-----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, CKNmARBd2ocdpYXKMPzH3KWFPvFyYBbA81CwKwOwvRIt5pm8zQCKr4B/6Nd48sdK f29vDoCwW3dn34wW9Bjd0Q== 0000950150-97-001194.txt : 19970815 0000950150-97-001194.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950150-97-001194 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUPERIOR NATIONAL INSURANCE GROUP INC CENTRAL INDEX KEY: 0000810463 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 954610936 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: 97662686 BUSINESS ADDRESS: STREET 1: 26601 AGOURA RD STREET 2: ` CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8188801600 MAIL ADDRESS: STREET 1: 26601 AGOURA ROAD CITY: CALABASAS STATE: CA ZIP: 91302 10-Q 1 FORM 10-Q 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 EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 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) DELAWARE 95-4610936 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
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 No X --- --- Number of shares of Common Stock, $.01 par value per share, outstanding as of close of business on August 8, 1997: 5,859,020 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 June 30, 1997 (unaudited) and December 31, 1996........................................3 Condensed consolidated statements of income for the three and six months ended June 30, 1997 (unaudited) and June 30, 1996 (unaudited)................................4 Condensed consolidated statement of changes in shareholders' equity for the six months ended June 30, 1997 (unaudited).....................................5 Condensed consolidated statements of cash flows for the six months ended June 30, 1997 (unaudited) and June 30, 1996 (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...........................................................................9 PART II. OTHER INFORMATION Item 2. Changes in Securities..........................................................................17 Item 5. Other Information..............................................................................17 Item 6. Exhibits and Reports on Form 8-K...............................................................18 SIGNATURE........................................................................................................22
3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SUPERIOR NATIONAL INSURANCE GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
June 30, December 31, 1997 1996 --------- ------------ (Unaudited) (*) ASSETS Investments: Bonds and notes: Available-for-sale, at market (cost: 1997, $170,594; 1996, $46,549) $ 171,060 $ 46,330 Equity securities, at market Common stock (cost: 1997, $686; 1996, $1,199) 838 1,173 Cash and Invested cash (Restricted cash: 1997, $842; 1996, $297) 72,428 100,487 Restricted investment -- 1,450 --------- --------- TOTAL INVESTMENTS 244,326 149,440 Reinsurance receivable 33,450 25,274 Premiums receivables (less allowance for doubtful accounts: 1997, $3,604; 1996, $300) 23,746 9,390 Earned but unbilled premiums receivable 12,321 5,251 Deferred policy acquisition costs 5,184 3,042 Deferred income taxes 22,986 9,520 Funds held by reinsurer 3,324 1,948 Receivable from reinsurer -- 93,266 Goodwill 14,868 -- Other Assets 19,598 9,438 --------- --------- TOTAL ASSETS $ 379,803 $ 306,569 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Claims and claim adjustment expenses $ 213,686 $ 115,529 Unearned premiums 15,652 9,702 Long-term debt 44,030 98,961 Accounts payable and other liabilities 27,500 13,615 --------- --------- TOTAL LIABILITIES 300,868 237,807 PREFERRED SECURITIES ISSUED BY AFFILIATE; authorized 1,100,000 shares; issued and outstanding 1,062,920 shares in 1997, and 1,013,753 shares in 1996 24,945 23,571 Shareholders' Equity: Common stock, no par value; authorized 25,000,000 shares; issued and outstanding 5,837,173 shares in 1997 and 3,430,373 shares in 1996 34,025 16,022 Unrealized gain (loss) on investments, net of taxes 408 (162) Paid in capital - warrants 2,206 2,206 Retained earnings 17,351 27,125 --------- --------- TOTAL SHAREHOLDERS' EQUITY 53,990 45,191 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 379,803 $ 306,569 ========= =========
* 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 Six Months Ended June 30, June 30, --------------------- --------------------- 1997 1996 1997 1996 -------- -------- -------- -------- REVENUES: Premiums written, net of reinsurance ceded $ 43,703 $ 24,153 $ 63,706 $ 42,796 Net change in unearned premiums 1,707 (17) 682 237 -------- -------- -------- -------- Net premiums earned 45,410 24,136 64,388 43,033 Net investment income 3,435 2,074 5,521 4,265 -------- -------- -------- -------- TOTAL REVENUES 48,845 26,210 69,909 47,298 EXPENSES: Claims and claim adjustment expenses, net of reinsurance recoveries 34,724 12,325 44,995 22,600 Commissions, net of reinsurance commissions 4,687 2,783 6,888 5,258 Policyholder dividends -- (1,705) -- (1,406) Interest expense 2,417 2,268 4,144 4,796 General and administrative expenses Underwriting 6,158 9,652 10,961 13,377 Other 340 (519) 521 (389) Goodwill 137 -- 137 -- -------- -------- -------- -------- TOTAL EXPENSES 48,463 24,804 67,646 44,236 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES AND PREFERRED SECURITIES DIVIDENDS AND ACCRETION, AND EXTRAORDINARY ITEM 382 1,406 2,263 3,062 Income tax expense 98 475 769 1,048 -------- -------- -------- -------- INCOME BEFORE PREFERRED SECURITIES DIVIDENDS AND ACCRETION, AND 284 931 1,494 2,014 EXTRAORDINARY ITEM Preferred securities dividends and accretion, net of income taxes (453) (405) (907) (810) Extraordinary loss on retirement of long- term debt, net of income tax benefit of $5,338 (10,361) -- (10,361) -- -------- -------- -------- -------- NET (LOSS) INCOME $(10,530) $ 526 $ (9,774) $ 1,204 ======== ======== ======== ======== EARNINGS PER COMMON AND DILUTIVE COMMON EQUIVALENT SHARES: INCOME BEFORE PREFERRED SECURITIES DIVIDENDS AND ACCRETION $ 0.05 $ 0.20 $ 0.32 $ 0.42 Preferred securities dividends and accretion (0.08) (0.08) (0.20) (0.15) Extraordinary loss on retirement of long-term debt, net of income tax benefit (1.78) -- (2.23) -- ======== ======== ======== ======== NET (LOSS) INCOME $ (1.80) $ 0.12 $ (2.11) $ 0.27 ======== ======== ======== ========
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, 1996 $16,022 $(17) $(145) $2,206 $27,125 $45,191 Net loss - - - - (9,774) (9,774) Change in unrealized gain on equity Securities - 117 - - - 117 Change in unrealized gain (loss) on investments, net of taxes - - 453 - - 453 Common stock issued 18,003 - - - - 18,003 ------ ---- ----- ------ ------- ------- Balance at June 30, 1997 $34,025 $100 $ 308 $2,206 $17,351 $53,990 ======= ==== ===== ====== ======= =======
See Notes to Condensed Consolidated Financial Statements. 5 6 SUPERIOR NATIONAL INSURANCE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
Six Months Ended June 30, --------- --------- 1997 1996 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (9,774) $ 1,204 --------- --------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization of bonds and preferred stock (803) (386) Loss (gain) on sale of investments 123 (21) (Gain) on sale of funds withheld investments -- (2,424) Amortization of Goodwill 136 -- Extraordinary Loss - retirement of long-term debt 10,361 -- Interest expense on long-term debt 3,146 -- Preferred securities dividends and accretion 907 1,227 (Increase) decrease in reinsurance receivables (4,216) 5,234 Decrease (increase) in premiums receivables 2,004 (789) (Increase) decrease in accrued investment income (588) 333 Increase in deferred policy acquisition costs (1,011) (282) Decrease in deferred income taxes 769 626 Increase (decrease) in claims and claim adjustment expense reserves 2,714 (16,520) Decrease in unearned premium reserves (909) (526) Increase (decrease) in policyholder dividends payable 896 (1,907) Decrease in other liabilities, net of other assets (15,685) (1,739) --------- --------- Total adjustments (2,156) (17,174) --------- --------- Net cash used in operating activities (11,930) (15,970) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Paid-in-capital - restricted stock 3 -- Proceeds from issuance of common stock 18,000 -- Long-term debt 44,000 -- Retirement of long-term debt (7,250) (600) Funding of discontinued operations (17,125) -- Proceeds from repurchase transaction -- 3,553 --------- --------- Net cash provided by financing activities 37,628 2,953 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of bonds and notes: Investments available-for-sale (90,283) (28,960) Investment funds withheld from reinsurers -- (67,425) Purchase of equity security (145) -- Purchase of Pac Rim Holding Corporation (41,170) -- Sales of bonds and notes: Investments available-for-sale 13,542 17,363 Maturities of bonds and notes: Investments available-for-sale 6,968 798 Sales and maturities of bonds and notes held to maturity: Funds withheld from reinsurers -- 98,011 Sale of equity security 517 -- Net decrease (increase) in invested cash 55,364 (5,805) Net (increase) in invested cash for funds withheld from reinsurers -- (1,627) --------- --------- Net cash provided by investing activities (55,207) 12,355 --------- --------- Net decrease in cash (29,509) (662) Cash and Invested cash at beginning of period 101,937 2,952 ========= ========= Cash and Invested cash at end of period $ 72,428 $ 2,290 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the year for income taxes $ 4 $ 4 ========= ========= Cash paid during the year for interest $ 191 $ 331 ========= =========
