1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT
(Mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31,1997
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 0-8804
THE SEIBELS BRUCE GROUP, INC.
(Exact name of registrant as specified in its charter)
South Carolina 57-0672136
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
1501 Lady Street (P.O. Box 1)
Columbia, S.C. 29201(2)
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (803) 748-2000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $1.00 per share
(Title of class)
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
[ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of March 2, 1998: $57,971,055.
The number of shares outstanding of the registrant's common stock as of March
2, 1998: 7,729,474.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual proxy statement in connection with the annual meeting to
be held May 20, 1998 are incorporated by reference into Part III.
2
TABLE OF CONTENTS
Table of Contents......................................................................... i
Abbreviations............................................................................. ii
PART I
------
Item 1. Business...................................................................... 1
Item 2. Properties.................................................................... 8
Item 3. Legal Proceedings............................................................. 8
Item 4. Submission of Matters to a Vote of Security Holders........................... 8
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters....................................................... 11
Item 6. Selected Financial Data....................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 13
Item 8. Financial Statements and Supplementary Data................................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................................... 49
PART III
--------
Item 10. Directors, Executive Officers, Promoters and
Control Persons of the Registrant............................................. 49
Item 11. Executive Compensation........................................................ 49
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................................ 49
Item 13. Certain Relationships and Related Transactions................................ 49
PART IV
-------
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K........................................................... 49
Signatures................................................................................ 52
3
ABBREVIATIONS
The following abbreviations used in the text have the meaning set forth below
unless the context requires otherwise:
FASB . . . . . . . . Financial Accounting Standards Board
FEMA . . . . . . . . Federal Emergency Management Administration
GAAP . . . . . . . . Generally Accepted Accounting Principles
IBNR . . . . . . . . Incurred-But-Not-Reported
Innovative . . . . . The Innovative Company
JUA . . . . . . . . Joint Underwriting Association
KIC . . . . . . . . Kentucky Insurance Company
LAE . . . . . . . . Loss Adjustment Expenses
MGA . . . . . . . . Managing General Agent
NAIC . . . . . . . . National Association of Insurance Commissioners
NCCI . . . . . . . . National Council on Compensation Insurance
NC Facility . . . . North Carolina Reinsurance Facility
NFIP . . . . . . . . National Flood Insurance Plan
PBP . . . . . . . . Premium Budget Plan
RBC . . . . . . . . Risk Based Capital
SAP . . . . . . . . Statutory Accounting Principles
SBIG . . . . . . . . The Seibels Bruce Group, Inc. (also the "Company")
SBC . . . . . . . . Seibels Bruce & Company
SCIC . . . . . . . . South Carolina Insurance Company
SC Facility . . . . South Carolina Reinsurance Facility
Universal . . . . . Universal Insurance Company
WYO . . . . . . . . Write-Your-Own
ii
4
PART I
Item 1. Business
DEVELOPMENT OF BUSINESS
The Seibels Bruce Group, Inc., a South Carolina corporation (the "Company"), is
a provider of automobile, flood and other property and casualty insurance
products and services through independent agents primarily in the southeastern
United States. The Company, founded in 1869, believes that its historic
franchise, strong agent relationships and regional market knowledge uniquely
position it to grow its fee-based operations as well as the risk-bearing
operations that are traditional of property-casualty insurance carriers. A new
management team introduced in the second quarter 1995, coupled with a
revitalized employee group, instituted a focused strategy that has dramatically
improved the Company's financial position. Seibels Bruce is one of three
servicing carriers for the South Carolina Reinsurance Facility ("SC Facility"),
a state-sponsored plan for insuring South Carolina drivers outside the
voluntary market. The Company recently began to bear risk on its automobile
operations and acquired The Innovative Company ("Innovative"), and its wholly
owned subsidiary, Universal Insurance Company ("Universal"), a nonstandard
automobile carrier headquartered in North Carolina, to realize growth and
expertise in this arena. Seibels Bruce is also a leading provider in the
National Flood Insurance Program ("NFIP"). The Company offers commercial lines
insurance products, all of which are reinsured by A+ rated carriers. To
complement its flood insurance products, the Company has a catastrophe claims
adjustment service, Insurance Network Services. The Company is committed to
turning its business opportunities into shareholder value.
Seibels Bruce is the parent company of South Carolina Insurance Company
("SCIC"), Seibels Bruce & Company ("SBC"), Innovative and its wholly-owned
subsidiary, as well as a premium financing subsidiary, Premium Budget Plan,
Inc. ("PBP"). SCIC consists of a group of property and casualty insurance
companies headquartered in South Carolina and Kentucky. SBC has served as a
Managing General Agent ("MGA"), and houses the Company's catastrophe claims
adjustment service division.
The following table sets forth the sources of the Company's revenue for the
periods indicated (dollars in thousands):
1997 1996 1995
---- ---- ----
Current operations:
Fee and service operations:
SC Facility premium-based fees $ 15,799 $ 14,556 $ 13,451
SC Facility claim-based fees 11,253 10,638 14,343
Flood premium-based fees 8,961 8,340 9,408
Flood claim-based fees 1,431 4,415 2,863
Other state facilities 118 1,390 2,613
MGA 4,473 6,170 6,734
Brokerage and other 2,015 910 160
Risk operations:
Nonstandard automobile 983 71 -
Other 177 - -
Assumed from pools and associations 4,894 5,819 1,232
-------- -------- --------
Total current operations 50,104 52,309 50,804
Premiums from run-off risk operations 737 1,774 10,042
-------- -------- --------
Total $ 50,841 $ 54,083 $ 60,846
======== ======== ========
1
5
Fee Generating Activity
The Company has acted as a servicing carrier for the SC Facility since the
state sponsored plan's inception in 1974. The SC Facility was designed to
insure South Carolina drivers unable to obtain insurance in the voluntary
market. Currently, approximately 42% of all drivers in the state are covered
by the SC Facility. Additionally, voluntary insurance companies are able to
cede up to 35% of their liability premiums to the SC Facility. Business ceded
from the voluntary insurers constituted approximately $277 million of the $485
million in premiums written in the SC Facility at its September 30, 1997 fiscal
year end. The remaining $208 million was written by "Designated Agents," who
underwrite automobile insurance exclusively for the SC Facility.
As a servicing carrier for the SC Facility, the Company receives a percentage
of the premiums written and claims paid as a commission for handling policy
production and claims adjustment services. The Company must pay the Designated
Agent a commission on the premium for policies written by them. All premiums
written as a servicing carrier are ceded to the SC Facility. When a
policyholder whose premium has been ceded to the SC Facility by either a
servicing carrier or a voluntary insurance company incurs a loss, that issuing
company adjusts the loss and is reimbursed for the loss and expenses by the SC
Facility.
Throughout its history, the SC Facility has operated at a deficit. The deficit
is subsidized by all South Carolina drivers who are assessed a "recoupment fee"
in addition to their insurance premium. The deficits have been due, in
large part, to the fact that automobile insurance premium rates for drivers
insured by the SC Facility have been inadequate to support the SC Facility on a
self-sustaining basis.
In June, 1997, the South Carolina Legislature passed reform legislation which
will reorganize the SC Facility over a transition period. In particular, the
legislation will replace the SC Facility with a Joint Underwriting Association
("JUA") starting March 1, 1999 through March, 2002. Thereafter, the JUA will
be replaced with an Assigned Risk Plan. Designated Agents became eligible on
July 1, 1997 to write voluntary automobile insurance on behalf of any private
insurer with whom they elect to contract. The Company believes the proposed
reorganization is likely to result in rates increasing to a self-sustaining
level, thereby triggering a voluntary exit from the SC Facility by insureds
able to obtain more attractive rates in the voluntary market. To this end, the
Company began offering a voluntary automobile program in October, 1997. The
Company believes it is in a good position to capture many of these insureds as
they enter the voluntary market.
Flood
The Company also functions as a servicing carrier for the WYO federal flood
facility of the NFIP, for which it receives commissions on written premiums and
incurred losses for handling policy production and claims adjusting services.
The Company writes this business in almost every state, with its primary volume
being produced in the southeast and along the eastern coast. In February,
1998, the Company hired five additional sales people to increase flood writings
throughout the United States. The areas targeted are the Northeast, Midwest,
California and Florida. During the fourth quarter of 1997, the company made an
investment in the form of both debt and equity into Sunshine State Holding
Company. The Company has also entered into a joint marketing agreement with
Sunshine State Insurance Company ("Sunshine"), the insurance subsidiary of
Sunshine State Holding Company, a Florida-based writer of homeowners insurance.
Under this agreement, the Company's agents in Florida will have access to
homeowners insurance through Sunshine State and Sunshine State agents will have
access to flood insurance through one of the Company's insurance subsidiaries.
The Company owns approximately 23% of the stock of Sunshine's parent
corporation. This business is directly related to catastrophic events which
produce flooding, and tends to be seasonal as coverages are most actively
sought by insureds during hurricane and other flood-related seasons. The
Company's coverage areas remained relatively unscathed in 1997, as hurricane
activity was minimal as compared to 1996 and 1995.
Other Insurance Lines
The Company sells commercial lines products, including commercial automobile
insurance, commercial package policies, business owner policies, garage
packages and umbrella policies. From May, 1993 through January, 1998, these
policies were sold by the Company in its capacity as a Managing General Agent.
As such, the underwriting risk associated with the policies has been borne by
an unaffiliated third party. In exchange for a commission, the Company sold,
issued policies and performed underwriting and claims services for the issuing
carrier for risks in Georgia, Kentucky, North Carolina, South Carolina and
Tennessee. Effective in February, 1998, the Company began to underwrite these
policies as the issuing carrier on a risk basis. While the business has
produced favorable loss ratios in recent years for the issuing carrier, the
Company has not enjoyed profitable results from its Managing General Agency
relationship. Accordingly, the Company recently terminated its
2
6
arrangement with such unaffiliated third party effective during the first
quarter of 1998. In its new capacity as the retainer of these risks, the
Company will be able to establish its own underwriting standards, develop new
products, improve agency retention and recruitment, reduce operating expenses,
and further improve loss ratios.
