-----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, HcWflx9FZ/UOy/LJVc46ePYXAbjse9fxZQZxbibBBF0UXjXDqbnTAPYnAJljWmFz 39FyrRU4P0F55Kqotp5VeA== 0000950148-96-000880.txt : 19960629 0000950148-96-000880.hdr.sgml : 19960629 ACCESSION NUMBER: 0000950148-96-000880 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUPERIOR NATIONAL INSURANCE GROUP INC CENTRAL INDEX KEY: 0000810463 STANDARD INDUSTRIAL CLASSIFICATION: 6411 IRS NUMBER: 953994873 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25984 FILM NUMBER: 96566033 BUSINESS ADDRESS: STREET 1: 26601 AGOURA RD CITY: CALABASAS STATE: CA ZIP: 91203 BUSINESS PHONE: 8188801600 MAIL ADDRESS: STREET 1: 26601 AGOURA ROAD CITY: CALABASAS STATE: CA ZIP: 91203 10-Q 1 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 3/31/96 1 - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------- FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 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 0-25984 ========= SUPERIOR NATIONAL INSURANCE GROUP, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 95-3994873 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 26601 AGOURA ROAD CALABASAS, CA 91302 (Address of principal executive offices) (818) 880-1600 (Registrant's telephone number, including area code) ========= 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 of Common Stock, without par value, outstanding as of close of business on March 31, 1996: 3,430,373 shares. - - -------------------------------------------------------------------------------- 2 SUPERIOR NATIONAL INSURANCE GROUP, INC. INDEX TO FORM 10-Q
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed consolidated balance sheets as of March 31, 1996 (unaudited) and December 31, 1995....................................... 3 Condensed consolidated statements of income for the three months ended March 31, 1996 (unaudited) and March 31, 1995 (unaudited).............................. 4 Condensed consolidated statement of changes in shareholders' equity for the three months ended March 31, 1996 (unaudited).................................. 5 Condensed consolidated statements of cash flows for the three months ended March 31, 1996 (unaudited) and March 31, 1995 (unaudited).............................. 6 Notes to condensed consolidated financial statements (unaudited)................................ 7 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations........................................................................... 8 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K....................................................... 13 SIGNATURE........................................................................................................ 14 EXHIBIT INDEX.................................................................................................... 15
3 SUPERIOR NATIONAL INSURANCE GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
March 31, December 31, ASSETS 1996 1995 ---- ---- (Unaudited) (*) Investments: Bonds and notes: Available-for-sale, at market (cost: 1996, $52,850; 1995, $41,800) $ 52,795 $ 42,053 Equity securities, at market Common stock (cost: $686; 1996 and 1995) 708 689 Funds withheld from reinsurers, at amortized cost (market: 1996, $98,908; 1995, $117,073) 100,176 114,921 Invested cash (certificates of deposit and other short-term instruments) 12,518 6,045 Restricted investment 1,640 1,700 --------- --------- TOTAL INVESTMENTS 167,837 165,408 Cash (Restricted cash: 1996, $2,072; 1995, $2,686) 2,585 2,952 Reinsurance recoverables 30,679 38,892 Premiums receivables (less allowance for doubtful accounts of $500 in 1996 and 1995) 13,390 14,724 Deferred policy acquisition costs 3,502 2,780 Income taxes 9,823 10,085 Other assets 8,622 9,501 --------- --------- TOTAL ASSETS $ 236,438 $ 244,342 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Claims and claim adjustment expenses $ 128,534 $ 140,774 Unearned premiums 9,782 10,220 Long-term debt 8,230 8,530 Policyholder dividends 8,292 8,094 Repurchase transaction 3,640 -- Accounts payable and other liabilities 12,334 12,199 --------- --------- TOTAL LIABILITIES 170,812 179,817 PREFERRED SECURITIES ISSUED BY AFFILIATE; authorized 1,100,000 shares; issued and outstanding 922,137 shares in 1996 and 1995 21,659 21,045 Shareholders' Equity: Common stock, no par value; authorized 25,000,000 shares; issued and outstanding 3,430,373 shares in 1996 and 1995 15,943 15,943 Unrealized gain on equity securities, net of taxes 14 2 Unrealized gain (loss) on available-for-sale investments, net of income taxes (36) 167 Paid in capital - warrants 2,206 2,206 Retained earnings 25,840 25,162 --------- --------- TOTAL SHAREHOLDERS' EQUITY 43,967 43,480 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 236,438 $ 244,342 ========= =========