See Notes to Condensed Consolidated Financial Statements 6 7 SUPERIOR NATIONAL INSURANCE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (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 subsidiaries, Superior National Insurance Company ("SNIC") and Superior Pacific Casualty Company ("SPCC"), is engaged in writing workers' compensation insurance principally in the States of California and Arizona, 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 1997 presentation. Operating results for the six months ended June 30, 1997 are not necessarily indicative of the results to be expected for the year ended December 31, 1997. These consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto contained in the Company's annual report on Form 10-K for the year ended December 31, 1996. A.2 ACQUISITION OF PACIFIC RIM On April 11, 1997, the Company completed its previously announced acquisition of Pac Rim Holding Corporation ("PRHC") and its wholly owned subsidiary Pacific Rim Assurance Company for total consideration of approximately $41 million in cash. The consideration paid by SNIG resulted in payment of approximately $20 million ($2.105 per share) to PRHC's common stockholders; $20 million to PRHC's debenture holders; and the remainder to PRHC's warrant and option holders. Pacific Rim Assurance Company was subsequently renamed Superior Pacific Casualty Company ("SPCC"). SNIG financed the acquisition with a combination of common stock and bank debt. A group of investors including Insurance Partners, L.P., TJS Partners, L.P., and SNIG management purchased approximately $18 million of newly issued SNIG common stock. The remaining portion of the purchase price was funded by a $44 million term loan to SNIG provided by a bank syndicate led by The Chase Manhattan Bank ("Chase"). Approximately $6.6 million of the loan proceeds was used to repay SNIG's previously outstanding long-term debt. Additionally, approximately $10 million of the loan proceeds was contributed by SNIG to the capital of SPCC. The Company accounted for the acquisition of PRHC as a purchase, and accordingly assets and liabilities of PRHC were adjusted to their fair value at the time of the purchase. Under the PRHC Acquisition Agreement, SNTL Acquisition Corp. ("SNTL"), a newly formed Delaware subsidiary of the Company, was merged with and into PRHC. The corporation resulting from this merger was renamed Superior Pacific Insurance Group, Inc. ("SPIG"), and is a wholly owned subsidiary of the Company. As a result, SPCC became an indirect operating subsidiary of the Company. On April 11, 1997, the Closing Date, in order to satisfy certain conditions of the term loan, the Company contributed all of its shares of SNIC to SNTL, so that SNIC became an indirect operating subsidiary of the Company. Thus, upon the Closing Date, SNIC and SPCC became subsidiaries of SPIG, which, in turn, became a subsidiary of the Company. 7 8 A.3 EARNINGS PER SHARE ("EPS") Earnings per common and dilutive common equivalent shares for the three and six months ended June 30, 1997 and 1996 are based on the average number of common shares outstanding during each period and assuming conversion of all stock options and warrants which are common stock equivalents. Common share equivalents included in the computation represent shares issuable upon assumed exercise of stock options and warrants which would have a dilutive effect. If the calculation of income per share including all common stock equivalents is antidilutive, such common stock equivalents are excluded from the EPS amounts. The number of shares used in the EPS calculations are 5,837,173 and 4,641,954 shares for the three and six months ended June 30, 1997 respectively, and 5,318,118 shares for the three and six months ended June 30, 1996. Changes in Securities". The "simplified stock method" of computing earnings per share was utilized in the calculations for the three and six months ended June 30, 1997. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard presentation No. 128, and "Earnings per Share" ("SFAS 128"), which establishes the computation, presentation, and disclosure requirements for earnings per share. SFAS 128 is effective for fiscal periods ending after December 15, 1997. The effects of SFAS 128 on the Company's earnings per share calculation is not expected to be materially different than that historically presented. A.4 CLAIMS AND CLAIM ADJUSTMENT EXPENSE 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 adjustments become known. While there can be no assurance that 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. A.5 FINANCING AGREEMENT SNIG announced the completion, on June 30, 1997, of the prepayment of approximately $88.6 million of long-term debt outstanding to Chase Manhattan Bank ("Chase"). The prepayment was accomplished by transferring reinsurance receivables due from Centre Reinsurance Limited ("Centre Re") to Chase in exchange for cancellation of the debt. SNIG recognized an extraordinary net-of-tax loss of approximately $10.4 million on debt prepayment in the second quarter of 1997. A.6 DEBT AGREEMENT Upon the close of the PRHC acquisition on April 11, 1997, the Company obtained a term loan in the amount of $44 million. The loan is collateralized by the stock of SPIG and its subsidiaries. The Company used the proceeds of the term loan for the acquisition and related expenses, a capital contribution to SPCC, and to refinance or repay existing indebtedness. The loan is due six years from April 11, 1997. Principal payments are due semi-annually in eleven consecutive installments of $3,650,000 with a final installment of $3,850,000. The interest rate on the debt is a LIBOR-based variable rate that will not exceed Chase's prime commercial lending rate unless default interest becomes due. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS References to "SNIG" and "the Company" in this quarterly report include the results of operations of the newly acquired subsidiary Superior Pacific Casualty Company ("SPCC"), formerly known as Pacific Rim Assurance Company. This discussion and analysis contains statements that constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to future events or the future financial performance of the Company and involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, inherent uncertainties related to the effect of the acquisition of PRHC and its subsidiary SPCC, the Company's leverage, and general conditions in the economy and in the workers' compensation insurance market in particular, and such factors could cause actual results to differ materially from those indicated by such forward-looking statements. OVERVIEW The Company incurred a net loss of approximately $10.5 million or $1.80 per share in the three month period ended June 30, 1997 versus income of approximately $0.5 million or $0.12 per share in the corresponding period in the prior year, and loss of $9.8 million or $2.11 per share for the six month period ended June 30, 1997, versus income of $1.2 million or $0.27 per share in the corresponding period in the prior year. Though the magnitude of the loss relates to an extraordinary charge related to retirement of long term debt (see "Financial Condition"), operating income has also declined from prior