loss protection were recorded. 7. Note Payable An aggregate amount of $47,550,000 of the sale proceeds received by the Company from the sale of USF RE was used to reduce the principal amount of Centris' outstanding note payable to Fleet National Bank from $72,550,000 to $25,000,000. As a result, Centris entered into a Sixth Amendment to its December 1994 Credit Agreement with Fleet National Bank ("Fleet Bank"), pursuant to which Amendment certain terms and conditions of the Credit Agreement were modified. Such modifications include changes in the Company's capital requirements and interest rates applicable to the outstanding balance of the note. Amounts outstanding bear interest at LIBOR plus a margin, currently 1.25%. The Company's Credit Agreement contains certain covenants, restrictions and dividend payment limitations and call provisions in the event of non-compliance. The Company has notified Fleet Bank that the sale of USF RE (See Note 5, herein) and the charge of $19,621,000 taken by the Company in connection with discontinuing the property/casualty reinsurance segment in the fourth quarter of 1998 combined with additional charges taken in the third quarter of 1999 and discussed elsewhere in this Form 10-Q has caused non- compliance with the minimum fixed charge coverage ratio, minimum debt service coverage ratio and minimum interest coverage ratio covenants. Fleet Bank retains the option to call the note as prescribed in the Credit Agreement. However, the Company has received no indication that Fleet Bank intends to call the debt. 8 THE CENTRIS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. 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):
Nine Months Quarter Ended Ended September 30, September 30, ---------------- ---------------- 1999 1998 1999 1998 ------- ------- ------- ------- Income (Numerator) (Loss) income applicable to common stock for Basic and Diluted income per share: (Loss) income from continuing operations ........................ $(5,726) $ 3,370 $(3,316) $ 9,150 Discontinued operations............. (4,000) (4,554) (4,000) (1,599) ------- ------- ------- ------- Net (Loss) income................... $(9,726) $(1,184) $(7,316) $ 7,551 ======= ======= ======= ======= Weighted Average Shares (Denominator) Basic Shares......................... 11,560 12,111 11,603 12,165 Effect of dilutive securities Common stock equivalents............. 101 -- 153 281 ------- ------- ------- ------- Diluted Shares......................... 11,661 12,111 11,756 12,446 ======= ======= ======= ======= Basic Income Per Share (Loss) income from continuing operations.......................... $ (0.49) $ 0.28 $ (0.29) $ 0.75 Discontinued operations.............. (0.35) (0.38) (0.34) (0.13) ------- ------- ------- ------- Net (Loss) income.................... $ (0.84) $ (0.10) $ (0.63) $ 0.62 ======= ======= ======= ======= Diluted Income Per Share (Loss) income from continuing operations.......................... $ (0.49) $ 0.28 $ (0.28) $ 0.74 Discontinued operations.............. (0.34) (0.38) (0.34) (0.13) ------- ------- ------- ------- Net (Loss) income.................... $ (0.83) $ (0.10) $ (0.62) $ 0.61 ======= ======= ======= =======
9. Comprehensive Income SFAS No. 130, "Reporting Comprehensive Income" was adopted by the Company effective January 1, 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 (loss) income is comprised of net (loss) income for the period plus the tax effected increase or decrease in unrealized investment gains occurring during the period. 10. Loss and Loss Adjustment expenses Insurance and reinsurance companies establish reserves for losses incurred, but not yet paid or reported, 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 that requires the use of informed judgments and estimates. Loss and loss adjustment expense ("LAE") 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. The results of the third quarter 1999 9 THE CENTRIS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) actuarial study resulted in increases of $5,700,000 and $3,100,000 for medical stop loss policy years 1998 and 1999, respectively. Such amounts are reflected in the continuing operations of the Company for the periods ended September 30, 1999. 11. Agreement between The Company and Eureko B.V. As more fully described in the Company's 1998 Annual report on Form 10-K the Company purchased 100% of the outstanding shares of common stock of the VASA companies from Eureko, B.V. of the Netherlands ("the Seller") for approximately $43 million in cash on December 31,1998. The transaction was accounted for as a purchase. On November 1,1999 the Seller and the Company entered into a memorandum of understanding to resolve and settle all pending matters related to the purchase. The resolution includes the payment of commissions received by CLIC under the reinsurance agreement with Life Re described in Note 4 to the Seller and payment of $2,900,000 to the Company by the Seller. Presently, the Company expects that the settlement of these matters will result in approximately $3,000,000 of goodwill from this purchase. During the fourth quarter, upon receipt of applicable financial information necessary to clear the reinsurance transaction described in Note 4, the Company will revise its purchase accounting to reflect the settlement. 