* Derived from audited financial statements See Notes to Condensed Consolidated Financial Statements. 3 4 SUPERIOR NATIONAL INSURANCE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited)
Three Months Ended March 31, ---------------------------- 1996 1995 ---- ---- REVENUES: Premiums written, net of reinsurance ceded $ 18,643 $ 24,562 Increase (decrease) in unearned premiums (254) 1,328 -------- -------- Net premiums earned 18,897 23,234 Net investment income 2,191 2,766 -------- -------- TOTAL REVENUES 21,088 26,000 EXPENSES: Claims and claim adjustment expenses, net of reinsurance recoveries 10,275 16,234 Commissions, net of reinsurance commissions 2,475 2,957 Policyholder dividends 299 623 Interest expense 2,528 2,090 General and administrative expenses Underwriting 3,725 3,312 Other 130 106 -------- -------- TOTAL EXPENSES 19,432 25,322 -------- -------- INCOME BEFORE INCOME TAXES AND PREFERRED SECURITIES DIVIDENDS AND ACCRETION 1,656 678 Income tax expense 573 190 -------- -------- INCOME BEFORE PREFERRED SECURITIES DIVIDENDS AND ACCRETION 1,083 488 Preferred securities dividends and accretion, net of taxes (405) (362) -------- -------- NET INCOME $ 678 $ 126 ======== ======== EARNINGS PER SHARE DATA: INCOME BEFORE PREFERRED SECURITIES DIVIDENDS AND ACCRETION $ 0.32 $ 0.14 Preferred securities dividends and accretion (0.12) (0.10) -------- -------- NET INCOME $ 0.20 $ 0.04 ======== ========
See notes to condensed Consolidated Financial Statements. 4 5 SUPERIOR NATIONAL INSURANCE GROUP, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Amounts in thousands) (Unaudited)
Net Unrealized Unrealized Gain (Loss) Total Gain (Loss) on Available- Paid in Share- Common on Equity for-sale Capital- Retained holders' Stock Securities Investments Warrants Earnings Equity -------------------------------------------------------------------------- Balance at December 31, 1995 $15,943 $ 2 $ 167 $2,206 $25,162 $43,480 Net income - - - - 678 678 Change in unrealized gain (loss) on equity securities - 12 - - - 12 Change in unrealized gain (loss) on available-for-sale investment, net of taxes - - (203) - - (203) -------------------------------------------------------------------------- Balance at March 31, 1996 $15,943 $14 $ (36) $2,206 $25,840 $43,967 ==========================================================================
See Notes to Condensed Consolidated Financial Statements. 5 6 SUPERIOR NATIONAL INSURANCE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
Three Months Ended March 31, ---------------------------- 1996 1995 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 678 $ 126 -------- -------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization of bonds and preferred stock (295) (1,000) (Gain)/loss on sale of investments -- (25) (Gain)/loss on sale of CentreRe investments (2,463) -- Preferred securities dividends and accretion 613 548 Decrease (increase) in reinsurance recoverables 8,214 (1,416) Decrease (increase) in premiums receivables 1,334 2,771 Decrease (increase) in deferred policy acquisition costs (722) (1,033) Decrease (increase) in income taxes 360 -- Increase (decrease) in claims and claim adjustment expense reserves (12,240) (3,068) Increase (decrease) in unearned premium reserves (438) 1,257 Increase (decrease) in policyholder dividends payable 198 (1,082) Increase (decrease) in accounts payable and other liabilities 1,041 1,761 -------- -------- Total adjustments (4,398) (1,287) -------- -------- Net cash provided by (used in) operating activities (3,720) (1,161) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Retirement of long-term debt (300) (300) Proceeds from repurchase transaction 3,640 -- -------- -------- Net cash provided by (used in) financing activities 3,340 (300) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of bonds and notes: Investments available-for-sale (16,300) (6,445) Investments funds withheld from reinsurers (59,143) -- Investments allocated to discontinued operations -- (1,581) Sales of bonds and notes: Investments available-for-sale 4,680 2,900 Maturities of bonds and notes: Investments held-to-maturity -- 5,220 Investments available-for-sale 437 225 Sales and maturities of bonds and notes: Funds withheld from reinsurers 76,996 -- Net (increase) decrease in short-term investments (6,657) (249) -------- -------- Net cash provided by (used in) investing activities 13 70 -------- -------- Net increase (decrease) in cash (367) (1,391) Cash at beginning of period 2,952 2,533 -------- -------- Cash at end of period $ 2,585 $ 1,142 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for income taxes $ 4 $ 4 ======== ======== Cash paid during the year for interest $ 168 $ 232 ======== ========
See Notes to Condensed Consolidated Financial Statements. 6 7 SUPERIOR NATIONAL INSURANCE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A.1 BASIS OF PRESENTATION Superior National Insurance Group, Inc. ("SNIG") is a holding company that, through its wholly-owned subsidiary, Superior National Insurance Company ("SNIC"), is engaged in writings workers' compensation insurance principally in the State of California, and until September 30, 1993, was engaged in writing commercial property and casualty insurance. The "Company" refers to SNIG and its subsidiaries. The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of regulation S-X. 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, including normally occurring accruals, considered necessary for a fair presentation have been included. Certain reclassifications of prior year amounts have been made to conform with the 1996 presentation. Operating results for the three months ended March 31, 1996 are not necessarily indicative of the results to be expected for the year ended December 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in SNIG's annual report on Form 10-K for the year ended December 31, 1995. A.2 EARNINGS PER SHARE ("EPS") The EPS calculations for the three months ended March 31, 1996 and 1995 are calculated based upon the weighted average number of shares of common stock, and adjusted for the effect, if any, of options and warrants considered to be common stock equivalents. Stock options and warrants are considered to be common stock equivalents, except when their effect is antidilutive. The number of shares used in the EPS calculations are 3,430,373 shares and 3,429,873 shares for the three months ended March 31, 1996 and 1995, respectively. A.3 CLAIMS AND CLAIM ADJUSTMENT EXPENSES RESERVES The liability for unpaid claims and claim adjustment expenses is based on an evaluation of reported losses and on estimates of incurred but unreported losses. The reserve liabilities are determined using adjusters' individual case estimates and statistical projections, which can be affected by many external factors that are difficult to predict, including changes in the economy, trends in medical treatments and litigation, changes in regulatory environment, medical services, and employment rights. The liability is reported net of estimated salvage and subrogation recoverable. Adjustments to the liability resulting from subsequent developments or revisions to the estimate are reflected in results of operations in the period which such adjustment become known. While there can be no assurance that the reserves at any given date are adequate to meet SNIG's obligations, the amounts reported on the balance sheet are management's best estimate of that amount. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: The following selected financial data and analysis provide an assessment of SNIG's financial results for the three months ended March 31, 1996 as compared to the three months ended March 31, 1995. Certain prior period amounts have been reclassified to conform to the current period presentation. Selected financial data as reported for the three months ended March 31, 1996 and 1995 are presented below.