year, to $0.4 million in the three-month period ended June 30, 1997 versus $1.4 million in the corresponding period in the prior year. The decrease in operating income is primarily due to expected increases in claim and claim adjustment expenses, resulting from the higher claim and claim adjustment expenses of the Company's newly acquired subsidiary, SPCC, which have not yet been offset by expected improvements in SPCC's expense ratios. The Company acquired PRHC for approximately $41 million on April 11, 1997, and thereupon SPCC became a subsidiary of the Company. The acquisition was accounted for as a purchase. Total assets, including goodwill, increased to $379.8 million from $306.5 million at December 31, 1996, primarily as a result of the acquisition. The total amount of goodwill that will be realized on the Company's balance sheet as a result of the acquisition reflects the Company's current estimate of purchase accounting adjustments. The financial statements of PRHC for the fiscal years ended December 31, 1996, 1995, and 1994 are currently being audited by the Company's independent auditors. See "Item 5 - Other Information." GENERAL FINANCIAL CONDITION: Total assets increased $81.8 million to $379.8 million for the quarter ended June 30, 1997. The increase was due to approximately $189.3 million in assets recorded related to the acquisition of PRHC; which was partially offset by a reduction of approximately $91.6 million in receivables due from reinsurers, that were transferred to Chase in exchange for cancellation of debt. Additionally, $17.1 million in assets were used to fund discontinued operations. Total liabilities increased $72.9 million to $300.9 million for the quarter ended June 30, 1997. The increase was due to approximately $171.2 million in liabilities recorded related to the acquisition of PRHC which was partially offset by the early extinguishment of the $90 million Chase loan and $7.2 million Imperial Bank debt. Total equity increased $8.3 million to $53.9 million. Approximately $18 million in additional capital was related to the April 11, 1997 private stock issuance and sale. The increase was partially offset by expenditures and increases in claims reserves associated with the acquisition of PRHC and the $10.4 million extraordinary loss recognized in conjunction with the early extinguishment of long-term debt. 9 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS: The following selected financial data and analysis provide an assessment of SNIG's financial results for the three months ended June 30, 1997 as compared to the three months ended June 30, 1996. Certain prior period amounts have been reclassified to conform to the current period presentation. Selected financial data as reported for the three months ended June 30, 1997 and 1996 are presented below.
Three Months Ended June 30, ---------------------------- (Dollars in thousands) 1997 1996 - ---------------------------------------------------------- -------- --------- Gross premiums written $ 48,310 $ 26,344 Net premiums written $ 43,703 $ 24,153 Net premiums earned $ 45,410 $ 24,136 Less: Claims and claim adjustment expenses net of reinsurance recoveries (34,724) (12,325) Underwriting expenses (10,845) (12,435) Policyholder dividends -- 1,705 -------- -------- Underwriting (loss) profit (159) 1,081 Net investment income 3,425 2,053 Net investment gains (losses) 10 21 Interest expense (2,417) (2,268) Other (340) 519 Goodwill (137) -- -------- -------- Income before income taxes 382 1,406 Income tax expense (benefit) 98 475 -------- -------- Income before preferred securities dividends, accretion and extraordinary items 284 931 Preferred securities dividends and accretion, net of taxes (453) (405) Extraordinary loss on retirement of long-term debt, net of taxes (10,361) -- -------- -------- Net (Loss) Income $(10,530) $ 526 ======== ======== Underwriting ratios (GAAP Basis): - ---------------------------------------------------------- Net claims and claim adjustment expense ratio 76.5% 51.1% Underwriting expense ratio 23.9% 51.5% Policyholder dividends ratio -- (7.1%) ======== ======== Combined ratio 100.4% 95.5% ======== ========
Gross premiums written increased $21.9 million or 83% in the second quarter of 1997 as compared to the same period in 1996. Of the $21.9 million increase, $21.3 million can directly be attributed to SPCC operations. The remaining $0.6 million increase in gross premiums written is attributable to SNIC's strategy to underwrite smaller risks. The Company's strategy is to continue to focus on profitable operating margins first and market share second. Net premiums written increased $19.6 million or 81% in the second quarter of 1997. The increase in net premiums written is reflective of the increase in gross premiums written as discussed above. Net premiums earned increased $21.3 million or 88% in the second quarter of 1997. The increase in net premiums earned reflects the increase in net premiums written described above. 10 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net claims and claim adjustment expenses increased $22.4 million or 182% in the second quarter of 1997, due primarily to activity resulting from the SPCC acquisition. The net claims and claim adjustment expense ratio increased to 76.5% in the second quarter of 1997 from 51.1% in the same period of 1996. Excluding SPCC which accounted for $18.5 million of the increase; SNIC increased by $3.9 million in the second quarter of 1997, due to unfavorable development in the 1995 accident year. Underwriting expenses, excluding policyholder dividends, decreased $1.6 million or 13% in the second quarter of 1997 as compared to the same period in 1996. Net commission expense increased $1.9 million or 68% in the second quarter of 1997 as compared to the same period in 1996. The increase in commission expense is driven by the newly acquired SPCC operations. Net underwriting expenses decreased 36.2% from $9.7 million in 1996 to $6.2 million in 1997. Excluding the one time $5.3 million settlement of adjustment for funds withheld recorded during the second quarter of 1996, underwriting expenses actually increased $1.8 million in the second quarter of 1997 as compared to 1996 due to SPCC. Policyholder dividends decreased $1.7 million in the second quarter of 1997 as compared to the same period in 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, dividends are no longer a significant factor in the marketing of workers' compensation insurance in California. In 1995, as a result of the diminishing value of Policyholder Dividends SNIC's management declared a moratorium in the payment of policyholder dividends for California policies. In December 1996, the Company discontinued policyholder dividend payments. Estimated amounts to be returned to policyholders were accrued when the related premium was earned by SNIC. Dividends were paid to the extent that a surplus was accumulated from premiums on workers' compensation policies. Consequently, the Company has paid no dividends in 1997 as of the second quarter. Underwriting profit from continuing operations decreased $1.2 million to $0.1 million loss in the second quarter of 1997 from a $1.1 million profit in the same period in 1996. The change in underwriting results for the second quarter of 1997 is attributable to an increase in workers' compensation reserves as outlined above in the "Net claims and claim adjustment expenses" section. Net investment income increased $1.4 million or 67% in the second quarter of 1997 compared to the same period in 1996. The improvement is due to the increase in assets available for investment resulting from the SPCC acquisition. This increase is due to a $1.6 million increase associated with SPCC, which is offset by a 9% or $0.2 million decrease excluding SPCC. The decrease in net investment income is due to a decline in the average amount available for investments by $20.4 million from $161.3 million in 1996 to $140.9 million in 1997. Interest expense for the second quarter of 1997 was $2.4 million as compared to $2.3 million for the same period in 1996. The $0.1 million increase was due to the $44 million Chase loan which was partially offset by the retirement of the Imperial Bank loan and the elimination of the funds withheld balance. 11 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Selected financial data as reported for the six months ended June 30, 1997 and 1996 are presented below.