Property and Casualty Insurance Underwriting
Effective in October, 1997, the Company began to actively solicit new business
from South Carolina automobile insureds for which the risk will, at least in
part, be retained by the Company. Effective in December, 1997, the Company
began to offer policies to insureds whose policies were expiring. Given the
short time frame that such policies were offered during 1997, relatively
little net earned premium is reflected as revenue in the 1997 income statement.
Underwriting activities for business on which the Company retains insurance
risks are designed to achieve adequate pricing, and seek to classify risks into
narrowly defined segments by using all available underwriting criteria and
credible historical data. The Company generally utilizes many factors in
determining its rates, including the number of vehicles, their type, age and
location, driving experience, number and type of convictions or accidents,
limits of liability, deductibles, and where allowed by law; sex and marital
status of the insured. Premium rates for automobile insurance generally are
subject to approval of state insurance departments. The rate approval process
varies from state to state.
As a consequence of the December 1, 1997 acquisition of Innovative, the Company
is engaged in underwriting activities for nonstandard automobile policies in
several other states, principally North Carolina. The underwriting activities
of Innovative, through its principal subsidiary, Universal, are similar to the
activities anticipated in South Carolina as the Company begins to retain
insurance risks. For the year ended December 31, 1997, Universal had direct
written premiums of approximately $31 million, and net earned premiums of $8.3
million. Only one month of such activity is reflected in the consolidated
financial statements of the Company.
Effective February 1, 1998, the company began retaining risk in its commercial
lines. Prior to February, the company acted in the capacity of a general agent
for an unaffiliated insurer. In its capacity as a general agent, the company
underwrote and settled claims for the unaffiliated insurer. These policies
consist of business owners, general liability, commercial auto and umbrella
policies for main street businesses.
In 1995, the Company voluntarily ceased writing insurance that was not 100%
reinsured and put many of its lines of business into run-off. Since 1994, the
Company has continued to collect premiums and pay losses on this business. In
1997, run-off accounted for approximately one percent of the Company's revenues
and approximately three percent in 1996.
Claims Operations
The Company services and adjusts claims for its retained business, servicing
carrier functions and MGA services. Since 1994, the Company has focused
efforts on utilizing its employee adjusters for handling of claims, thus
allowing a reduction in usage of outside adjusters and corresponding reduction
in LAE expenses. Through the earlier involvement of the Company's claims
personnel in the claims process, the Company has recognized lower overall
adjustment expenses.
The Company, by virtue of its experience with weather-related catastrophes, has
developed a comprehensive catastrophe plan designed to maximize customer
service in the event of such a catastrophe. This plan has been particularly
useful with the widespread incidence of flood claims in 1994 through 1996.
Insurance Network Services, a catastrophe claims handling operation and wholly
owned subsidiary of the Company, was formed and began operating in 1996. The
division earned revenues of $0.2 million in 1997 and $0.4 million in 1996.
Revenues in 1997 were less than the previous year due to the lack of weather
related catastrophic events in serviced areas during 1997.
Management, in conjunction with the Company's independent actuaries, reviews
the loss reserves to evaluate their adequacy. Such review is based upon past
experience and current circumstances and includes an analysis of reported
claims, an estimate of losses for IBNR claims, estimates for LAE, reductions
for salvage/subrogation reserves, second injury funds and assumed reinsurance
losses. Management believes the reserves are sufficient to prevent prior
years' losses from adversely affecting future periods; however, establishing
reserves is an estimation process and adverse developments in future years may
occur and would be recorded in the year so determined.
3
7
Reinsurance
The Company currently reinsures 50% of its nonstandard automobile business in
South Carolina and 40% of its business in other states under separate pro-rata
reinsurance agreements with groups of reinsurers. This type of reinsurance is
designed to increase the capacity of the Company to write new and renewal
business. The Company cedes a portion of the premiums to the reinsurers net of
a ceding commission, and collects the same portion of claims payments from the
reinsurers. The lead reinsurer for the South Carolina business is Hartford
Insurance Company, while the reinsurers in other states are Gerling Global
Reinsurance Corporation and TIG Reinsurance Company.
Effective February, 1998, the Company reinsures its commercial lines business
on a per risk excess of loss basis. The Company will retain $100,000 per risk,
and will cede the excess to American Re Insurance Company. Effective in April
1998, the Company will purchase catastrophe coverage for its commercial and
personal lines of business.
Prior to suspending underwriting operations in the first half of 1995, the
Company reinsured a portion of its risks. Business was ceded principally to
reduce the Company's exposure on large individual risks and to provide
protection against large catastrophic occurrences. The Company's principal
reinsurer under the prior agreements, in terms of the amount of reinsurance
recoverable on incurred losses, is Swiss Reinsurance American Corporation.
Reinsurance does not legally discharge an insurer from its primary liability on
the policies it issues, but an assuming reinsurer is liable to the insurer to
the extent of reinsurance ceded. Therefore, the Company is subject to credit
risk with respect to the obligations of its reinsurers. The Company evaluates
the financial condition of each prospective reinsurer before it cedes business
to the carrier. Reserves for uncollectable reinsurance are provided if deemed
necessary.
In its capacity as a servicing carrier, the Company issues policies for
automobile and flood insurance then reinsures 100% of these risks with the SC
Facility and the NFIP. While the amount of reinsurance recoverable under these
arrangements is significant, the Company believes these balances from the SC
Facility and the NFIP are fully collectable.
Other
From January, 1994 until December, 1996, the Company provided services to the
Kentucky Fair Plan, a homeowners residual market. That servicing role was
resumed by the state of Kentucky as of December 1996. Prior to December, 1997,
the Company assisted subagents in providing excess and surplus lines coverage
for difficult or unusual risks. The business was sold effective in December,
1997. The Company will collect immaterial amounts of revenue as the buyer
renews policies through 2001. The Company continues to runoff remaining
policies on its inactive life insurance subsidiary.
In the acquisition of Innovative, the Company acquired PBP, a premium financing
company. In 1997, PBP had total operating income of $1.2 million. Only one
month of such activity is reflected in the 1997 consolidated financial
statements of the Company. Premium finance is an important competitive factor
in selling nonstandard automobile insurance in North Carolina.
Investment and Investment Results
The Company's cash and investments were distributed as follows at December 31,
1997 and 1996 (in thousands):
1997 1996
---- ----
Asset Values % Asset Values %
------------ - ------------ -
U. S. Government and government
agencies and authorities $ 38,624 74.6 $ 40,102 93.4
States, municipalities and
political subdivisions 2,289 4.4 115 0.3
Corporate bonds 1,021 2.0 - -
-------- ------ -------- ------
Total debt securities 41,934 81.0 40,217 93.7
Cash & short term investments 8,922 17.2 2,664 6.2
Equity securities 915 1.8 35 0.1
Other long term Investments 22 - 28 -
-------- ------ -------- ------
Total cash and investments $ 51,793 100.0% $ 42,944 100.0%
======== ====== ======== ======
4
8
Asset values represent market values at December 31, 1997 and 1996,
respectively. During the fourth quarter of 1997, the Company invested $1.4
million into Sunshine State Holding Company. This investment was a combination
of $0.8 million in equity and $0.6 million in loans. The equity investment is
greater than 20% of the equity of Sunshine State Holding Company, therefore the
Company's equity in the undistributed earnings of the affiliate are reported in
earnings.
The following table sets forth the consolidated investment results for the
three years ended at December 31, 1997 (in thousands):
1997 1996 1995
---- ---- ----
Total investments (1) $ 53,078 $ 47,614 $ 53,841
Net investment income $ 3,121 3,006 3,176
Average yield 5.9% 6.3% 5.9%
Net realized investments gains (losses) $ 529 $ (14) $ 164
(1) Average of the aggregate invested amounts (market values) at the beginning
of the year, as of June 30 and as of the end of the year.
Regulation
State Regulation. Insurance companies are subject to supervision and
regulation in the jurisdictions in which they transact business, and such
supervision and regulation relate to numerous aspects of an insurance company's
business and financial condition. The primary purpose of such supervision and
regulation is the protection of policyholders. The extent of such regulation
varies but generally derives from state statutes which delegate regulatory,
supervisory and administrative authority to state insurance departments.
Accordingly, the state insurance departments have the authority to establish
standards of solvency which must be met and maintained by insurers, license
insurers and agents; and to approve policy forms. State insurance departments
also conduct periodic examinations of the affairs of insurance companies and
require the filing of annual and other reports relating to the financial
condition of insurance companies.
Most states have enacted legislation which regulates insurance holding company
systems, including acquisitions, dividends, the terms of surplus notes, the
terms of affiliate transactions and other related matters. Four of the
Company's insurance subsidiaries are domiciled in the state of South Carolina
and are principally regulated by the South Carolina Department of Insurance.
Universal is domiciled in North Carolina and is principally regulated by the
North Carolina Department of Insurance. KIC is domiciled in Kentucky and is
principally regulated by the Kentucky Department of Insurance.
Insurance companies are required to file detailed annual statements with the
state insurance regulators in each of the states in which they do business, and
their business and accounts are subject to examination by such regulators at
any time. In addition, these insurance regulators periodically examine the
insurer's financial condition, adherence to statutory accounting principles,
and compliance with insurance department rules and regulations. South
Carolina, North Carolina and Kentucky insurance laws, rather than federal
bankruptcy laws, would apply to the liquidation or reorganization of any of the
Company's insurance companies. An examination of SCIC, Consolidated American
Insurance Company, Catawba Insurance Company and Investors National Life
Insurance Company of South Carolina as of December 31, 1996, is in process.
Examinations have been completed of Universal as of December 31, 1995, and of
Kentucky Insurance Company as of June 30, 1995.