12. Certain Reclassifications The 1998 Consolidated Balance Sheet presentation has been revised to conform to the 1999 presentation. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Business Operations General During the nine month period ended September 30, 1999, the Company completed the sale of its USF RE INSURANCE COMPANY ("USF RE") subsidiary, reduced its outstanding debt by $47,550,000 to $25,000,000, increased its free cash flow position, maintained its risk retention level at 25% (down from 50% in prior years) for its medical lines business, and continued the assimilation of the VASA Group companies, acquired December 31, 1998. These major transactions, which are more fully described in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (1998 Form 10-K), are reflected in the 1999 periods and result in reduced premiums in the medical lines segment and significant changes in the Company's balance sheet. The sale of USF RE also terminated the inter-company pooling agreement between USF RE and its subsidiary, USFIC, which affected the specialty lines segment. Subsequent to the close of the third quarter of 1999, the Company entered into a merger agreement under which the Company could be acquired, and completed a sequence of significant transactions which are described below. Current Period Events Pending Merger On October 12, 1999, the Company announced that it had entered into a definitive agreement whereby the Company will be acquired by an entity wholly owned by HCC Insurance Holdings, Inc. ("HCC"). The transaction will take the form of a cash tender offer by a subsidiary of HCC for all outstanding shares of the Company at $12.50 per share. Following completion of a successful tender offer, HCC will merge the Company with the HCC subsidiary and pay $12.50 per share for the remaining untendered shares, if any, subject to applicable appraisal rights. In addition, options to purchase the Company's stock will be converted into the right to receive $12.50 per share less the applicable option exercise price. The tender offer is subject to customary terms and conditions, including tender of at least a majority of the Company's shares of common stock. The tender offer is expected to be completed by year end, 1999. The Boards of Directors of the Company and HCC have both unanimously approved the transaction. Completion of the tender offer and subsequent merger requires certain regulatory approvals. If the acquisition is terminated, HCC has the right, under certain circumstances, either to receive a $6 million breakup fee (plus expenses up to $1 million) or to exercise an option to acquire up to 19.9% of the Company's common stock. HCC also obtained an option to acquire, in certain circumstances, up to approximately 13% of the Company's outstanding common stock which is beneficially owned by certain senior officers and directors of the Company, including the right to vote such stock in favor of the merger. Agreement between The Company and Eureko B.V. As more fully described in the Company's 1998 Annual report on Form 10-K the Company purchased 100% of the outstanding shares of common stock of the VASA companies from Eureko, B.V. of the Netherlands ("the Seller") for approximately $43,000,000 in cash on December 31, 1998. The transaction was accounted for as a purchase. On November 1, 1999 Eureko, B.V. and the Company entered into a memorandum of understanding to resolve and settle all pending matters related to the purchase. The resolution includes the payment of commissions received by CLIC under the reinsurance agreement with Life Re described elsewhere in this Form 10-Q to the Seller and payment of $2,900,000 to the Company by the Seller. Presently, the Company 11 expects that the settlement of these matters will result in approximately $3,000,000 of goodwill from this purchase. During the fourth quarter, upon receipt of applicable financial information necessary to clear the reinsurance transaction described above, the Company will revise its purchase accounting to reflect the settlement. Discontinued Operations The Company announced discontinuance of its property/casualty reinsurance segment as of December 31, 1998 and recorded a $19,600,000 provision for anticipated future costs associated with such discontinuance (the "Provision"). On June 29, 1999, the Company completed the sale to Folksamerica Holding Company, Inc. ("Folksamerica") of its property/casualty reinsurance subsidiary, USF RE INSURANCE COMPANY ("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 note that bears interest at 6.4% annually. The note is subject to downward adjustment based on future adverse loss development. Through September 30, 1999, transaction fees, the excess of subsidiary equity on the date of sale, unrealized investment portfolio losses, investment banking fees, severance costs, legal fees, asset retirements and net losses from discontinued operations totaling $15,729,000 reduced the Provision. In the third quarter of the 