Three Months Ended March 31, ---------------------------- (Dollars in thousands) 1996 1995 - - --------------------------------- -------- -------- Gross premiums written $ 20,785 $ 26,344 Net premiums written $ 18,643 $ 24,562 Net premiums earned $ 18,897 $ 23,234 Less: Net claims and LAE (10,275) (16,234) Underwriting expenses (6,200) (6,269) Policyholder dividends (299) (623) -------- -------- Underwriting profit $ 2,123 $ 108 ======== ======== Net investment income $ 2,191 $ 2,790 Net investment gains (losses) $ -- $ (24) Underwriting ratios (GAAP Basis): Net claims and LAE ratio 54.4% 69.9% Underwriting expense ratio 32.8% 26.9% Policyholder dividends ratio 1.6% 2.7% -------- -------- Combined ratio 88.8% 99.5% ======== ========
Underwriting profit from continuing operations increased $2.0 million in the first quarter of 1996. The improvement in underwriting results for the first quarter of 1996 is due to improved claim and claim adjustment expense margins. The improved underwriting results also reflect the Company's focus on maintaining underwriting margins by controlling writings that are not within the Company's underwriting guidelines, curtailing writings in unprofitable agencies, and emphasizing loss control management. Gross premiums written decreased $5.6 million or 21% in the first quarter of 1996. The decrease was expected as a result of the lack of mandated rates due to the replacement of California's minimum rate law by an open rating system effective January 1, 1995. The competitive market conditions have been further intensified by certain carriers who are willing to underwrite business at apparently inadequate rates. At the end of the first quarter of 1996, production measured in policy counts was 21% higher than the first quarter of 1995, but the estimated annual premium associated with those policies was down 14%. The Company chooses not to sacrifice margin and shareholder return for the sake of market share, and the Company will remain cautious in its premium production consistent with its disciplined underwriting philosophy. The Company will remain focused on small to medium size 8 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED) customers employing a pricing strategy adequate to produce a reasonable profit. SNIC believes the rates it has filed with the Department of Insurance (the "DOI") are adequate, but it is unable to predict the degree to which such rates are competitive in the marketplace given the intense competition among insurers. Net premiums written decreased $5.9 million or 24% in the first quarter of 1996. The decrease in net premiums written is reflective of the decrease in gross premiums written as discussed above. Net premiums earned decreased $4.3 million or 19% in the first quarter of 1996. The decrease in net premiums earned reflects the decrease in net premiums written described above. Net claims and LAE decreased $6.0 million or 37% in the first quarter of 1996. The net claims and LAE ratio decreased 15.5 percentage points to 54.4% in the first quarter of 1996 from 69.9% in the same period in 1995. The improvement in 1996 was due primarily to improved net claims and LAE margins on the 1996 accident year. The Company continues to experience favorable direct development with respect to prior accident years, but adverse ceded development generally negated favorable direct experience during the first quarter of 1996. Underwriting expenses, excluding policyholder dividends, were flat for the first quarter 1996 compared to 1995. However, the underwriting expenses ratio increased 5.9 points to 32.8% for the first quarter of 1996 from 26.9% for the corresponding period in 1995. The increase in ratio is due primarily to decreased premium production with fixed overhead costs. Policyholder dividends decreased $0.3 million in the first quarter of 1996. Prior to open rating, policyholder dividends served both as an economic incentive to employers for safe operations and as a means of price differentiation. As a result of consumers' preference for the lowest net price at the policy's inception under open rating, dividend paying is no longer a significant factor in the marketing or selling of workers' compensation insurance in California. Consequently, only 17% of the estimated earned premium effective in the first quarter of 1996 was written on a participating basis compared to 29% in 1995 which caused the decrease in the 1996 policyholder dividend expenses. Net investment income decreased $0.6 million or 21% in the first quarter of 1996 compared to the same period in 1995. $0.4 million of the decrease was attributable to a decrease in the portfolio investment yield to 5.58% in the first quarter of 1996 from 6.43% in the same period in 1995. The decrease is due primarily to investment dispositions in 1995 of higher yielding investments in the funds withheld pledged assets portfolio which were replaced by lower yielding securities. Also contributing to lower investment income in the first quarter of 1996 is the $0.14 million decrease in investment income due to a 5.2% (or $9.1 million) decrease in the average investable assets in the first quarter of 1996 compared to the same period in 1995. A summary of net investment income (excluding capital gains (losses)), the investment portfolio, and the change in carrying value of invested assets for the three months ended March 31, 1996 and 1995 are as follows: 9 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED) A summary of net investment income, excluding capital gains (losses), for the three months ended March 31, 1996 and 1995 are as follows:
Three months ended March 31, ---------------------------- (Dollars in thousands) 1996 1995 ---- ---- Interest on debt instrument $2,232 $2,498 Interest on invested cash 81 354 ------ ------ Total investment income 2,313 2,852 Investment expense 122 62 ------ ------ Net investment income $2,191 $2,790 ====== ======
The distribution of SNIG's consolidated investment portfolio is as follows (in thousands):
March 31, 1996 December 31, 1995 -------------- ----------------- Amortized Market Amortized Market Available for Sale: Cost Value Cost Value - - ------------------- ---- ----- ---- ----- Government Agencies & Authorities $34,032 $33,817 $22,549 $22,524 Collateralized Mortgage Obligations 10,475 10,284 10,753 10,779 Corporate Instruments 7,243 7,554 7,398 7,612 State & Political Subdivisions 1,100 1,140 1,100 1,138 ------- ------- ------- ------- Total Available for Sale $52,850 $52,795 $41,800 $42,053 ======= ======= ======= =======
March 31, 1996 December 31, 1995 -------------- ----------------- Amortized Market Amortized Market Funds Withheld from Reinsurers Cost Value Cost Value - - ------------------------------ ---- ----- ---- ----- U.S. Government $ 85,896 $ 84,847 $103,496 $105,554 Agencies & Authorities Collateralized Mortgage Obligations 6,700 6,645 2,306 2,316 Special Revenue 2,113 2,140 2,118 2,183 Corporate Instruments 5,218 5,027 7,001 7,020 Invested Cash 249 249 -- -- -------- -------- -------- -------- Total Funds Withheld From Reinsurers $100,176 $ 98,908 $114,921 $117,073 ======== ======== ======== ========
10 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)
March 31, 1996 December 31, 1995 -------------- ----------------- Market Market Equity Securities Cost Value Cost Value - - ----------------- ---- ----- ---- ----- Corporate $686 $708 $686 $689 ---- ---- ---- ---- Total $686 $708 $686 $689 ==== ==== ==== ====
The Company's management monitors the matching of assets and liabilities and attempts to keep investment duration at the mid-point of the length of its net claim and LAE payout pattern. Investment duration is the weighted average measurement of the current maturity of a fixed income security, in terms of time, of the present value of the future payments to be received from that security. However, in selecting assets to purchase for its investment portfolio, the Company considers each security's modified duration and the effect of that security's modified duration on the portfolio's overall modified duration. Modified duration is a measurement that estimates the percentage change in market value of an investment for a small change in interest rates. The modified duration of fixed maturities at March 31, 1996 was 2.19 years compared to 4.69 years at December 31, 1995. At March 31, 1996, 98% of the carrying values of investments in the fixed maturities portfolio were rated as investment grade by the Securities Valuation Office of the National Association of Insurance Commissioners. DISCONTINUED OPERATIONS: Discontinued operations claims moderated during the first quarter of 1996 after seven months of heavy activity associated with a California Supreme Court decision affecting construction defect claim coverage. The Company has significant exposure to construction defect liabilities on casualty insurance policies underwritten from 1986 to 1991. Management believes its current reserves are adequate to cover this increase in claims activity depending on the length of time the recent reporting trends continue. There can be no assurance, therefore, that further upward development of ultimate loss costs associated with construction defect claims will not occur. The Company will continue to monitor the adequacy of its loss reserves in the discontinued operations very closely. LIQUIDITY AND CAPITAL RESOURCES: Liquidity is a measure of an entity's ability to secure sufficient cash to meet its contractual obligations and operating needs. The Company's cash inflows are generated from cash collected for policies sold, investment income on the existing portfolio and sales and maturities of investments. The Company's cash outflows consist primarily of payments for policyholders' claims, operating