NAIC Guidelines. The NAIC has adopted Risk-Based Capital ("RBC") requirements
for property and casualty insurance companies to evaluate the adequacy of
statutory capital and surplus in relation to investment and insurance risks
such as asset quality, asset and liability matching, loss reserve adequacy, and
other business factors. The RBC formula is used by state insurance regulators
as an early warning tool to identify, for the purpose of initiating regulatory
action against insurance companies that are potentially inadequately
capitalized. Compliance is determined by the ratio of the Company's regulatory
total adjusted capital to its company action level RBC (as defined by the
NAIC). Companies which fall below the company action level RBC are required to
disclose plans to remedy the situation. As of December 31, 1997, all of the
insurance subsidiaries have ratios that are in excess of the level which would
prompt regulatory action.
5
9
Regulation of Dividends and Other Payments from Insurance Subsidiaries
The Company is a legal entity separate and distinct from its subsidiaries. As a
holding company, the primary sources of cash needed to meet its obligations,
including principal and interest payments with respect to indebtedness, are
dividends and other permitted payments from its subsidiaries and affiliates.
North Carolina and South Carolina insurance laws and regulations require a
domestic insurer to report any action authorizing distributions to shareholders
and material payments from subsidiaries and affiliates at least 30 days prior
to distribution or payment except in limited circumstances. Additionally,
those laws and regulations provide the Department of Insurance with the right
to disapprove and prohibit distributions meeting the definition of an
"Extraordinary Dividend" under the statutes and regulations.
The North Carolina Insurance Holding Company System Regulatory Act provides
that, without prior approval of the Commissioner of Insurance of the State of
North Carolina, dividends within any 12-month period may not exceed the lessor
of (i) 10% of surplus as regarding policyholders as of the preceding December
31 or (ii) the net income, not including realized capital gains, for the
12-month period ending the preceding December 31.
The South Carolina Insurance Holding Regulatory Act provides that, without
prior approval of the Director of Insurance of the State of South Carolina,
dividends within any 12-month period may not exceed the greater of (i) 10% of
SCIC's surplus as regarding policyholders as shown in the insurer's most recent
annual statement or (ii) SCIC's net income, not including realized capital
gains or losses as shown in the insurer's most recent annual statement.
Payment of cash dividends by the Company is at the discretion of its Board of
Directors and is based on its earnings, financial condition, capital
requirements, and other relevant factors. If the ability of SCIC and the
Company's other insurance subsidiaries to pay dividends or make other payments
to the Company is materially restricted by regulatory requirements, it could
affect the Company's ability to service its debt and/or pay dividends.
Required Participation
State Residual Market Plan. Most states in which the Company's property and
casualty insurance group writes business have collective pools, underwriting
associations, reinsurance facilities (the largest being the SC Facility and NC
Facility), assigned risk plans and or other types of residual market plans,
pursuant to which coverages not normally available in the voluntary market are
shared by all companies writing that type of business in that state.
Participation is usually based on the ratio of the Company's share of the
voluntary market in a given state.
South Carolina Automobile. The SC Facility is an unincorporated, non-profit
administrative service association of insurers. The SC Facility is supported
by the majority of the automobile insurers doing business in the state of South
Carolina and provides a mechanism for the insurance companies to cede mandated
high-risk coverages under automobile policies, and to share the cost of those
coverages ceded. Every insurer authorized to write automobile liability
insurance in South Carolina is required to participate in the SC Facility.
When policyholders whose premiums have been ceded through the SC Facility incur
a loss, the member company which issued the policy adjusts the loss and
subsequently is reimbursed for the loss and expenses by the Facility. The SC
Facility has also created a pool of "Designated Agents", which are agencies
usually comprised of a single independent agent who lost his or her access to
the voluntary automobile market. Designated Agents are assigned to one of the
Facility's servicing carriers. Prior to October 1, 1996, the cession of
retention of physical damage was dictated by whether or not the risk was
"pointed" or "clean". Only clean risk physical damage could be ceded to the SC
Facility prior to October 1, 1996. Effective October 1, 1996, however,
physical damage was removed from the mandate, and the SC facility agreed to
accept any physical damage, pointed or clean, provided the Facility-filed rates
were used.
1997 Legislation. In 1997, the South Carolina State General Assembly passed
legislation which transforms the SC Facility into a Joint Underwriting
Association (JUA) effective March 1, 1999. Beginning March 1, 1999, insurance
companies may no longer cede new business to the SC Facility. Non-servicing
Carriers may continue to cede renewals to the SC Facility until October 1, 1999
and Servicing Carriers may continue to cede renewals to the SC Facility until
March 1, 2002. All renewals ceded after March 1, 1999 must be ceded at the
rate level approved for the SC Facility. The new JUA will begin accepting
business on March 1, 1999. It is anticipated that the initial rate level for
the JUA will be approximately 50% to 60% above the current SC Facility rate.
The JUA will remain in existence for a three-year period at which time it is to
be transformed into an Assigned Risk Plan. The legislation allowed for the
current Designated Agents to receive voluntary contracts without jeopardizing
their Designated Agent Status.
6
10
National Flood Insurance Program. FEMA's Federal Insurance Administration
manages the NFIP. The NFIP regulations established the "Financial
Assistance/Subsidy Arrangement" pursuant to which the NFIP Administrator and
the private sector insurers participate in the WYO Program. Under the WYO
Program, insurers which are parties to a Financial Assistance/Subsidy
Arrangement may issue, in their own names, a Standard Flood Insurance Policy,
the form and substance of which is approved by the NFIP Administrator.
Insurers are responsible for all aspects of service, including policy issuance,
endorsements and renewals of policies and adjustments of claims brought under
the policies, and the NFIP Administrator monitors the performance levels of all
insurers participating in the WYO Program.
The Company is required to furnish to FEMA such summaries and analyses of
information, including claims information, as may be necessary to carry out the
purposes of the National Flood Insurance Act of 1968, as amended.
Competition and Other Factors
The Company operates in highly competitive industry markets. Many of its
competitors have greater financial resources and higher ratings from A. M. Best
than the Company. In general, the Company competes with both large national
writers and smaller regional companies in each state in which it operates.
These competitors include other companies that, like the Company, serve the
agency market, as well as companies that sell insurance directly to
policyholders. Direct writers may have certain competitive advantages over
agency writers, including increased name recognition, increased loyalty of
their customer base, and, potentially, reduced acquisition costs.
Nonstandard Automobile Insurance Business. The Company is one of three
servicing carriers for the SC Facility. The Company competes with the major
carriers for nonstandard voluntary automobile business. The nonstandard
automobile insurance business is price sensitive and certain competitors of the
Company have, from time to time, decreased their prices in an apparent attempt
to gain market share. Although the Company's pricing is inevitably influenced
to some degree by that of its competitors, management of the Company believes
that it is generally not in the Company's best interest to match such price
decreases, choosing instead to compete on the basis of underwriting criteria
and superior service to its agents and insureds.
The South Carolina Legislature has instituted reform legislation which will
reorganize the SC Facility over a three-year transition period into a JUA. The
Company believes that one result of the proposed reorganization will be that
the SC Facility rates will increase to a level that will trigger a voluntary
exit from the SC Facility by customers able to obtain more attractive rates in
the voluntary market. In this event, the Company feels there will be an
opportunity to attract those customers to the Company's nonstandard automobile
insurance products, and, eventually, into standard and preferred automobile
products. In particular, the Company believes its Designated Agent
relationships, its underwriting data and experience with the SC Facility and
knowledge of the South Carolina automobile insurance market will allow it to
obtain additional business.
Competition in the North Carolina market is driven not only by price, but also
by premium financing. The North Carolina market is sensitive to the down
payment required on a nonstandard automobile policy. The Company, through PBP,
plans to offer down payments which are similar to its competitors.
Flood Program. Factors influencing the choice of a competitor over the Company
include a competitor's ability to offer homeowners or other property products
to agents, and a competitor's ability to increase commission rates and on-line
policy issuance capability. The Company has been impacted by not having a
homeowners product to compliment its flood insurance especially in Florida;
thus, the Company signed the joint marketing agreement with Sunshine which
gives the Company's agents access to a homeowners product.
Commercial Lines/MGA Operations. As the Company resumes writing risk-bearing
commercial business in 1998, new competition factors arise. The Company will
continue to focus on small businesses in developing its "Main Street" book of
business, but competition in this market is intense. The Company will be
competing with the large national and regional carriers, many with higher A.M.
Best ratings than the Company, which influences the decisions of many
commercial insurance customers. In addition, companies offering workers'
compensation coverage may reap some competitive advantage. The Company is
reinsuring its book of business with A+ rated carriers to try and lessen the
effects of not having a rating. The Company is also investigating certain
niche markets in which it believes the competition will be less, and a lack of
a rating will have little impact.
7
11
Employees
At December 31, 1997, the Company and its subsidiaries employed a total of 397
employees.
Item 2. Properties
The Columbia, South Carolina headquarters, containing approximately 141,000
square feet of occupied space, is owned by the Company and used primarily by
its property and casualty insurance operations. The Winston-Salem, North
Carolina office houses Innovative and Universal. That office contains
approximately 18,000 square feet, and is leased through an arrangement with a
term through 2005. Some additional premises are leased by the Company in
locations in which they operate. Management believes that these facilities are
adequate for the current level of operations. The company sold one of its
auxiliary buildings during 1997. This sale created a gain of $311,000 for the
company.
Item 3. Legal Proceedings
The Company was served with a complaint dated November 19, 1997 by Norwest
Financial Resources, Inc. ("Norwest") that claimed indemnification against the
Company pursuant to the Asset Purchase Agreement dated as of July 2, 1993 by
and among Premium Service Corporation of Columbia ("Premium"), the Company and
Norwest. The indemnification claim relates to certain loans which were
recorded on the books of Premium but which later were discovered to be
incorrectly recorded as realizable assets. This complaint was filed in the
state of South Carolina in the Richland County, Court of Common Pleas.
Management believes the Company has no liability in the case.