Six Months Ended June 30, ------------------------- (Dollars in thousands) 1997 1996 - ---------------------------------------- ----------- ---------- Gross premiums written $ 71,090 $ 48,159 Net premiums written $ 63,706 $ 42,796 Net premiums earned $ 64,388 $ 43,033 Less: Net claims and claim adjustment expenses (44,995) (22,600) Underwriting expenses (17,849) (18,635) Policyholder dividends - 1,406 --------- -------- Underwriting profit 1,544 3,204 Net investment income 5,502 4,244 Net investment gains (losses) 19 21 Interest expense (4,144) (4,796) Other (521) 389 Goodwill (137) - --------- -------- Income before income taxes 2,263 3,062 Income tax expense (benefit) 769 1,048 --------- -------- Income before preferred securities dividends and accretion 1,494 2,014 and discontinued operations Preferred securities dividends and accretion, net of taxes (907) (810) Extraordinary loss on retirement of long-term debt, net of taxes (10,361) - --------- -------- Net (Loss) Income $ (9,774) $ 1,204 ========= ======== Underwriting ratios (GAAP Basis): - ---------------------------------------- Net claims and claim adjustment expense ratio 69.9% 52.5% Underwriting expense ratio 27.7% 43.3% Policyholder dividends ratio - (3.3%) --------- -------- Combined ratio 97.6% 92.5% ========= ========
Gross premiums written increased $22.9 million or 48% in the first six months of 1997 as compared to the same period in 1996. Of the $22.9 million increase, substantially all of the increase can be attributed to SPCC operations. Net premiums written increased $20.9 million or 49% in the first six months of 1997. The increase in net premiums written is reflective of the increase in gross premiums written as discussed above. Net premiums earned increased $21.3 million or 50% in the first six months of 1997. The increase in net premiums earned reflects the decrease in net premiums written described above. Net claims and claim adjustment expenses increased $22.4 million or 99% to $45.0 million in the first six months of 1997 due primarily to activity resulting from the SPCC acquisition. The net claims and claim adjustment expense ratio increased to 69.9% in the first six months of 1997 from 52.5% in the same period of 1996. Excluding SPCC which accounted for $18.5 million of the increase; SNIC increased by $3.9 million in 1997. Gross claims and LAE expenses increased by $8.6 million due to continued unfavorable development in the 1995 accident year. 12 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Underwriting expenses, excluding policyholder dividends, decreased $0.8 million or 4% in the first six months of 1997 as compared to the same period in 1996. Net commission expense increased by 31% from $5.3 million in 1996 to $6.9 million in 1997. The increase in commission expense is driven by SPCC operations. Net underwriting expenses decreased 18.1% from $13.4 million in 1996 to $11.0 million in 1997. Excluding the one time $5.3 million settlement adjustment recorded during the second quarter of 1996, underwriting expenses actually increased $2.9 million from 1996 to 1997, as a result of the SPCC acquisition. Policyholder dividends decreased $1.4 million for the first six months of 1997 as compared to the same period in 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, dividends are no longer a significant factor in the marketing of workers' compensation insurance in California. In 1995, as a result of the diminishing value of Policyholder Dividends SNIC's management declared a moratorium in the payment of policyholder dividends for California policies. In December 1996, the Company discontinued policyholder dividend payments. Estimated amounts to be returned to policyholders were accrued when the related premium was earned by SNIC. Dividends were paid to the extent that a surplus was accumulated from premiums on workers' compensation policies. Consequently, the Company has paid no dividends in 1997 as of the second quarter. Underwriting profit from continuing operations decreased $1.7 million to $1.5 million in the first six months of 1997 from $3.2 million in the same period in 1996. The change in underwriting results for the first six months of 1997 is attributable to the increase in workers' compensation reserves as outlined above in the "Net claims and claim adjustment expenses" section. Net investment income increased $1.3 million or 29.6% in the first six months of 1997 as compared to the same period in 1996. This increase is due to a $1.6 million increase associated with SPCC, which is offset by a 7% or $0.3 million decrease excluding SPCC. The decrease in net investment income is due to a decline in the average amount available for investments by $15.8 million from $160.1 million in 1996 to $144.3 million in 1997. Interest expense for the first six months of 1997 was $4.1 million as compared to $4.8 million for the same period in 1996. The decrease of $0.7 million or 13.6% was due to the elimination of funds withheld balance and the retirement of the Imperial Bank loan, off-set by the addition of the $44.0 million Chase loan. A summary of net investment income, excluding capital gains (losses), for the three and six months ended June 30, 1997 and 1996 are as follows:
Three months ended June 30, Six months ended June 30, -------------------------- ------------------------- (Dollars in thousands) 1997 1996 1997 1996 -------- -------- -------- -------- Interest on bonds and notes $ 1,940 $ 1,919 $ 2,798 $ 4,151 Interest on invested cash 1,706 251 3,052 332 -------- -------- -------- -------- Total investment income 3,646 2,170 5,850 4,483 Capital gains 10 21 19 21 Investment expense 221 117 348 239 -------- -------- Net investment income $ 3,435 $ 2,074 $ 5,521 $ 4,265 ======== ======== ======== ========
13 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The distribution of SNIG's consolidated investment portfolio is as follows (in thousands):
June 30, 1997 December 31, 1996 --------------------- --------------------- Amortized Market Amortized Market Available for Sale: Cost Value Cost Value -------- -------- -------- -------- U.S. Government Agencies & Authorities $ 58,135 $ 58,095 $ 22,596 $ 22,484 Collateralized Mortgage Obligations 59,593 59,841 12,989 12,855 Corporate Instruments 52,866 53,124 9,864 9,867 State & Political Subdivisions -- -- 1,100 1,124 -------- -------- -------- -------- Total Available for Sale $170,594 $171,060 $ 46,549 $ 46,330 ======== ======== ======== ========
(Dollars in thousands) June 30, 1997 December 31, 1996 ------------------- --------------------- Market Market Equity Securities Cost Value Cost Value - ---------------------------- -------- ------ --------- ------- Corporate $ 686 $ 838 $ 1,199 $ 1,173 -------- ----- --------- ------- Total $ 686 $ 838 $ 1,199 $ 1,173 ======== ===== ========= =======