expenses and dividend obligations. Cash flow used in operations for the three months ended March 31, 1996 was $3.7 million compared to $1.2 million for the corresponding period in 1995. The $2.6 million decline in cash from operating activities was due primarily to a $3.2 million decrease in premiums received and $1.0 million in increased claims payments. Partially offsetting these increases was a reduction in policyholders dividend payments of $1.5 million in 1996. The Company generated $3.3 million in cash from financing activities for the three months ended March 31, 1996 and used $0.3 million for the corresponding period in 1995. The cash generated by financing activities in the first quarter of 1996 was funded by the proceeds received from a repurchase transaction which was partially offset by the principal paydown of the bank term note. The use of cash in the first quarter of 1995 was related to the principal paydown of the bank term loan. SNIG believes that it has adequate short-term investments and readily marketable investment grade securities to cover both claim payments and expenses. As of March 31, 1996, the Company had total cash, cash equivalents and investments of $170.4 million. This amount includes $100.2 million in funds withheld from Centre Re and $1.6 million in restricted cash. The Company's remaining invested assets were comprised of $52.8 million 11 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED) in bonds and notes, held at market value; $0.7 million in equity securities; and $12.5 million in invested cash, including certificates of deposit with maturities less than one year and money market deposits. Early in 1995, SNIC entered into an agreement with a national brokerage house to allow it to enter into $5 million in repurchase agreements that are secured by either U.S. treasuries or government agency bonds. This type of financing allows SNIC a great deal of flexibility to manage short-term investments, avoiding the unnecessary realization of losses to satisfy short term cash needs. As of March 31, 1996, the book value including accrued interest for repurchase agreement outstanding was $3.6 million. The market value of the security underlying the agreement was $3.5 million. The agreement matured on April 19, 1996 with an interest rate of 5.35%. Because SNIG depends on dividends from its insurance subsidiary for its net cash flow requirements, absent other sources of cash flow, SNIG cannot pay dividends materially in excess of the amount of dividends that could be paid by SNIC to SNIG. Insurance companies are also subject to restrictions affecting the amount of stockholder dividends and advances that may be paid within any one year without the prior approval of the DOI. The California Insurance Code provides that amounts may be paid as dividends on an annual noncumulative basis (generally based on the greater of (1) net income for the preceding year or (2) 10% of statutory surplus as regards policyholders as of the preceding December 31) without prior notice to, or approval by, the DOI. No ordinary dividends were paid during the three months ended March 31, 1996. SNIC is a party to various leases principally associated with the Company's home and branch office space. Such leases contain provisions for scheduled lease charges and escalations in base rent over the lease term. The Company's minimum commitment with respect to these leases in 1996 is approximately $1.9 million. These leases expire from 1996 to 2001. Other than the Company's obligations to pay claims, policyholder dividends, ceded reinsurance premiums, lease expenses and the Company's commitments to pay principal and interest on the bank debt, the Company has no significant cash commitments. 12 13 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit: Exhibit Description 27 Financial Data Schedule (b) Reports on Form 8-K: On February 28, 1996, the Company filed a Current Report on Form 8-K (File No. 0-25984), under "Item 5. Other Events," in order to report that SNIC had canceled, effective January 1, 1996, the multi-year aggregate excess of loss reinsurance contract it had entered into with Centre effective January 1, 1993. 13 14 SIGNATURE 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. Dated: May 14, 1996 SUPERIOR NATIONAL INSURANCE GROUP, INC. By /s/ J. Chris Seaman ---------------------- Name: J. Chris Seaman Title: Executive Vice President and Chief Financial Officer 14 15 EXHIBIT INDEX Exhibit Description Page 27 Financial Data Schedule 16 15 EX-27 2 FINANCIAL DATA SCHEDULE
7 1000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 52,795 100,176 98,908 708 0 0 167,837 2,585 347 3,502 236,438 128,534 9,782 0 0 8,230 21,659 0 15,943 28,024 236,438 18,897 2,191 0 0 10,275 3,194 5,664 1,656 573 1,083 0 0 0 678 0.20 0 140,774 13,599 (4,015) 1,880 19,944 128,534 (4,015)
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