1999, the Company increased the Provision by $5,700,000 due to additional loss experience occurring in the medical lines segment related to policy year 1998. This income statement charge is reflected in loss and loss adjustment expenses in the medical lines segment. Also in the third quarter the Company increased the Provision by $4,000,000 through an additional income statement charge from discontinued operations to provide for certain matters which may be in excess of the note receivable from Folksamerica previously described. Included in this amount is the write-off of reinsurance recoverable related to the insolvency of New Cap Re, an unrelated reinsurer. The Company is maintaining the balance of the Provision for discontinued operations as the buyer retains control over loss development on discontinued business lines for the next five years. Reinsurance Agreement In connection with the December 31, 1998 acquisition of Seaboard Life Insurance Company (USA) (now known as Centris Life Insurance Company ("CLIC")), part of the acquisition of The VASA Group Companies, the Seller separately negotiated a reinsurance agreement with Life Reassurance Corporation of America ("Life Re") covering CLIC's Individual Life and Annuity business, which business was to be retroactively reinsured on a 100% indemnity basis effective as of July 1, 1998. The Company has classified the liabilities relating to this agreement as "pending transferable reinsurance" and has classified the related assets as "assets held for transfer". Any income earned or loss incurred from the Individual Life and Annuity business line is credited to or charged to such reinsurer. For the third quarter and nine-month periods of 1999, losses of $(534,000) and income of $2,304,000, respectively, were credited to the reinsurer and are excluded from the Company's results. On October 22, 1999, CLIC and Life Re closed the reinsurance transaction. Terms of the closure include a requirement for a final accounting to be prepared prior to March 31, 2000. Pertinent financial aspects of this transaction will be reflected in the records of CLIC during the fourth quarter of 1999 upon receipt of all required financial information by CLIC. The closure of the reinsurance transaction will not have an effect on the consolidated balance sheets of the Company. Managed And Withdrawal Lines For the quarterly and year-to-date periods ended September 30, 1999, the Company reported $9,495,000 and $39,167,000, respectively, in both revenue and expenses from managed and withdrawal lines. These lines of business were acquired as part of the VASA Group transaction, and pursuant to the terms of the purchase agreement, the Company can neither profit from nor suffer loss from running off this business due to loss protections provided by the Seller. For further discussion of the terms and conditions of the purchase of the VASA Group companies see the Company's 1998 Form 10-K. 12 Results Of Operations Effective January 1, 1999, the Company's risk retention level on medical stop loss and provider excess business produced by its subsidiary, USBenefits, was reduced to 25% from the 50% level it had in prior years. This action substantially reduced the Company's exposure to underwriting risk. The decrease in the risk retention level produced the declines in premiums earned in the 1999 periods as compared to the 1998 periods. Accordingly, consolidated revenues, excluding managed and withdrawal lines, decreased 38.4% to $26,192,000 for the third quarter ended September 30, 1999 from $42,512,000 in the 1998 third quarter, and decreased 24.2% to $92,284,000 for the first nine months of 1999 from $121,682,000 for the 1998 nine month period. Commissions and fees increased in the 1999 periods as a result of higher production levels that include rate increases of between 12% and 15%. The Company's acquisition and divestiture activities yield a decrease in invested assets from $292,463,000 at December 31, 1998 to $73,947,000 at September 30, 1999 which produces lower levels of investment income after June 30, 1999. Insurance and reinsurance companies establish reserves for losses incurred, but not yet paid or reported, 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 that requires the use of informed judgments and estimates. Loss and loss adjustment expense ("LAE") 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 become available, the Company's actuarial estimates may be revised. Such revisions may impact earnings. Loss and loss adjustment expense decreased by 12.6%, to $19,882,000 for the 1999 third quarter compared to $22,746,000 for the 1998 quarter. This result reflects changes in the net risk retention level in the medical lines segment to 25% on policies effective January 1, 1999 and continuing loss development on policy year 1998 and prior years for which the Company had a net retention level of 50%. Following an actuarial review in the third quarter, the Company increased its reserves by $3,100,000 for medical stop loss policy year 1999 and reflected additional loss and loss adjustment expenses of $5,700,000 for policy year 1998 in the medical lines