Catawba was served with a complaint dated November 7, 1997 by the Municipal
Association of South Carolina which claimed it has potential deficiency of
approximately $1.75 million with respect to certain South Carolina municipality
taxes. Management and legal counsel believe Catawba has basis for non-payment
of such amounts and the Company has adequately reserved in its financial
statements with respect to this claim. This complaint was filed in the State
of South Carolina in the Richland County, Court of Common Pleas, Fifth Judicial
Circuit.
The Company and its subsidiaries are parties to various other lawsuits
generally arising in the normal course of their insurance and ancillary
businesses. The Company does not believe that the eventual outcome of such
suits will have a material effect on the financial condition or results of
operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders of the Company during the
fourth quarter of the fiscal year covered by this report.
8
12
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
---- --- --------
Steven M. Armato 46 Vice President of certain subsidiaries since December, 1995. Previously held
the position of Vice President from April, 1986. Employed by the Company since
April, 1981.
Priscilla C. Brooks 46 Corporate Secretary of the Company and certain subsidiaries since February,
1995. Assistant Corporate Secretary of the Company and certain subsidiaries
since 1982. Employed by the Company since 1973.
Michael A. Culbertson 49 Senior Vice President of the Company since June, 1995 and Group Vice President
of certain subsidiaries since December, 1995. Also holds the position of
Director of certain subsidiaries of the Company. Previously held position of
Vice President of Claims from June, 1993 until June, 1995. Employed by the
Company in various claims capacities since December, 1974.
Ernst N. Csiszar 47 President, Chief Executive Officer, and Director of the Company and certain
subsidiaries since June, 1995. Visiting professor at the School of Business,
University of South Carolina since 1988.
James P. Donnelly 45 Vice President and Chief Information Officer of certain subsidiaries since
February, 1997. Previously a Vice President in the Information Technology
Department of CNA Insurance Companies. Employed by CNA for more than five years
prior to 1997.
Wayne A. Fletcher 46 Vice President and Director of Development for certain subsidiaries since 1997.
From 1994 to 1997, Mr. Fletcher served as President of Bankers Underwriters,
Inc., a subsidiary of Banker's Insurance Group. Prior to 1994, Mr. Fletcher
spent a year as Assistant to the President of the California-based American
Sterling Corporation. From 1985 to 1993, he created and developed National
Flood Services. Mr. Fletcher has served in various insurance-related
capacities for the U.S. government,including managing the Federal Crop
Insurance Program.
Robert F. Key 39 Treasurer of the Company and certain subsidiaries since November, 1996. Also
serves as Director of certain subsidiaries. Previously employed by First Union
Bank from May, 1989 to July, 1996.
Robert L. Lippert 35 Vice President of the Company since July, 1997, and Vice President of certain
subsidiaries since May, 1996. Previously a professor at Rutgers University from
July, 1992 to May, 1996. Also has served as an independent consultant.
Kenneth W. Marter 36 Director of Finance and Controller of the Company and certain subsidiaries since
December, 1997. Director of Finance of the Company since November, 1996.
Previously Director of Finance with Air South Airlines, Inc. from July, 1994 to
October, 1996. Employed by the University of South Carolina from August, 1992
to June, 1994.
9
13
NAME AGE POSITION
---- --- --------
Andrew P. Martin 40 President and Chief Operating Officer of Universal Insurance Company, a
subsidiary of the Company since November, 1997. Previously served as Vice
President of Marketing, Administration and Strategic Planning for Integon
Corporation. Prior to Integon's acquisition of Bankers and Shippers Insurance
Company, Mr. Martin spent six years as Chief Financial Officer, Controller and
Treasurer for Bankers and Shippers Insurance Company.
Matthew P. McClure 28 Assistant Secretary of the Company and certain subsidiaries since November,
1996. Also serves as Legal Counsel for the Company and its subsidiaries.
Previously Manager of Financial Planning with Air South Airlines, Inc. from
July, 1995 to May, 1996. Employed by the South Carolina Fifth Judicial Circuit
solicitor from May, 1993 to July, 1995.
John A. Weitzel 52 Vice President and Chief Financial Officer of the Company and certain
subsidiaries since September, 1995. Director of the Company and certain
subsidiaries since October, 1995. Previously Chief Financial Officer of
Milwaukee Insurance Group, Inc. from April, 1985 to November, 1994.
John C. West 76 Chairman of the Board since September, 1994. Director of the Company since
June, 1994. Currently of counsel with the law firm of Bethea, Jordan and
Griffin PA in Hilton Head Island, South Carolina and professor at the University
of South Carolina. Former Governor of South Carolina (1971-75) and former
Ambassador to the Kingdom of Saudi Arabia (1977-81).
10
14
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
(a) Market Information
The Company's common stock is quoted and traded on The NASDAQ Stock Market
under the symbol "SBIG." The following table sets forth the range of high and
low closing sales prices as reported on The NASDAQ Stock Market. The table
reflects a 1-for-4 reverse stock split of the Common Stock that occurred on
April 10, 1997. On March 2, 1998, the last reported sales price of the Common
Stock on The NASDAQ Stock Market was $7.50 per share.
High Low
---- ---
1998
- ----
First quarter (through March 2, 1998) 7.69 7.00
1997
- ----
First quarter 9.50 7.25
Second quarter 8.25 6.13
Third quarter 8.75 7.75
Fourth quarter 8.38 7.38
1996 High Low
- ---- ---- ---
First quarter 16.00 6.25
Second quarter 12.50 9.50
Third quarter 10.50 8.00
Fourth quarter 10.75 8.00
(b) Holders
There were approximately 2,664 shareholders of record as of March 2, 1998.
This number does not include beneficial owners holding shares through nominee
or "street" names.
(c) Dividends
There have been no dividends declared by the Company on its common stock during
the past 5 years, and the Board of Directors does not presently intend to pay
any cash dividends on common stock in the foreseeable future. The ability of
the Company to declare and pay cash dividends, as well as to pay any debt
service, is dependent upon the ability of SCIC and Universal to declare and pay
dividends to the Company. SCIC and Universal are regulated as to their payment
of dividends by their respective state of domicile's insurance laws. The
Company's payment of cash dividends is at the discretion of the Board of
Directors and is based on its earnings, financial condition, capital
requirements, and other relevant factors. See Note 9 of Notes to Financial
Statements.
11
15
Item 6. Selected Financial Data
The following selected financial data for each of the five years ended December
31, 1997 is derived from the audited consolidated financial statements of the
Company. The selected data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and
the Consolidated Financial Statements and accompanying notes included elsewhere
herein.
(in thousands) 1997 1996 1995 1994 1993
---- ----- ---- ---- ----
FINANCIAL CONDITION
Total cash & investments $ 51,793 $ 42,944 $ 50,641 $ 61,686 $ 120,480
Total assets 234,618 220,472 224,005 255,935 324,695
Total debt 3,036 0 2,476 439 11,934
Shareholders' equity 37,544 23,791 10,187 650 13,902
Per share 4.86 3.86 2.44 0.16 7.40
RESULTS OF OPERATIONS
Revenues
Insurance:
Commission & service income $ 44,105 $ 46,419 $ 49,572 $ 60,669 $ 41,625
Property & casualty premiums 6,580 7,186 10,384 14,718 55,331
Credit life premiums 156 478 890 1,801 3,207
Net investment & other interest 3,887 3,807 4,330 6,226 7,090
Realized gains (losses) on investments 529 (14) 164 (6,327) 1,969
Other 112 151 843 2,673 4,697
--------- -------- -------- -------- ---------
Total revenues $ 55,369 $ 58,027 $ 66,183 $ 79,760 $ 113,919
--------- -------- -------- -------- ---------
Income (loss) before extraordinary item $ 4,003 $ 5,176 $ 1,152 $(19,074) $ (10,249)
Extraordinary item-gain from
extinguishment of debt, net of income taxes - - - - $ 9,235
Net income (loss) $ 4,003 $ 5,176 $ 1,152 $(19,074) $ (1,014)
Basic earnings per share before extraordinary item 0.57 1.05 0.28 (6.89) (5.47)
Basic earnings per share effect of extraordinary item - - - - 4.93
Basic earnings per share 0.57 1.05 0.28 (6.89) (0.54)
Diluted earnings per share 0.55 0.94 0.27 (6.89) (0.54)
(See Item 7 and Notes to Financial Statements included under Item 8).
12
16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The selected financial data and consolidated financial statements and related
notes thereto should be read in conjunction with the following discussion as
they contain important information for evaluation of the Company's financial
condition and operating results.
OVERVIEW
The Company provides automobile, flood, commercial and other property and
casualty insurance services and products. The largest sources of revenues
during 1997, 1996, and 1995 were derived from the Company's participation in
the SC Facility and the NFIP. Other revenues have been derived from acting as
a Managing General Agent for an unaffiliated insurance company (this
relationship was terminated effective 2/1/98), excess and surplus lines
brokerage services and catastrophe claims services. The following table shows
revenues by the various segments during the years ended December 31, 1997,
1996, and 1995, respectively (in thousands):
1997 1996 1995
---- ---- ----
Current operations:
Fee and service operations:
SC Facility premium-based fees $ 15,799 $ 14,556 $ 13,451
SC Facility claim-based fees 11,253 10,638 14,343
Flood premium-based fees 8,961 8,340 9,408
Flood claim-based fees 1,431 4,415 2,863
Other state facilities 118 1,390 2,613
MGA 4,473 6,170 6,734
Brokerage and other 2,015 910 160
Risk operations:
Nonstandard automobile 983 71 -
Other 177 - -
Assumed from pools and associations 4,894 5,819 1,232
-------- -------- --------
Total current operations 50,104 52,309 50,804
Premiums from run-off risk operations 737 1,774 10,042
-------- -------- --------
Total $ 50,841 $ 54,083 $ 60,846
======== ======== ========
As one of the three servicing carriers, the Company earns commission and
service income as a percentage of gross premiums written and also earns a fee
on claims paid. Until October 1, 1994, the Company serviced the largest of
three blocks of business for the SC Facility ("Block 1"). As the result of a
competitive bid process in 1994, the Company, as the second lowest bidder, was
awarded a five-year contract to service the second largest block of business
("Block 2") at lower rates than its old contract. However, the Company
continued to process the remaining run-off claims from Block 1 for losses
incurred prior to October 1, 1994, pursuant to the rates under its prior
contract. Premium-based fees under the new contract are 21.0% of gross premiums
written (compared with a rate of 28.0% under its prior contract). The Company
is responsible for paying all costs of processing the policies, including a
mandated 12.0% commission on gross premiums earned to the agent. The Company
also receives income on the claims it pays for the SC Facility in the amount of
11.0% of the gross paid claims (compared with a 15.0% rate under its prior
contract). The Company is responsible for paying all costs to process these
claims, including adjusting expenses. However, the SC Facility does reimburse
the Company in full for legal expenses associated with processing these claims.