The Company's management monitors the matching of assets and liabilities and attempts to maintain its investment duration at the mid-point of the length of its net claim and claim adjustment expenses 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 June 30, 1997 was 2.23 years compared to 4.69 years at December 31, 1996. At June 30, 1997, 99% 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 counts and losses remained consistent with management's expectations during the second quarter of 1997. The Company has significant exposure to construction defect liabilities on casualty insurance policies underwritten from 1986 to 1993. Management continues to closely monitor its potential exposure to construction defect claims. Management believes its current reserves are adequate to cover its claims activity. 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 closely monitor the adequacy of its loss reserves in the discontinued operations. 14 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 and operating expenses. For its insurance operations, SNIC must have available cash and liquid assets to meet its obligations to policyholders and claimants in accordance with contractual obligations in addition to meeting its ordinary operating costs. It is management's opinion that its present cash resources, with the addition of $44 million in additional bank debt and $18 million in equity raised in April 1997, in connection with the PRHC acquisition, are sufficient to meet the needs of the Company. During the first six months of 1997, the Company used $11.9 million of cash in its operations versus $16 million during the same period in 1996. The $4.0 million decrease in funds used in operating activities in 1997 were primarily the result of a stabilization in the premium levels coupled with a decrease in claim payments for prior accident years associated with higher premium levels for policies before 1995. The Company's continued negative cash flow is the result of the Company's historical in-force premium base being significantly higher than its current level. The Company anticipates to continue to experience negative cash flow until the claims related to the historically higher premium base have been paid out. SNIG believes that it has adequate short-term investments and readily marketable investment grade securities to cover both claim payments and expenses. As of June 30, 1997, the Company had total cash, cash equivalents and investments of $244.3 million. The Company generated $37.6 million in cash from financing activities for the six months ended June 30, 1997, and generated $3 million for the corresponding period in 1996. The cash generated by financing activities in the six months of 1997, was associated with the April 11, 1997 $44 million Chase Manhattan Bank term loan and the approximate $18 million in newly issued SNIG common stock. Early in 1995, SNIC entered into a reverse repurchase facility with a national securities brokerage firm ("broker") that allows SNIC to engage in up to $5 million in reverse repurchase transactions secured either by U.S. Treasury instruments or U.S. Agency debt. This arrangement provides SNIC with additional short-term liquidity. Under the facility, SNIC contacts the broker and indicates the size of the reverse repurchase transaction desired, and the nature of the security SNIC proposes to "sell" to the broker. Based upon the characteristics of the security, the broker indicates at what price it will purchase the security and what rate they will sell the security back to SNIC in 30 days. SNIC then transfers the security to the broker in exchange for the agreed-upon proceeds. SNIC repurchases the security from the broker at a later date at a previously agreed-upon price. SNIC may roll over any reverse repurchase transaction, and the transaction is repriced at the time of roll over. 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. Further, this method of financing is relatively inexpensive as compared to bank debt. Reverse repurchase transactions are viewed as short-term financing both by the DOI and current accounting literature. As of June 30, 1997, SNIC had no obligation outstanding under this facility. Historically, for long-term financing, the Company required borrowings in order to meet its obligations. 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 the intermediate holding company SPIG, and then to SNIG. Insurance companies are also subject to restrictions affecting the amount of shareholder 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 six months ended June 30, 1997. 15 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 1997, is approximately $3.6 million. These leases expire from 1997 to 2002. The Company does not foresee any expenditures other than those arising in the normal course of business and the PRHC acquisition. The Company is required to make principal payments on the Chase term loan of $3.65 million twice per annum commencing October 11, 1997. The Company made a $10 million capital contribution to SPCC upon consummation of the acquisition, and management believes SPCC is adequately capitalized for the foreseeable future. SPCC is not writing new premium (other than selected renewal premium) and may not pay dividends to SPIG without prior DOI approval. 16 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES The Company's acquisition of PRHC was financed in part by the issuance and sale on April 11, 1997 to Insurance Partners, L.P., Insurance Partners Offshore (Bermuda), L.P., TJS Partners, L.P. and certain members of the Company's management, in a private transaction, 2,390,438 shares of Common Stock at $7.53 per share for an aggregate purchase price of approximately $18 million. In issuing and selling such shares of Common Stock, the Company relied upon the exemption from registration provided by Section 4(2) of the Securities Act. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 8, 1997, the Company's Annual Meeting of Shareholders was held. Shareholders voted (1) to elect eleven directors of the Company, and to approve the following proposals: (2) "The Stock Issuance to Insurance Partners, L.P., TJS Partners, L.P. and SNIG Management;" (3) "Transfer Restrictions Charter Amendment;" (4) "Reincorporation of the Company in the State of Delaware;" (5) "Amendment of Bylaws to Increase Authorized Number of Directors" and (6) "Ratification to the Appointment of KPMG Peat Marwick LLP as Independent Auditors." The following directors were elected by the shareholders: Bradley E. Cooper, William L. Gentz, Steven D. Germain, Roger W. Gilbert, Steven B. Gruber, Thomas J. Jamieson, Gordon E. Noble, C. Len Pecchenino, Craig F. Schwarberg, J. Chris Seaman, and Robert A. Spass. The results of each matter voted on are as follows:
VOTES AGAINST/ VOTES ABSTAINED/BROKER VOTES FOR WITHHELD NON-VOTES ---------- ------------- ---------------------- (1) DIRECTORS Bradley E. Cooper 3,935,398 - 43,736 William L. Gentz 3,968,373 - 10,761 Steven D. Germain 3,968,098 - 11,036 Roger W. Gilbert 3,965,123 - 14,036 Steven B. Gruber, 3,965,123 - 12,786 Thomas J. Jamieson 3,968,498 - 10,636 Gordon E. Noble 3,968,498 - 10,636 C. Len Pecchenino 3,965,048 - 14,086 Craig F. Schwarberg 3,935,698 - 43,436 J. Chris Seaman 3,963,248 - 15,886 Robert A. Spass 3,964,773 - 14,361 (2) THE STOCK ISSUANCE TO INSURANCE PARTNERS, L.P., TJS PARTNERS, L.P., AND SNIG MANAGEMENT 2,307,496 33,775 22,935 (3) TRANSFER RESTRICTIONS CHARTER AMENDMENT 2,306,521 34,749 22,935 (4) REINCORPORATION OF THE COMPANY IN THE STATE OF DELAWARE 2,283,153 61,492 19,560 (5) AMENDMENT OF BYLAWS TO INCREASE AUTHORIZED NUMBER OF DIRECTORS 2,361,580 40,718 34,816 (6) RATIFICATION TO THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS INDEPENDENT AUDITORS 3,029,155 4,801 16,750