segment. During the second quarter of 1999, the Company purchased reinsurance coverage in connection with the sale of USF RE that provides $5,000,000 of excess of loss protection on development of policy year 1998 losses above a pre-specified retention. Unanticipated development in the third quarter will exhaust the reinsurance protection. Specialty lines experience primarily reflects changes since January 1, 1999 in retrocessional arrangements and termination of the intercompany pooling agreement with USF RE. Policy acquisition expenses decreased to $3,732,000, or by 60.5% in the 1999 period, from $9,451,000, due primarily to the reduction in the Company's exposure to underwriting risk discussed above and changes in the cost structures associated with 1999 medical lines policies. General and administrative expenses of continuing operations for the third quarter of 1999 increased 75.3% as compared to the 1998 period and increased 21.5% on a year to date basis. Increased general and administrative costs in the third quarter of 1999 are inclusive of higher health care expenses and additional professional services pertaining to the Company's major transactions described elsewhere in this Form 10-Q. Loss and loss adjustment expense decreased by 12.6%, to $19,882,000 for the 1999 third quarter compared to $22,746,000 for the 1998 quarter. This result reflects changes in the net risk retention level in the medical lines segment to 25% on policies effective January 1, 1999 and continuing loss development on policy year 1998 and prior years for which the Company had a net retention level of 50%. Following an actuarial review in the third quarter, the Company increased its reserves by $3,100,000 for medical stop loss policy year 1999 and reflected additional loss and loss adjustment expenses of $5,700,000 for policy year 1998 in the medical lines segment. During the second quarter of 1999, the Company purchased reinsurance coverage in connection with the sale of USF RE that provides $5,000,000 of excess of loss protection on development of policy year 1998 losses above a pre-specified retention. Unanticipated development in the third quarter will exhaust the reinsurance protection. Specialty lines experience primarily reflects changes since January 1, 1999 in retrocessional arrangements and termination of the intercompany pooling agreement with USF RE. 13 Policy acquisition expenses decreased to $3,732,000, or by 60.5% in the 1999 period, from $9,451,000, due primarily to the reduction in the Company's exposure to underwriting risk discussed above and changes in the cost structures associated with 1999 medical lines policies. General and administrative expenses of continuing operations for the third quarter of 1999 increased 75.3% as compared to the 1998 period and increased 21.5% on a year to date basis. Increased general and administrative costs in the third quarter of 1999 are inclusive of higher health care expenses and additional professional services pertaining to the Company's major transactions described elsewhere in this Form 10-Q. Interest expense, on a year to date basis, rose to $2,583,000, from $1,626,000, in the 1999 period as compared to the 1998 period, due to the December 1998 increase in borrowing levels to finance the VASA acquisition. An aggregate amount of $47,550,000 of the sale proceeds received by the Company from the June 1999 sale of USF RE was used to reduce the principal amount of Centris' outstanding note payable to $25,000,000 from $72,550,000. Accordingly, interest expense declined to $407,000 for the third quarter of 1999 from $524,000 for the third quarter of 1998. Net losses from continuing operations were $5,726,000 and $3,316,000 for the third quarter and nine month periods of 1999 compared to net income of $3,370,000 in the third quarter of 1998 and $9,150,000 in the 1998 nine month period. These outcomes reflect completion of the Company's major restructuring transactions begun in 1998 as well as loss development on policy year 1999 and prior years in the medical lines segment. Generally, 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. In the 1999 periods, amounts pertaining to increases in loss and loss adjustment expenses for the 1998 policy year relate to the sale of USFRE previously described and do not produce an income tax benefit as a result of the loss disallowance rules promulgated in the Federal Tax Code. Accordingly, the Company incurs income tax expense in periods of operating losses. The statutory combined ratio is the traditional indicator of the potential underwriting profitability of an insurance company's business. The Company's statutory combined ratios for continuing operations were 112.5 and 102.7 for the nine-month periods ended September 30, 1999 and 1998, respectively. Business Segments The Company conducts business in two segments: MEDICAL LINES includes (i) medical stop-loss and provider excess coverage 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 Centris Life Insurance Company ("CLIC") (formerly known as Seaboard Life Insurance Company (USA)) and Centris Insurance Company ("CIC") (formerly known as VASA North Atlantic Insurance Company) became reinsurers of the medical lines business with net retained liability under all medical stop- loss and provider excess contracts limited to 25%. CLIC and CIC are rated "A-" (Excellent) by A.M. Best Company although these ratings have been placed under review with developing implications pending the outcome of the merger with HCC. There can be no assurance that these companies will retain their current A.M. Best Company ratings following completion of the merger. Medical stop-loss coverage is a form of excess insurance that protects employers that self-fund their employee healthcare plans by limiting 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. 