In 1997, the Company expanded its participation in the South Carolina
automobile business to include writing and retaining a portion of the risk on
nonstandard automobile policies. These revenues were not significant during
1997. Also in the fourth quarter of 1997 the Company acquired Innovative and
its subsidiary, Universal, a writer of nonstandard automobile insurance in
North Carolina, West Virginia and Georgia. Only one month of activity from
Universal is included in the current year results.
The Company is a servicing carrier for the NFIP. During 1996 and 1995, the
Company recognized income for the policies it processes in the amount of 30.6%
of gross premiums written. The Company's estimated rate for 1997 is 31.6% and
would
13
17
increase to 32.9% if the Company is able to increase its contracts in force, as
defined by the NFIP, by 10%. The Company is responsible for paying all costs
associated with processing the policies, including a commission to the
independent agent. The Company also receives a fee on the claims that it pays
on these policies in the amount of 3.3% of incurred claims. The Company is
reimbursed for the allocated loss adjustment expenses associated with these
claims according to a standard fee schedule.
Prior to February, 1998, the Company derived revenues from its role as a
commercial lines Managing General Agent for an unaffiliated insurance company.
While the Company performed all services and paid all costs (including the
independent agents' commissions) related to administering and processing
policies and claims, the policies were written on behalf of an unaffiliated
insurance company. The Company's financial statements reflect commission
income as a percentage of premiums written but do not reflect these premiums
written or associated claims incurred. Beginning in February, 1998, as the
commercial policies renew, the Company will retain the risk.
The Company continues to maintain reserves and pay significant claims with
respect to its run-off operations. These run-off operations consist primarily
of general liability policies that include contractors' liability and
environmental coverages primarily in California and commercial (including
worker's compensation) and personal lines policies in the Southeast. The
run-off of claims on these policies created substantial losses to the Company
during the past 10 years. The Company commissioned additional reviews of its
run-off operations by independent actuaries resulting in a large increase in
reserves during the year ended December 31, 1994.
During 1997, the Company received other income from its excess and surplus
lines. The company acted as an MGA or broker for several non-affiliated
insurance companies. The Company sold this business in December, 1997.
Beginning in early 1995, the Company replaced its Chief Executive Officer and
Chief Financial Officer and began an intensive and ongoing effort to recruit
additional management. New management has taken a number of actions to
stabilize and improve the Company's financial condition through significant
cost reductions, the raising of new equity capital, and a renewed emphasis on
the proper mix of both risk and non-risk fee-based businesses. As a result of
these actions and the relative stabilization of reserves, the Company was
profitable in 1997, 1996 and 1995 and resumed limited underwriting activities
in 1996.
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
Commission and Service Income
Commission and service income for the year ended December 31, 1997 decreased
$2.3 million or 5% to $44.1 million from $46.4 million for the year ended
December 31, 1996. This decrease is due to a $1.7 million decrease in
premium-based fee revenue from the Company's MGA relationship in commercial
lines. Also, flood claim-based revenues decreased $2.1 million due to reduced
claims activity during the year ended December 31, 1997. Revenues from SC
Facility premium-based and claim-based fees increased $1.2 million and $0.6
million, respectively, for the year ended December 31, 1997. Flood
premium-based fees also increased $0.6 million for the same period.
Property and Casualty Premiums Earned
Property and casualty premiums earned for the year ended December 31, 1997
decreased $0.6 million, or 11.8% to $6.6 million from the year ended December
31, 1996. This decrease is due to a $0.9 million decrease in premiums assumed
from pools and associations.
Credit Life Premiums Earned
Net credit life premiums earned for the year ended December 31, 1997 decreased
$0.3 million or 67.4% to $0.2 million from $0.5 million for the year ended
December 31, 1996. The Company sold the related subsidiary in September, 1993.
Under the sale agreement, the Company retained the responsibility and continues
to run-off the policies in existence at the sales date.
14
18
Net Investment and Interest Income
Net investment and other interest income for the year ended December 31, 1997
increased 2.1% or $80,000 from $3.8 million as of December 31, 1996 to $3.9
million. The Company's cash and investment position increased $8.8 million
from December 31, 1996 to December 31, 1997. Approximately one-half of the
increase is due to the addition of Universal's $4.2 million portfolio on
December 1, 1997. Investment income only includes results for one month of the
Universal portfolio. Average yield for the portfolio was down slightly from
6.3% in 1996 to 5.9% in 1997 which is reflective of the lower interest rate
environment experienced in 1997.
Realized Gains on Investments
Realized gains on investments totaled $529,000 for the year ended December 31,
1997, a $543,000 increase over the previous year. Of this total, $221,000 was
realized on the sale of stock in an industry trade group ISO. In addition, the
Company sold surplus real estate, which resulted in a gain of $311,000.
Loss and Loss Adjustment Expense
Property and casualty loss and loss adjustment expense for the year ending
December 31, 1997 decreased $1.8 million , or 15.0% to $10 million from $11.8
million for the year ended December 31, 1996. The decrease is due to a
reduction in losses and loss adjustment expenses related to the Company's
run-off business.
Policy Acquisition Costs
Policy acquisition costs for the year ended December 31, 1997 and 1996 were
$1.4 and $1.8 million, respectively. The $0.4 million decrease is due to
reduction in net premiums written in the property and casualty segments and a
decrease in policy acquisition costs associated with the credit life segment.
Other Operating Costs and Expense
Other operating costs and expense for the year ended December 31, 1997
increased $0.9 million, or 2.2% to $39.9 million from $39 million for the year
ended December 31, 1996. This increase is mainly due to the Company hiring
individuals in 1997 for its voluntary automobile program and associated start
up costs for that program.
Years Ended December 31, 1996 and 1995
Commission & Service Income
Commission and service income for the year ended December 31, 1996 decreased
$3.2 million, or 6.4%, to $46.5 million from $49.6 million for the year ended
December 31, 1995. This decrease is due primarily to a decline of $3.7 million
in SC Facility claims-based fees resulting largely from the new contract
effective in October, 1994. The effect of this new contract caused an
immediate reduction in premium-based fees and a more gradual reduction over an
approximate 18-month period in claims-based fees for the reasons explained in
the above overview.
Property and Casualty Premiums Earned
Net property and casualty premiums earned for the year ended December 31, 1996
decreased $3.2 million, or 31%, to $7.2 million from $10.4 million for the year
ended December 31, 1995. This decline is largely due to the suspension of
risk-bearing business in the first half of 1995 and would have been
significantly greater but for the $5.8 million of premiums the Company was
required to assume from the NC Facility (compared to $1.2 million of such
premiums assumed in 1995). In 1996, the Company continued to earn premiums on
personal lines business written by the Company in the first half of 1995.
Credit Life Premiums Earned
Net credit life premiums earned for the year ended December 31, 1996 decreased
$0.4 million, or 46%, to $0.5 million from $0.9 million for the year ended
December 31, 1995
15
19
Net Investment and Interest Income
Net investment and other interest income for the year ended December 31, 1996
decreased $0.5 million, or 12%, to $3.8 million from $4.3 million for the year
ended December 31, 1995. This decrease is primarily a result of a decrease of
$7.7 million, or 15%, in the Company's overall cash and investment position
from $50.6 million at December 31, 1995 to $42.9 million at December 31, 1996.
This decrease is due to the Company's negative cash flow from operations in
1996 and is described in "Liquidity and Capital Resources." However, average
yield on total cash and investments improved from 5.9% for the year ended
December 31, 1995 to 6.3% for the year ended December 31, 1996.
Other Income
Other income for the years ended December 31, 1996 and 1995 was $0.2 million
and $0.8 million, respectively. Other income in 1995 includes a gain from the
settlement of litigation.
Loss and Loss Adjustment Expenses
Property and casualty loss and loss adjustment expenses incurred decreased $5.8
million, or 32.9%, to $11.8 million from $17.6 million for the year ended
December 31, 1995. This decrease largely corresponds to the decrease in
property and casualty premiums earned and also reflects a smaller provision for
prior year losses of $1.1 million in 1996 as compared to $3.4 million in 1995.
See "Loss and Loss Adjustment Expense Reserves."
Policy Acquisition Costs
Property and casualty policy acquisition costs incurred decreased $2 million,
or 53%, to $1.8 million from $3.8 million for the year ended December 31, 1996
compared to the year ended December 31, 1995. This decrease is due to the
reduction in net premiums written. The decline would have been greater but for
the policy acquisition costs associated with the premiums the Company was
required to assume from the NC Facility.
Interest Expense
Interest expense was $0.2 million and $0.3 million for the years ended December
31, 1996, and 1995, respectively. The majority of the interest expense during
both years related to interest paid on notes payable to one of the Company's
principal shareholders. The Company repaid these notes in full on May 1, 1996.