ITEM 5. OTHER INFORMATION SNIG announced on July 25, 1997 that it is investigating the possibility that errors contained in the historical financial statements of PRHC may have to be corrected in a filing with the Securities and Exchange Commission ("SEC"). SNIG has engaged its auditors, KPMG Peat Marwick LLP, to re-audit the financial statements of PRHC for the years ending December 31, 1996, 1995, and 1994. In SNIG's view, the financial statements provided to SNIG by PRHC's management and auditors prior to SNIG's April 11, 1997, acquisition of PRH used methods and assumptions that may not have been consistent with generally accepted accounting principles. The audited financial statements will be made public through a filing with the SEC as soon as possible, but the audit is not expected to be completed before mid-August. As a result of SNIG's examination of this issue and the time required to complete the audit, SNIG has not timely reported to the SEC pro forma financial information for the combined companies on Form 8-K, however, SNIG does not expect that the lack of a timely filing will have any material negative effect on the company in the future. The Company's shareholders approved the reincorporation of the Company in the State of Delaware at the meeting of shareholders held on April 8, 1997, and the reincorporation became effective on April 11, 1997. 17 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 2.1 Amended and Restated Agreement and Plan of Merger dated as of February 17, 1997 among the Company, SNTL Acquisition Corp., and PRIM***** 3.1 Certificate of Incorporation of the Company, as currently in effect ++ 3.2 Bylaws of the Company, to date ++ 10.1 Employment agreement, dated 1st of June 1994, by and between Mr. William L. Gentz, President and Chief Executive Officer of the Company, and the Company* 10.2 Employment agreement, dated February 17, 1997, by and between Mr. Arnold J. Senter, Executive Vice President and Chief Operating Officer of the Company, and the Company + 10.3 1986 Non-Statutory Stock Option and 1986 Non-Statutory Stock Purchase Plan*** 10.4 1995 Stock Incentive Plan*** 10.5 Aggregate Excess of Loss Cover entered into on the 30th day of August 1991, between Centre Reinsurance Limited (Centre Re) and the Company, as amended* 10.6 Multi-year Prospective Accident Year Stop Loss Reinsurance Contract effective the 1st of January 1993, between Centre Reinsurance International Company and the Company (the "1993 Centre Re Contract")* 10.7 Letter dated March 28, 1996 from the Company canceling the 1993 Centre Re Contract effective January 1, 1996*** 10.8 Workers' Compensation and Employers' Liability Quota Share Insurance Contract No. 30006A effective January 1, 1994, between the Company and Zurich Reinsurance Centre, as amended (the "ZRC Contract")* 10.9 Addendum No. 4 to the ZRC Contract effective as of January 1, 1996*** 10.10 Addendum No. 1 to the Retrocession Agreement (an ancillary agreement to the ZRC Contract) effective as of January 1, 1996*** 10.11 Lease, dated 27th day of October 1988, by and between Corporate Center at Malibu Canyon, a California Limited Partnership and the Company, relating to the lease of the Company's home office and Calabasas Branch Facilities* 10.12 Lease, dated 27th of July 1993, by and between TOMOE Investment and Development, Inc. and the Company, relating to the lease of its South San Francisco Facility* 10.13 Lease, dated 14th of November 1991, by and between Dean Witter Reynolds and the Company relating to the lease of its Fresno Facilities* 10.14 Lease, dated 23rd of February 1993, by and between Shaw Avenue Associates, a California Limited Partnership and the Company relating to the lease of its Fresno Facilities* 10.15 Lease, dated 14th of February 1994, by and between Contra Costa County Employees Retirement Association and the Company relating to its Sacramento Facility* 10.16 Credit Agreement between the Company and The Chase Manhattan Bank ("Chase") dated as of November 12, 1996, (the "1996 Credit Agreement"), and all material exhibits thereto + 10.17 Amendment No. 1 to 1996 Credit Agreement dated as of April 11, 1997 10.18 Assumption Acknowledgment under the 1996 Credit Agreement dated as of April 11, 1997 among the Company, as a California corporation ("SNIG-California"), the Company and Chase 10.19 Agreement in Principle dated 29th of March 1994 by and between the Company and Centre, a Bermuda Corporation, or one of its affiliates* 10.20 Limited Partnership Agreement of Superior National Capital, L.P. (Capital) with certificate of Limited Partnership and Certificate of Exempted Partnership, all as filed on the 28th of June 1994, with the Registrar of Companies of Bermuda*
18 19 10.21 Preferred securities purchase agreement, dated 30th day of June 1994, by and between Capital, Superior National Capital Holding Corporation, the Company and Centre Reinsurance Services (Bermuda) III Limited* 10.22 Loan agreement, dated 30th of June 1994, whereby Capital agrees to loan $20,408,163 to the Company* 10.23 Liability Assumption Agreement, dated 30th of June 1994, by and between the Company and Capital* 10.24 Certificate dated 30th of June 1994, evidencing the issuance of 800,000 Preferred Securities of Capital to Centre Re* 10.25 Note made by the Company in favor of Capital dated 30th of June 1994, in the aggregate principal amount of $20,408,163* 10.26 Purchase warrant, dated as of the 30th of June 1994, entitles Centreline Reinsurance Limited to purchase 2,317,426 shares of the Company's common stock* 10.27 Certificate of Limited Partnership of Superior National Capital, L.P.* 10.28 Warrant held by International Insurance Advisors, Inc. to purchase 6,097,130 shares at $1.00 per share dated March 31, 1992 and expiring April 1, 2002* 10.29 Stock Purchase Agreement dated as of September 17, 1996, as amended and restated effective as of February 17, 1997, among the Company, Insurance Partners, L.P., Insurance Partners Offshore (Bermuda), L.P., TJS Partners, L.P., and certain members of the Company's management***** 10.30 Registration Rights Agreement dated as of April 11, 1997 among the Company, Insurance Partners, L.P. and Insurance Partners Offshore (Bermuda), L.P. +++ 10.31 Letter Agreement dated November 25, 1996 among the Company and the shareholders and holders of warrants party thereto, relating to such warrants and certain registration rights+++ 10.32 Credit Agreement dated as of April 11, 1997 (the "1997 Credit Agreement") among the Company, SNTL Acquisition Corp., various lending institutions, and Chase+++ 10.33 Pledge Agreement under the 1997 Credit Agreement dated as of April 11, 1997 among the Pledgors therein and Chase+++ 10.34 Assumption Acknowledgment under the 1997 Credit Agreement dated as of April 11, 1997 among SNTL Acquisition Corp., Superior Pacific Insurance Group,Inc. and Chase+++ 10.35 SNIG