14 SPECIALTY LINES insurance underwriting is conducted by the Company's USF Insurance Company ("USFIC") subsidiary, which is presently rated "A" (Excellent) by A.M. Best Company, a rating that it shared with USF RE, under an Intercompany Pooling Agreement that has been terminated effective as of January 1, 1999. There can be no assurance that USFIC will continue to be rated by A.M. Best Company following the merger or that if USFIC continues to be rated, that it will retain its current rating of "A". 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. The tables set forth below present pre-tax operating information by business segment and holding company operations (including realized gains) for the quarters and nine month periods ended September 30, 1999 and 1998, respectively. MEDICAL LINES (Dollars in Thousands)
Quarter Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- % % 1999 1998 Change 1999 1998 Change ------- ------- ------ ------- -------- ------ Revenues: Premiums earned............ $13,730 $26,855 (49)% $55,569 $ 79,973 (31)% Commissions and fees....... 9,907 8,792 13 % 27,973 26,312 6 % Investment income.......... 828 1,033 (20)% 4,260 3,094 38 % ------- ------- ------- -------- Total revenues............. 24,465 36,680 (33)% 87,802 109,379 (20)% ------- ------- ------- -------- Expenses: Losses and loss adjustment................ 19,053 21,434 (11)% 55,169 60,428 (9)% Policy acquisition......... 4,680 9,046 (48)% 18,410 27,219 (32)% General and administrative............ 5,320 3,523 51 % 11,755 10,202 15 % ------- ------- ------- -------- Total expenses............. 29,053 34,003 (15)% 85,334 97,849 (13)% ------- ------- ------- -------- (Loss) income before income taxes....................... $(4,588) $ 2,677 (271)% $ 2,468 $ 11,530 (79)% ======= ======= ======= ========
The decline in premiums earned in the 1999 periods as compared to 1998 is the result of the Company reducing its exposure to underwriting risk by limiting its risk retention level on business written by USBenefits to 25% on policies effective January 1, 1999 from the 50% level used in prior periods. Commission and fee income increased moderately in the 1999 period due to expansion of INTERRA brokerage operations and higher production levels. Loss and loss adjustment expenses declined as a result of changes in the net risk retention level to 25% on the 1999 medical lines business combined with the impact of the results of the third quarter 1999 actuarial study which resulted in additional loss and loss adjustment expenses of $5,700,000 for policy year 1999 and $3,100,000 for policy year 1998. Fluctuations in general and administrative expenses in the 1999 periods occur due to changes in overhead allocations which occur as a result of the sale of USF RE described elsewhere in this Form 10-Q. 15 SPECIALTY LINES (Dollars in Thousands)
Quarter Ended Nine Months Ended September 30, September 30, --------------------- -------------------- % % 1999 1998 Change 1999 1998 Change ------ ------ ------ ------ ------ ------ Revenues: Premiums earned.................. $ 927 $1,593 (42)% $2,899 $4,823 (40)% Investment income................ 241 305 (21)% 865 890 (3)% ------ ------ ------ ------ Total revenues................... 1,168 1,898 (38)% 3,764 5,713 (34)% ------ ------ ------ ------ Expenses: Losses and loss adjustment....... 829 1,312 (37)% 2,539 3,538 (28)% Policy acquisition............... (948) 405 (469)% 932 General and administrative....... 296 137 116 % 390 625 (38)% ------ ------ ------ ------ Total expenses................... 177 1,854 (90)% 2,460 5,095 (52)% ------ ------ ------ ------ Income before income taxes......... $ 991 $ 44 2,152 % $1,304 $ 618 111 % ====== ====== ====== ======
Specialty lines operating results reflect changes in reinsurance programs and termination of the intercompany pooling agreement with the Company's USF RE subsidiary effective January 1, 1999. These operating changes are the principal factors impacting premiums earned, loss and loss adjustment expenses and policy acquisition costs in the 1999 periods. HOLDING COMPANY (Dollars in Thousands)