Other Operating Costs and Expenses
Other operating costs and expenses for the years ended December 31, 1996 and
1995 were $39 million and $42.8 million, respectively. This decrease of $3.8
million, or 9%, is primarily a result of the Company's continuing efforts to
maintain costs at a level appropriate to the associated revenue levels. A
portion of this decrease is related to the cancellation of the Company's
contract with Policy Management Systems Corporation ("PMSC") in September,
1996. While most of the services that PMSC had provided for the Company were
discontinued in 1995 and 1994, the amount paid to PMSC during 1996 was reduced
from $1.8 million for the year ended December 31, 1995 to $0.9 million for the
year ended December 31, 1996.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Loss and loss adjustment expenses reserves are estimates at a given point in
time of the amount of claims that the insurer expects to pay claimants plus
investigation and litigation costs, based on facts and circumstances then
known. It can be expected that the ultimate liability in each case will differ
from such estimates. During the loss settlement period, additional facts
regarding individual claims may become known and, consequently, it becomes
necessary to refine and adjust the estimates of liability.
The liability for losses on direct business is determined using case-basis
evaluations and statistical projections. The liabilities determined under
these procedures are reduced, for GAAP purposes, by estimated amount to be
received through salvage and subrogation and second injury funds of $0.7
million in 1997. The resulting liabilities represent the Company's estimate of
the net cost of all unpaid losses and LAE incurred through December 31 of each
year. These estimates may be
16
20
affected by the frequency and/or severity of future claims. These estimates
are continually reviewed and as experience develops and new information becomes
known, the liability is adjusted as necessary.
The anticipated effect of inflation is implicitly considered when estimating
liabilities for losses and LAE. While anticipated price increases due to
inflation are considered, an increase in average severity of claims may be
caused by a number of factors that vary with the individual type of policy
written. Future average severity is projected based on historical trends
adjusting for changes in underwriting standards, policy provisions, and general
economic trends.
These anticipated trends are monitored based on actual developments and are
modified as necessary. The Company does not discount its loss and LAE
reserves.
The following table presents, on a GAAP basis, a three-year analysis of losses
and LAE, net of ceded reinsurance recoverable, with the net liability
reconciled to the gross liability as reported in the Company's financial
statements (in thousands):
1997 1996 1995
---- ---- ----
Liability for losses and LAE at the beginning of the year:
Gross liability per balance sheet $ 132,152 $ 145,523 $ 166,698
Ceded reinsurance recoverable, classified as an asset (84,725) (84,492) (88,731)
--------- --------- ---------
Net liability 47,427 61,031 77,967
--------- --------- ---------
Reserves acquired in purchase of Universal 2,655 - -
--------- --------- ---------
Provision for losses and LAE for claims
occurring in the current year 12,202 10,697 14,243
(Decrease) Increase in estimated losses and LAE for
claims occurring in prior years (3,362) 1,117 3,375
--------- --------- ---------
8,840 11,814 17,618
--------- --------- ---------
Losses and LAE payments for claims occurring during
Current year 8,845 9,151 11,711
Prior years 10,923 16,267 22,843
--------- --------- ---------
19,768 25,418 34,554
--------- --------- ---------
Liability for losses and LAE at the end of the year:
Net liability 39,154 47,427 61,031
Ceded reinsurance recoverable, classified as an asset 75,616 84,725 84,492
--------- --------- ---------
Gross liability per balance sheet $ 114,770 $ 132,152 $ 145,523
========= ========= =========
The ceded reinsurance recoverable, classified as an asset, includes $ 67.1
million at the end of 1997 ($74.8 million at the end of 1996 and $76.1 million
at the end of 1995) of balances recoverable from various facilities (such as
the SC Facility, NC Facility and NFIP). See Note 13 of Notes to Financial
Statements.
17
21
The difference between the year-end net liability for losses and LAE reported
in the accompanying consolidated financial statements in accordance with GAAP
and that in accordance with SAP was as follows for the years ended December 31
(in thousands):
1997 1996
---- ----
Net liability on a SAP basis as filed in annual statement $ 39,540 $ 47,952
Established salvage and subrogation recoveries recorded on a cash basis
for SAP and on an accrual basis for GAAP (386) (525)
--------- ---------
Net liability on a GAAP basis, at year end 39,154 47,427
Ceded reinsurance recoverable, classified as an asset 75,616 84,725
--------- ---------
Gross liability on a GAAP basis, at year end $ 114,770 $ 132,152
========= =========
The following table reflects the loss and LAE development for 1997 and 1996 on
a GAAP basis (in thousands):
Unpaid losses Re-estimated as Cumulative
and LAE of one year later Redundancy
------- ----------------- ----------
1997: Gross liability $ 114,770
Less reinsurance recoverable 75,616
----------
Net liability $ 39,154
==========
1996: Gross liability $ 132,152 $ 122,784 $ 9,368
Less reinsurance recoverable 84,725 78,719 6,006
---------- ----------- -----------
Net liability $ 47,427 $ 44,065 $ 3,362
========== =========== ===========
18
22
The following analysis reflects loss and LAE development on a SAP basis, net of
ceded reinsurance recoverable, for a ten year period for retained business only
for year ended December 31 (in millions):
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Liability for unpaid losses and LAE 145 129 122 114 112 118 120 80 62 48 40
(SAP)
Cumulative liability paid through:
One year later 82 104 78 77 63 30 65 26 16 9
Two years later 150 141 121 116 50 84 86 42 29
Three years later 173 166 145 93 91 102 99 52
Four years later 191 183 115 125 104 112 108
Five years later 203 151 139 135 111 120
Six years later 174 170 147 140 117
Seven years later 191 176 151 146
Eight years later 195 179 156
Nine years later 199 183
Ten years later 203
Liability re-estimated as of:
One year later 158 174 135 136 119 129 138 85 63 45
Two years later 197 177 150 147 124 139 144 87 62
Three years later 200 188 156 151 134 151 143 85
Four years later 210 185 159 161 145 149 141
Five years later 204 185 168 172 143 150
Six years later 204 195 180 171 145
Seven years later 213 206 178 173
Eight years later 224 204 181
Nine years later 222 207
Ten years later 224
Cumulative (deficiency) redundancy (79) (78) (59) (59) (33) (32) (21) (5) - 3
==== ==== ==== ==== ==== ==== ==== === ==== ===
The preceding table presents the development of balance sheet liabilities on a
SAP basis for 1987 through 1997. The top line of the preceding table shows the
initial estimated liability on a SAP basis. This liability represents the
estimated amount of losses and LAE for claims arising in years that are unpaid
at the balance sheet date, including losses that have been incurred but not yet
reported. The next portion of the table reflects the cumulative payments made
for each of the indicated years as they have developed through time. This table
has been adjusted for a modification made to 1994 paid losses on a GAAP basis,
not recorded for statutory net losses incurred. On a statutory basis, the
modification is a reclassification only and has no effect on income.
In evaluating this information, it should be noted each amount includes the
effects of all changes in amounts for prior periods. This table does not
present accident or policy year development data, which readers may be more
accustomed to analyzing. Conditions and trends that have affected development
of the liability in the past may not necessarily occur in the future.
Accordingly, it may not be appropriate to extrapolate future redundancies or
deficiencies based on this table.
A part of the Company's reserve for losses and LAE is set aside for
environmental, pollution, and toxic tort claims. These claims relate to
business written by the West Coast operation prior to 1986. On June 7,1994, the
Company settled a dispute relative to approximately 400 of these claims. Any
future liability on these claims is limited to 50% of the direct loss and LAE
paid. The Company's obligation does not begin until the other company pays out
subsequent to June 7,1994, a total of $ 20 million in losses and LAE paid, net
of reinsurance. As of December 31, 1997, $7.5 million of claims payments have
been made (before considering reinsurance recoveries) since June 7, 1994. A
portion of the reinsurance on this business was placed with a reinsurer
currently operating under the supervision of its state regulator. Estimates of
any obligations of the Company take into account potential recoverable amounts.
19
23
Of the remaining environmental, pollution and toxic tort claims, the following
activity took place during 1997 and 1996:
1997 1996
---- ----
Pending, January 1 71 85
New claims advised 11 16
Claims settled 35 30
-- --
Pending, December 31 47 71
== ==
The policies corresponding to these claims were written on a direct basis. The
Company has excess of loss reinsurance with company retention through 1980 of $
100,000 and $ 500,000 after that date. The claims are reserved as follows as
of December 31, 1997 and 1996 (in thousands):
1997 1996
---- ----
Case reserves $ 2,960 $ 3,170
IBNR 4,641 6,381
LAE reserves 1,820 3,764
-------- ---------
Total $ 9,421 $ 13,315
======== =========
The above claims involve four Superfund sites, seven asbestos or toxic claims,
four underground storage tanks and 32 miscellaneous clean-up sites. For this
direct business there are usually several different insurers participating in
the defense and settlement of claims made against the insured. Costs and
settlements are pro-rated by either time on the risk or policy limits.
In estimating the liability for reported and estimated losses and adjustment
expenses related to environmental and construction defect claims, management
considers facts currently known along with current state of the law and
coverage litigation. Liabilities are recognized for known claims (including
the cost of related litigation) when sufficient information has been developed
to indicate the involvement of a specific insurance policy, management can
reasonably estimate its liability. In exposures on both known and unasserted
claims, estimates of the liabilities are reviewed and updated continually. The
potential development of losses is restricted by policy limits.
Because only 47 claims remain open as of December 31,1997, the exposure to
significant additional development is less than when the claims were less
mature. In addition, the likelihood of new claims being asserted for
construction liability is lessened by the expiration of statutes of limitations
since the last policy expired over ten years ago.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity relates to the Company's ability to produce sufficient cash to
fulfill contractual obligations, primarily to policyholders. Sources of
liquidity include service fee income, premium collections, investment income
and sales or maturities of investments.
Net cash used in operations totaled $2.4 million for 1997, a substantial
improvement over $12.9 million in 1996 and $21.7 million in 1995. As a result
of its decision to suspend risk taking activities in 1995, the Company's stream
of direct premium collections was eliminated for the first six months of 1996.
However, the company continued to pay losses and loss adjustment expenses
totaling $25.4 million in 1996, of which $16.3 million represented loss
payments on prior year claims. Total losses paid in 1997 declined to $19.8
million, which included $10.9 million from prior years. The 1997 losses paid
included Universal's loss experience for the month of December 1997. Direct
Premium collections in 1997 prior to the acquisition of Universal were minimal.