Assumption Acknowledgment under the 1997 Credit Agreement dated as of April 11, 1997 among SNIG-California, the Company, and Chase+++ 10.36 Agreement with Prime Advisors regarding investment Management Services provided to the Company dated April 12, 1997+++ 10.40 State of California Department of Insurance Amended Certificate of Authority* 10.41 The Pacific Rim Assurance Company 401(k) Plan (incorporated by reference from Exhibit 10.11 of Form S-1). (1) 10.42 Office Building Lease dated January 4, 1989 between the Company, Pacific Rim Assurance Company and 16030 Associates for office space in Encino, California (incorporated by reference from Exhibit 10.16 of Form S-1). (1) 10.43 Sublease dated January 5, 1989 between Coastline Financial Corp. and Pacific Rim Assurance Company for office space in Encino, California (incorporated by reference from Exhibit 10.17 of Form S-1). (1) 10.44 Office Building Lease dated September 30, 1998 between The Pacific Rim Assurance Company and The Austin Family Trust dated November 6, 1980 for office space in San Bernardino, California (incorporated by reference from Exhibit 10.18 of Form S-1). (1) 10.45 Office Space Lease dated February 11, 1991 between Rancon Realty Fund V and The Pacific Rim Assurance Company (incorporated by reference from Exhibit 10.24 of Form S-1). (1) 10.46 Office building lease dated January 21, 1992 between The Pacific Rim Assurance Company and Trizec Warner, Inc. for office space in Woodland Hills, California, and related Guaranty of Pac Rim Holding Corporation. (1) 10.47 Addendum No. 2 dated as of September 2, 1992 of Office Building Lease between The Pacific Rim Assurance Company and Trizec Warner, Inc. (1)
19 20 10.48 Office Building Lease dated October 2, 1992, between The Pacific Rim Assurance Company and Richard V. Gunner & George Andros, for office space in Fresno, California. (1) 10.49 Sublease dated February 3, 1994 between The Pacific Rim Assurance Company and the Federal Emergency Management Agency, for office space in Woodland Hills, California. (1) 10.50 Sublease dated February 25, 1994 between The Pacific Rim Assurance Company and The Money Store, for office space in Woodland Hills, California. (1) 10.51 Lease Amendment #1, dated April 1, 1993, to the Office Property Lease between Rancon Realty Fund V, and The Pacific Rim Assurance Company. (1) 10.52 Sublease dated May 1, 1994 between The Pacific Rim Assurance Company and Group Data Services, Incorporated. (1) 10.53 Office lease between L.A.X. Business Center, and Pac Rim Holding Corporation dated June 1, 1995. (1) 10.54 Certificate of Authority from Department of Insurance, State of Arizona to transact the business of Casualty With Workers' Compensation Insurance. (1) 10.55 Certificate of Authority from Department of Insurance, State of Texas to transact the business of casualty with workers' compensation insurance. (1) 10.56 Sublease dated August 15, 1995 between The Pacific Rim Assurance Company and the General Services Administration. (1) 10.57 Sales, License and Service Agreement dated November 14, 1995 between Macess Corporation and The Pacific Rim Assurance Company for equipment purchases, software license and professional prepaid support and software maintenance. (1) 10.58 Master Equipment Lease dated November 15, 1995 between General Electric Capital Computer Leasing Corporation and The Pacific Rim Assurance Company for the lease of computer equipment and software. (1) 10.59 Certificate of Authority from the State of Georgia Office of Commissioner of Insurance, to transact the business of Property and Casualty (including Workers' Compensation). (1) 10.60 Producer agreement between Regional Benefits Insurance Services, a subsidiary of Superior Pacific Casualty Company, and Hull & Co., Inc., dated May 15, 1996. (2) 10.61 Producer agreement between Regional Benefits Insurance Services, and Gulf Atlantic Management Group, Inc., dated May 15, 1996. (2) 10.62 Office lease between Gulf Atlantic Investment Group, Inc. and Regional Benefits Insurance Services, Inc., dated May 20, 1996. (2) 10.63 Employment Agreement between Pac Rim Holding Corporation and Stanley Braun, dated April 15, 1994, as amended March 27, 1995, and March 30, 1996. (3) 10.64 Third Amendment to Employment Agreement between Pac Rim Holding Corporation and Stanley Braun, dated as of April 10, 1997, (filed herewith) 27 Financial Data Schedule.
* Previously filed as an exhibit to SNIG's Registration Statement on Form 10, as filed with the Securities and Exchange Commission ("SEC") on May 1, 1995 (File No. 0-25984). ** Previously filed as an exhibit to Amendment No. 2 to SNIG's Registration Statement on Form 10/A, as filed with the SEC on November 1, 1995 (File No. 0-25984). *** Previously filed as an exhibit to SNIG's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 as filed with the SEC on March 29, 1996. ***** Previously filed as an exhibit to SNIG's statement on Schedule 13D filed for Pac Rim Holding Corporation, as filed with the SEC on February 27, 1997. + Previously filed as an exhibit to SNIG's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, as filed with the SEC on March 10, 1997. ++ Previously filed as an exhibit to SNIG's Current Report on Form 8-K, as filed with the SEC on April 24, 1997. 20 21 +++ Previously filed as an exhibit to SNIG's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, as filed with the SEC on May 15, 1997 (1) Incorporated by reference from the Exhibits to the Annual Report on Form 10-K of Pac Rim Holding Corporation for the year ended December 31, 1995. (2) Previously filed with the Quarterly Report on Form 10-Q of Pac Rim Holding Corporation, for the quarter ended June 30, 1996. (3) Previously filed as Exhibit K to Annex C of SNIG's Proxy Statement dated March 10, 1997. (b) Reports on Form 8-K: The Company filed a report on Form 8-K on April 24, 1997 related to the acquisition of Pac Rim Holding Corporation and the Company's reincorporation in Delaware. 21 22 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: August 13, 1997 SUPERIOR NATIONAL INSURANCE GROUP, INC. By /s/ J. Chris Seaman ----------------------------- Name: J. Chris Seaman Title: Executive Vice President and Chief Financial Officer 22 EX-10.64 2 THIRD AMENDMENT TO EMPLOYMENT AGREEMENT 1 EXHIBIT 10.64 THIRD AMENDMENT TO EMPLOYMENT AGREEMENT THIS THIRD AMENDMENT TO EMPLOYMENT AGREEMENT ("Third Amendment") is executed this 10th day of April, 1997 ("Effective Date") and is entered into by and among PAC RIM HOLDING CORPORATION, a Delaware corporation (the "Corporation"), THE PACIFIC RIM ASSURANCE COMPANY, a California corporation ("Employer"), and STANLEY BRAUN, an individual ("Employee"). 1.0 RECITALS 1.1 Employer, Corporation, and Employee previously entered into an Employment Agreement. The Employment Agreement was amended by the First Amendment on March 27, 1995, and again amended by the Second Amendment on March 30, 1996. 1.2 As of the date of this third Amendment, the First Amendment, the Second Amendment, and the Employment Agreement constituted the entire understanding concerning Employee's employment with Employer. 