Quarter Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- % % 1999 1998 Change 1999 1998 Change ------- ------ ------ ------- ------ ------ Revenues: Commissions & fees........... $ 136 $ -- $ 224 $ -- Investment income............ 267 25 968 % 268 85 215 % Realized gains............... 156 3,909 (96)% 226 6,505 (97)% ------- ------ --- ------- ------ Total revenues............... 559 3,934 (86)% 718 6,590 (89)% ------- ------ ------- ------ Expenses: General and administrative... 2,171 780 178 % 3,784 2,286 66 % Interest..................... 407 524 (22)% 2,583 1,626 59 % ------- ------ ------- ------ Total expenses............... 2,578 1,304 98 % 6,367 3,912 63 % ------- ------ ------- ------ (Loss) income before income taxes......................... $(2,019) $2,630 $(5,649) $2,678 ======= ====== ======= ======
Changes in realized gains in the 1999 period as compared to the 1998 period arise from the continuous evaluation of the investment portfolio in accordance with the Company's investment guidelines. General and administrative expenses in the 1999 periods fluctuate based upon the timing of purchased services and the allocation of services provided to the operating subsidiaries. Increased general and administrative costs in the third quarter of 1999 are inclusive of higher health care expenses and additional professional services pertaining to the Company's major transactions described elsewhere in this Form 10-Q. 16 Changes in realized gains in the 1999 period as compared to the 1998 period arise from the continuous evaluation of the investment portfolio in accordance with the Company's investment guidelines. General and administrative expenses in the 1999 periods fluctuate based upon the timing of purchased services and the allocation of services provided to the operating subsidiaries. Increased general and administrative costs in the third quarter of 1999 are inclusive of higher health care expenses and additional professional services pertaining to the Company's major transactions described elsewhere in this Form 10-Q. Interest expense for 1999 year to date rose due to higher borrowing levels to finance the VASA acquisition. Interest expense declined in third quarter of 1999 due to the reduction of outstanding debt by $47,550,000 to $25,000,000 as a result of the proceeds received from completion of the sale of USF RE on June 29, 1999. 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. Cash available from operations varies between periods primarily due to the timing of premium collections and the payment of claims. In December 1998, the Company borrowed an additional $42,700,000 under its existing Credit Agreement for the purchase of the VASA companies. As previously noted, the Company received $71,750,000 in cash upon completion of the sale of USF RE on June 29, 1999 and utilized $47,550,000 of such proceeds to pay down the loan balance on its Credit Agreement to $25,000,000. This resulted in a reduction of the debt to total capitalization ratio to 23.6%. This transaction also produced additional cash of $24,000,000 available to fund the Company's business. In connection with the sale of USF RE, the Company entered into a Sixth Amendment to its December 1994 Credit Agreement with Fleet National Bank ("Fleet Bank"), pursuant to which Amendment certain terms and conditions of the Credit Agreement were modified. Such modifications include changes in the Company's capital requirements and interest rates applicable to the outstanding balance of the bank debt. Amounts outstanding bear interest at LIBOR plus a margin, currently 1.25%. The Company's Credit Agreement contains certain covenants, restrictions and dividend payment limitations and call provisions in the event of non- compliance. The Company has notified Fleet Bank that the sale of USF RE (See Note 5, herein) and the charge of $19,621,000 taken by the Company in connection with discontinuing the property/casualty reinsurance segment in the fourth quarter of 1998 combined with additional charges taken in the third quarter of 1999 and discussed elsewhere in this Form 10-Q has caused non- compliance with the minimum fixed charge coverage ratio, minimum debt service coverage ratio and minimum interest coverage ratio covenants. Fleet Bank retains the option to call the note as prescribed in the Credit Agreement. However, the Company has received no indication that Fleet Bank intends to call the debt. The investment portfolio reflects an allocation of approximately 88% in fixed-income investments, primarily taxable, with an "AA" average fixed income portfolio rating, and 12% in equities. The portfolio does not contain any real estate investments, derivatives, high yield bonds, private placements or mortgage loans. 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 adopted and has implemented a formal plan 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 17 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 Year 2000 contingency plan. The evaluation phase of the plan was completed in December 1997. Commencing in 1998 and continuing in 1999, the Company has implemented and tested Year 2000 compliant systems for its corporate financial reporting system 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 the remainder of 1999. In addition, 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. The Company continues to monitor the status of external Year 2000 issues and is developing contingency plans for issues that may arise. In support of this objective, the Company has developed a worst case scenario relating to Year 2000 situations. This scenario indicates that Year 2000 risks relate to the Company's relationships with its trading partners where concerns 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. 