Net cash flow provided in 1997 by investing activities made up for the deficit
in operating cash flow as total funds provided by investing activities equaled
$2.3 million. Investments sold or matured totaled $4.3 million and proceeds
were used to purchase new investments totaling $1.6 million.
Financing activities in 1997 provided $6.3 million in cash. The June 1997
public offering raised approximately $8.6 million, of which $2.9 million was
used to repay notes associated with the Innovative acquisition.
20
24
Total cash and investments at December 31, 1997, 1996 and 1995 were $51.8
million, $42.9 million and $50.6 million, respectively. At December 31, 1997,
$8.9 million, or 17.2%, of the portfolio was committed to cash and short term
investments consisting primarily of repurchase agreements as compared to $2.7
million, or 6.2%, of the portfolio at December 31, 1996. Investments in US
Treasury Securities, US Agency Securities, Overnight Repurchase Agreements and
cash represents 96.2% of Cash and Investments.
All debt securities are considered available for sale and are carried at market
value as of December 31, 1997 and 1996. The market values of the debt
securities were $47,000 above book value at the end of 1997, which is included
as an increase in shareholders' equity, compared with $0.5 million below book
value at the end of 1996. The weighted average maturity of the fixed income
investments as of December 31, 1997 was approximately 3.2 years. Average net
investment yields on the Company's cash and investments were 5.9% in 1997 and
6.3% in 1996.
Financing activities since January 1, 1996 include the following:
- - During the first quarter of 1996, the Company issued 408,750 shares of
unregistered Company stock at a price of $8.00 per share to a group of
investors. The proceeds of this stock sale were used to repay a $2
million loan from a shareholder which was due May 1, 1996. In
addition, the Company has issued to this group stock options expiring
on December 31, 2000 to acquire an additional 408,750 shares at the
greater of $10.00 per share or the book value per share at the date of
exercise.
- - A different group of investors acquired 1,562,500 shares of Company
Common Stock at a price of $4.00 per share in the third quarter of
1996. The proceeds were used to make a $6.3 million contribution to
SCIC. In conjunction with the sale of common stock, the Company also
issued stock options to acquire an additional 781,250 shares at the
greater of $6.00 per share or the book value per share at the date of
exercise, expiring December 31, 1998 and 781,250 shares at the greater
of $8.00 or the book value per share at the date of exercise, expiring
December 31, 2000.
- - Offering costs associated with the two transactions listed above
totaled $180,000 leaving the Company with net proceeds of $9.3 million
which were used to make a $6.3 million contribution to SCIC and $2.0
million was used to repay a loan to a shareholder. The remaining
amounts were used as working capital.
- - In June, 1997, the Company lead a public equity offering. A total of
2,853,089 shares were offered at $7.00 per share. 1,853,089 of the
2,853,089 shares were offered by a former shareholder, and 1,000,000
shares were offered by the Company. Subsequent to the offering, the
Underwriters exercised an over-allotment option to purchase 427,963
additional shares at $7.00 per share. Proceeds from the offering
totaled $9,996,000 and net proceeds to the Company were $9,296,000
after the underwriters 7% commission and after all related issuance
costs. Approximately half of the proceeds were used in items related
to the Universal acquisition, another $1.8 million was used for the
Sunshine investment and the remainder was used for working capital.
- - In the fourth quarter of 1997, subsidiaries of the Company acquired
notes payable to a financial institution in the amounts of $825,000
and $2,750,000 in connection with the acquisition of Innovative by the
Company. The $825,000 is a long term loan, the proceeds of which were
used for permanent working capital. The $2,750,000 loan is a short
term revolving line of credit used to finance the accounts of a
subsidiary premium finance company, Premium Budget Plan. As of
December 31, 1997, $1,909,000 was outstanding on this line of credit.
- - In the fourth quarter, the Company issued 220,000 shares of Cumulative
Convertible Redeemable Nonvoting Special Preferred Stock ("Special
Stock") to the previous shareholders of Innovative as consideration
for the purchase of Innovative. The Special Stock pays quarterly
dividends at an annual rate of $0.62 per share. On or after August
15, 2000, but prior to August 15, 2002, the Company at its option
only, may redeem in whole or in part the Special Stock at a price of
$15.00 per share. On August 15, 2002, the Company must redeem any
remaining shares at a rate of $10.00 per share. On or after August
15, 2000, but prior to August 15, 2002, holders of the shares have the
right to convert each share of the Special Stock into 1.23 shares of
Common Stock.
The Company is a legal entity separate and distinct from its subsidiaries. As
a holding company, the primary sources of cash needed to meet its obligations,
including principal and interest payments with respect to any indebtedness, are
dividends and other permitted payments from its subsidiaries and affiliates.
21
25
North Carolina and South Carolina insurance laws and regulations require a
domestic insurer to report any action authorizing distributions to shareholders
and material payments from subsidiaries and affiliates at least 30 days prior
to distribution or payment except in limited circumstances. Additionally,
those laws and regulations provide the Department of Insurance with the right
to disapprove and prohibit distributions meeting the definition of an
"Extraordinary Dividend" under the statutes and regulations.
The North Carolina Insurance Holding Company System Regulatory Act provides
that, without prior approval of the Commissioner of Insurance of the State of
North Carolina, dividends within any 12-month period may not exceed the lesser
of (i) 10% of surplus as regarding policyholders as of the preceding December
31 or (ii) the net income, not including realized capital gains, for the
12-month period ending the preceding December 31.
The South Carolina Insurance Holding Regulatory Act provides that, without
prior approval of the Director of Insurance of the State of South Carolina,
dividends within any 12-month period may not exceed the greater of (i) 10% of
SCIC's surplus as regarding policyholders as shown in the insurer's most recent
annual statement or (ii) SCIC's net income, not including realized capital
gains or losses as shown in the insurer's most recent annual statement.
Payment of cash dividends by the Company is at the discretion of its Board of
Directors and is based on its earnings, financial condition, capital
requirements, and other relevant factors. If the ability of SCIC or Universal
and the Company's other insurance subsidiaries to pay dividends or make other
payments to the Company is materially restricted by regulatory requirements, it
could affect the Company's ability to service its debt and/or pay dividends.
In addition, no assurance can be given that North Carolina or South Carolina
will not adopt statutory provisions more restrictive than those currently in
effect.
The volume of premiums that the property and casualty insurance subsidiaries
may prudently write is based in part on the amount of statutory net worth as
determined in accordance with applicable insurance regulations. NAIC has
adopted RBC requirements for property and casualty insurance companies to
evaluate the adequacy of statutory capital and surplus in relation to
investments and insurance risks such as asset quality, asset and liability
matching, loss reserve adequacy, and other business factors. The RBC formula
is used by state insurance regulators as an early warning tool to identify, for
the purpose of initiating regulatory action, insurance companies that are
potentially inadequately capitalized. Compliance is determined by the ratio of
the companies' regulatory total adjusted capital to its authorized control
level RBC (as defined by NAIC). All six of the property and casualty insurance
subsidiaries of the Company have December 31, 1997 ratios of total adjusted
capital to RBC that are in excess of the level which would prompt regulatory.
UTILIZATION OF NET OPERATING LOSS CARRYFORWARDS
The Company has unused tax operating loss carryforwards and capital loss
carryforwards of approximately $92.9 million for income tax purposes. However,
due to a "change in ownership" event that occurred in January, 1995, the
Company's use of the carryforwards are subject to limitations in future years
of approximately $2 million per year. Net operating loss carryforwards
available for use in 1998 is approximately $7.2 million, due to tax losses
incurred in 1995 subsequent to the change in ownership event and the carryover
of previous years' unused limitations.
Based on its recent earning history, the Company has established a valuation
allowance of $12.6 million against the net deferred tax asset as December 31,
1997.
YEAR 2000 COMPLIANCE
The Company, and its subsidiaries began evaluating the Year 2000 compliance
issue in early 1997 and developed a plan that had the Company 40% compliant by
December 31, 1997. The Company expects that it will be 95% compliant by
December 31, 1998 and, 100% compliant by June 30, 1999. As of December 31,
1997, the Company has spent approximately $25,000 on the Year 2000 compliance
issue and expects total costs to be approximately $300,000, which the Company
will fund out of current operating funds primarily in 1998.
22
26
Item 8. Financial Statements and Supplementary data (continued on following
page).