1.3 Employer, Corporation, and Employee desire to enter into this Third Amendment upon the terms and conditions set forth herein to amend the Agreement. NOW THEREFORE, IN CONSIDERATION of the mutual covenants and agreements contained herein and for such other good and valuable consideration, the receipt and adequacy of which is hereby admitted and acknowledged, the Parties hereto agree as follows: 2.0 DEFINITIONS. All capitalized terms not defined herein shall have the same meanings ascribed to them in the Employment Agreement and First Amendment. However, to the extent any definitions used herein differ from the definitions contained in the First Amendment or the Employment Agreement, the definitions provided below shall supersede same and shall be controlling in interpreting the Agreement. 2.1 Agreement: "Agreement" shall collectively refer to the Employment Agreement, the First Amendment and the Second Amendment. 2.2 First Amendment: "First Amendment" shall mean the Amendment to Employment Agreement dated March 27, 1995 by and among Corporation, Employer and Employee. 2.3 Employment Agreement: "Employment Agreement" shall mean the agreement by and between Employer and Employee on August 16, 1994. 2.4 Parties: "Parties" shall collectively refer to Corporation, Employer, and Employee. 2.5 Second Amendment: "Second Amendment" shall mean the Second Amendment to Employment Agreement dated March 30, 1996. -1- 2 2.6 Third Amendment: "Third Amendment" shall mean this Third Amendment to Employment Agreement dated as of the Effective Date. 3.0 AMENDMENTS. The following section of the First Amendment is amended to read as follows: 3.1 Section 2.2a Change in Control is replaced with the following language: "2.2a Change in Control: "Change in Control" shall mean the closing of an acquisition by no later than June 30, 1997 of more than fifty-one percent (51%) of the outstanding common stock of Corporation through a merger, sale, or reorganization by an entity, individual, or group acting in concert which satisfies all of the following conditions: (i) The affirmative vote by a required majority of the Board of Directors of Corporation (as required by the By-Laws of Corporation for the proposed transaction) approving the proposed transaction subject to shareholder approval; (ii) The acquisition of 100% of Employee's stock of Corporation, on the same terms and conditions as those set forth for the Corporation's other Shareholders; (iii) The affirmative vote of a required majority (as required by the By-Laws of Corporation for the proposed transaction) of shares of the stock of Corporation in favor of the proposed transaction causing the Change in Control as well as approving this Amendment; (iv) Subject to the approval of the SEC, Corporation shall submit the request for -2- 3 shareholder approval of certain elements of this Third Amendment which became effective upon shareholder approval as a joint resolution with the proposed transaction effectuating a Change in Control; and (v) Employee continuing to provide services to Employer until the closing of the acquisition unless any cessation of services was the result of Termination Without Cause. A Change in Control shall not occur as a result of any stock acquisition by Mr. Richard H. Pickup or his Affiliates through the exercise of options, warrants, conversion of debentures, or through other changes in ownership resulting from capital infusions recommended by a State regulatory agency for which Employer is subject or Employee on behalf of Employer is subject." 4.0 CAPACITIES AND DUTIES. Upon a Change in Control, Section 4.2 is replaced in its entirety as follows: "6.3 Employee agrees that, in connection with the acquisition of 100% of Employee's stock of Corporation upon a Change in Control, Employee agrees not to violate the provisions of Section 11.0 or the Confidentiality Agreement during the four (4) year period after a Change in Control." 5.0 RATIFICATION. To the extent not otherwise modified by the terms and conditions of this Third Amendment, all of the terms of the Employment Agreement as previously modified by the First Amendment and previously modified by the Second Amendment are hereby ratified and republished. 6.0 BOARD OF DIRECTORS' APPROVAL The execution of this Third Amendment has been authorized by a duly called meeting of the Board of Directors of the Corporation and Employer. Employee was absent from such meeting due to a conflict of interest. The meeting was ratified by a telephonic board meeting. It is acknowledged that any Change in Control is subject to Shareholder approval, but the Board's action is all that is necessary to give effect to this Third Amendment. The undersigned officers of the Corporation and Employer have been duly authorized to execute this -3- 4 Third Amendment on behalf of the Corporation and Employer pursuant to this resolution of the Board of Directors of each. The Parties hereto have set their hands the day and year first above written. PAC RIM HOLDING CORPORATION, a Delaware corporation By: /s/ PAUL W. CRAIG --------------------------- Paul W. Craig Its: Executive Vice President "CORPORATION" THE PACIFIC RIM ASSURANCE COMPANY, a California corporation By: /s/ PAUL W. CRAIG --------------------------- Paul W. Craig Its: Executive Vice President "EMPLOYER" /s/ STANLEY BRAUN ----------------------------------- STANLEY BRAUN, an individual "EMPLOYEE" Drafted by: THE BUSCH FIRM 2532 Dupont Drive Irvine, California 92715 (714) 474-7368 April 10, 1997 2240H-22.2(C) -4- 5 EXHIBIT A CONSENT TO AMENDMENT AND AGREEMENT I, the undersigned, am the spouse of Stanley Braun. I have read the Employment Agreement dated April 15, 1994 ("Employment Agreement"), the Amendment to Employment Agreement dated March 27, 1995 ("First Amendment"), the Second Amendment to Employment Agreement dated March 30, 1996 ("Second Amendment"), and this Third Amendment to the Employment Agreement dated April 10, 1997 by and among Pac Rim Holding Corporation, a Delaware corporation. The Pacific Rim Assurance Company, a California corporation ("Corporation") and my spouse, Stanley Braun, and clearly understand the provisions thereof. I am aware that by the provisions of said Amendment and Agreement my spouse has agreed to certain provisions regarding his employment with the aforementioned Corporation, including the expiration of certain stock options according to their terms and the grant of new stock options and my community interest therein, if any, in accordance with the terms and provisions of said Third Amendment, Second Amendment, First Amendment and Employment Agreement. I hereby approve of and consent to the provisions of said Third Amendment, Second Amendment, First Amendment and Employment Agreement, in its entirety. DATED: April 10, 1997 /s/ NANCY BRAUN ---------------------------- -5- EX-27 3 FINANCIAL DATA SCHEDULE
7 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 171,060 0 0 838 0 0 244,326 0 116 5,184 379,803 213,686 15,652 0 0 44,030 24,945 0 34,025 19,965 379,803 64,388 5,521 19 0 44,995 8,290 14,361 2,263 769 1,494 0 (10,361) 0 (9,774) 0 0 195,131 38,632 6,363 (5,808) (53,457) 180,861 6,363
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