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 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. 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, 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. 18 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, 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 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. Forward Looking Statements Some of the statements included in this quarterly report, on Form 10-Q, 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, that are not historical facts may be considered to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Investors are cautioned that all such forward-looking statements are subject to certain risks and uncertainties that 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 programs; 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, customers 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. Although the Company believes that the assumptions underlying the forward- looking statements contained herein are reasonable, any of the assumptions could prove to be inaccurate and, therefore, there can be no assurance that such forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements, the inclusion of such information should not be regarded as a representation by the Company or by any other person that the objectives and plans of the Company will be achieved. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company does not believe there have been any material changes in the market risks since December 31, 1998, which would impact the fair value of certain assets and liabilities included in the Condensed Consolidated Balance Sheets. 19 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Following is a list of exhibits that are required to be filed as part of this Form 10-Q 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, and incorporated herein by this reference. 3.2, 4.2 The Bylaws of the Company, as amended, as presently in effect. Filed as Exhibits 3.2 and 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, 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, 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, and 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. 15.* Independent Auditors' letter regarding unaudited interim financial information. 27.* Financial Data Schedules
- -------- * Describes the exhibits filed with this Quarterly Report on Form 10-Q. (b) The following report on Form 8-K was filed by the Company with the Securities and Exchange Commission during the third quarter ended September 30, 1999: A Current Report on Form 8-K filed on July 13, 1999, describing the completion of the sale of 100% of the issued and outstanding stock of USF RE INSURANCE COMPANY to Folksamerica Holding Company, Inc. and a concurrent reduction in the principal amount in the Company's Credit Agreement with Fleet National Bank (the Sixth Amendment to the Credit Agreement), together with exhibits describing these transactions. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Centris Group, Inc. Date: November 11, 1999 By: /s/ David L. Cargile ---------------------------------- David L. Cargile Chairman of the Board, President and Chief Executive Officer Date: November 11, 1999 By: /s/ Charles M. Caporale ---------------------------------- Charles M. Caporale Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 21 EX-15 2 INDEPENDENT AUDITOR'S REVIEW REPORT EXHIBIT 15 Independent Auditors' Review Report ----------------------------------- The Board of Directors and Shareholders The Centris Group, Inc.: We have reviewed the condensed consolidated balance sheet of The Centris Group, Inc. and subsidiaries as of September 30, 1999, and the related condensed consolidated statements of income and comprehensive income for the quarters and nine-month periods ended September 30, 1999 and 1998, and condensed consolidated statements of cash flows for the nine-month periods ended September 30, 1999 and 1998. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of The Centris Group, Inc. and subsidiaries as of December 31, 1998, and the related consolidated income statement, statements of stockholders' equity and comprehensive income and cash flows for the year then ended (not presented herein); and in our report dated March 26, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1998, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG LLP Los Angeles, California November 8, 1999 EX-27 3 ARTICLE 7 FINANCIAL DATA SCHEDULE
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 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 0 0 0 0 0 0 73,947 26,734 190,101 0 486,317 141,734 15,582 0 0 25,000 0 0 0 0 486,317 58,468 5,393 226 67,364 57,708 17,941 57,679 (1,877) 1,439 (3,316) (4,000) 0 0 (7,316) (.63) (.62) 0 0 0 0 0 0 0
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