23
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
The Seibels Bruce Group, Inc.:
We have audited the accompanying consolidated balance sheets of The
Seibels Bruce Group, Inc. (a South Carolina corporation) (the Parent Company)
and subsidiaries (collectively the "Company"), as of December 31, 1997 and
1996, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements and the schedules referred
to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statement referred to above present
fairly, in all material respects, the consolidated financial position of The
Seibels Bruce Group, Inc. and subsidiaries, as of December 31, 1997 and 1996
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Schedules I, II, III, IV, V
and VI listed in Part IV, Item 14 are presented for purposes of complying with
the Securities and Exchange Commissions rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements, and in our
opinion, fairly state in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Columbia, South Carolina
March 9, 1998 (except with respect to matters
discussed in Note 16, as to which the date is
March 16, 1998)
24
28
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
For the year ended December 31
(Dollars shown in thousands)
1997 1996
---- ----
ASSETS
Investments:
Debt securities, available-for-sale, at market
(cost of $41,845 at 1997 and $40,709 at 1996) $ 41,934 $ 40,217
Equity securities, at market (cost of $906 at 1997
and $34 at 1996) 915 35
Cash and short-term investments 8,922 2,664
Other long-term investments 22 28
--------- ---------
Total cash and investments 51,793 42,944
Accrued investment income 785 772
Premiums and agents' balances receivable, net 5,674 6,477
Premium notes receivable 3,233 -
Reinsurance recoverable on paid losses and
loss adjustment expenses 30,244 28,218
Reinsurance recoverable on unpaid losses and
loss adjustment expenses 75,616 84,725
Property and equipment, net 5,462 5,194
Prepaid reinsurance premiums - ceded business 50,602 46,118
Deferred policy acquisition costs 1,580 96
Other assets 9,629 5,928
--------- ---------
Total assets $ 234,618 $ 220,472
========= =========
LIABILITIES
Losses and claims:
Reported and estimated losses and claims
- retained business $ 30,847 $ 37,019
- ceded business 66,262 74,735
Adjustment expenses
- retained business 8,307 10,408
- ceded business 9,354 9,990
Unearned premiums:
Property and casualty
- retained business 3,739 1,380
- ceded business 50,602 46,118
Credit life 41 194
Balances due other insurance companies 15,489 8,736
Notes payable 3,036 -
Current income taxes payable 41 17
Other liabilities and deferred items 7,156 8,084
--------- ---------
Total liabilities 194,874 196,681
--------- ---------
COMMITMENTS AND CONTINGENCIES
CUMULATIVE, CONVERTIBLE, REDEEMABLE, NONVOTING SPECIAL
PREFERRED STOCK, Redemption value $2,200, 220,000 shares issued and
outstanding 2,200 -
--------- ---------
SHAREHOLDERS' EQUITY
Special stock, no par value, authorized 5,000,000 shares, none outstanding - -
Common stock, $1 par value, authorized 12,500,000 shares, issued &
outstanding of 7,730,725 and 6,168,097 shares at 1997 and 1996 7,731 6,168
Additional paid-in-capital 61,665 54,050
Unrealized gain/(loss) on investments 47 (536)
Accumulated deficit (31,899) (35,891)
--------- ---------
Total shareholders' equity 37,544 23,791
--------- ---------
Total liabilities and shareholders' equity $ 234,618 $ 220,472
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
25
29
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31,
(Dollars shown in thousands, except per share amounts)
1997 1996 1995
---- ---- ----
Commission & service income $ 44,105 $ 46,419 $ 49,572
Premiums earned:
Property & casualty 6,580 7,186 10,384
Credit life 156 478 890
Net investment income 3,121 3,006 3,176
Other interest income 766 801 1,154
Realized gains (losses) on investments 529 (14) 164
Other income 112 151 843
-------- -------- --------
Total revenue 55,369 58,027 66,183
-------- -------- --------
Expenses
Property & casualty:
Losses & loss adjustment expenses 8,840 11,814 17,618
Policy acquisition costs 1,207 1,777 3,794
Credit life benefits 70 203 545
Interest expense 119 174 308
Other operating costs & expenses 41,084 39,014 42,768
-------- -------- --------
Total expenses 51,320 52,982 65,033
-------- -------- --------
Income from operations,
before income taxes 4,049 5,045 1,150
Provision (benefit) for income taxes 46 (131) (2)
-------- -------- --------
Net income $ 4,003 $ 5,176 $ 1,152
======== ======== ========
Basic earnings per share:
Net income $ 0.57 $ 1.05 $ 0.28
======== ======== ========
Weighted average shares outstanding 7,002 4,918 4,181
======== ======== ========
Diluted earnings per share:
Net income $ 0.55 $ 0.94 $ 0.27
======== ======== ========
Weighted average shares outstanding 7,274 5,492 4,240
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
26
30
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Year Ended December 31,
(Dollars shown in thousands)
1996 1996 1995
---- ---- ----
Common stock outstanding:
Beginning of year $ 6,168 $ 4,193 $ 3,625
Stock issued in connection with rights offering 1,428 - 554
Stock issued to benefit plans, agents and others 135 4 14
Stock issued in connection with capital contributions - 1,971 -
--------- --------- ---------
End of year $ 7,731 $ 6,168 $ 4,193
========= ========= =========
Additional paid-in-capital:
Beginning of year $ 54,050 $ 46,660 $ 41,859
Stock issued in connection with rights offering 7,175 - 4,767
Stock issued to benefit plans, agents and others 440 21 34
Stock issued in connection with capital contributions - 7,369 -
--------- --------- ---------
End of year $ 61,665 $ 54,050 $ 46,660
========= ========= =========
Unrealized gain (loss) on investments:
Beginning of year $ (536) $ 401 $ (2,615)
Change during the year 583 (937) 3,016
--------- --------- ---------
End of year $ 47 $ (536) $ 401
========= ========= =========
Accumulated deficit:
Beginning of year $ (35,891) $ (41,067) $ (42,219)
Net income for the year 4,003 5,176 1,152
Preferred stock dividend (11) - -
--------- --------- ---------
End of year $ (31,899) $ (35,891) $ (41,067)
========= ========= =========
Total shareholders' equity $ 37,544 $ 23,791 $ 10,187
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements
27
31
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
(in thousands)
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 4,003 $ 5,176 $ 1,152
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and Amortization 856 979 925
Realized (gains) losses on investments (218) 14 (164)
Realized (gain) on sale of real estate (311) - -
Stock issued as compensation 81 16 31
Change in assets and liabilities:
Accrued investment income 72 (75) 112
Premium and agents' balances receivable, net 1,165 528 6,023
Premium notes receivable 194 - -
Reinsurance recoverable on losses and loss
adjustment expenses 27,972 (1,028) 7,093
Prepaid reinsurance premiums-ceded business 964 (2,649) 5,014
Deferred policy acquisition costs 201 197 606
Unpaid losses and loss adjustment expenses (34,899) (13,371) (21,175)
Unearned premiums (2,831) 1,565 (10,164)
Balances due other insurance companies 3,383 (3,702) (6,681)
Current income taxes payable 24 (174) 42
Outstanding drafts and bank overdraft - - (3,891)
Other-net (3,026) (414) (634)
-------- -------- --------
Net cash used in operating activities (2,370) (12,938) (21,711)
-------- -------- --------
Cash flows from investing activities:
Proceeds from investments sold 2,399 3,954 10,804
Proceeds from investments matured 1,863 3,095 2,030
Cost of investments acquired (1,554) (14,288) (4,201)
Proceeds from mortgage loan receivable - - 1,965
Proceeds from property and equipment sold 665 116 57
Purchase of property and equipment (1,074) (797) (92)
-------- -------- --------
Net cash provided by (used in) investing activities 2,299 (7,920) 10,563
-------- -------- --------
Cash flows from financing activities:
Issuance of capital stock - 9,340 -
(Repayment of) proceeds from notes payable (2,849) (2,476) 2,000
Stock issued under stock option plans 575 9 18
Proceeds from stock offerings 8,603 - 5,321
-------- -------- --------
Net cash provided by financing activities 6,329 6,873 7,339
-------- -------- --------
Net increase (decrease) in cash and short term investments 6,258 (13,985) (3,809)
Cash and short term investments, beginning of year 2,664 16,649 20,458
-------- -------- --------
Cash and short term investments, end of year $ 8,922 $ 2,664 $ 16,649
======== ======== ========
Supplemental cash flow information:
Interest paid $ 61 $ 350 $ 96
Income taxes paid (recovered) 21 43 (44)
Noncash investing activities:
Acquisition:
Preferred stock issued (2,200) - -
Assets acquired 36,831 - -
Liabilities assumed (37,224) - -
-------- -------- --------
Goodwill (2,593) - -
Notes payable in lieu of interest paid - - 37
The accompanying notes are an integral part of these consolidated financial
statements.
28
32
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation
The Seibels Bruce Group, Inc. ("SBIG", or the "Company") provides
automobile, flood, and other property and casualty insurance services
and products to customers located primarily in the southeastern United
States. The Company's largest source of revenues derives from the
Company's role as one of three servicing carriers for the South
Carolina Reinsurance Facility (the "SC Facility"), a state-sponsored
plan for insuring South Carolina drivers outside of the voluntary
market. The Company also is a leading provider, and an original
participant, in the National Flood Insurance Program (the "NFIP"), a
flood insurance program administered by the federal government. As a
servicing carrier for the Facility and the NFIP, the Company receives
commissions and fees, but reinsures all of the underwriting risk. The
Company provides other fee-based services, including services in its
capacity as a managing general agent ("MGA") for commercial insurance
policies underwritten by unaffiliated insurance companies,
catastrophic claims services, excess and surplus lines brokerage
services and liability run-off management services. Recently, the
Company began marketing and underwriting nonstandard automobile
insurance on a risk-bearing basis. In the fourth quarter of 1997, the
company purchased The Innovative Company ("Innovative") and its
subsidiaries Universal Insurance Company ("Universal") and Premium
Budget Plan ("PBP"). Universal is a nonstandard automobile insurance
company headquartered in North Carolina. PBP is a premium finance
company also located in North Carolina. Only one month's operations
of Innovative is included in the financial statements.
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles (GAAP) and
include the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Certain classifications previously presented in the consolidated
financial statements for prior years have been changed to conform to
current classifications.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates, although, in the opinion of the
management, such differences would not be significant.
Cash and Short-term Investments
For purposes of the Statements of Cash Flows, the Company considers
both cash and short-term investments within the caption "cash and
short-term investments" to be those highly liquid investments
purchased with an initial maturity of three months or less.
Fair Value of Financial Instruments
In accordance with FASB Statement 115, investments in debt and equity
securities are classified as either held-to-maturity, available for
sale or trading. The Company currently holds these securities as
available for sale, and reports them at fair value, with subsequent
changes in value reflected as unrealized investment gains and losses
credited or charged directly to shareholders' equity. The fair values
of cash and short-term investments approximate carrying value because
of the short maturity of those instruments.
The fair values of debt securities and equity securities were
determined in accordance with methods prescribed by the National
Association of Insurance Commissioners which do not differ materially
from nationally quoted market prices. The fair market value of certain
municipal bonds is assumed to be equal to amortized cost where no
market quotations exist.
29
33
Premium and agents' balances are carried at their historical costs
which approximate fair value as a result of timely collections and
evaluations of recoverability with a provision for uncollectable
amounts.
Stock Split
In April, 1997, the Company executed a 1-for-4 reverse stock split of
its common stock. All references in the financial statements, notes
thereto and other references to number of shares or earnings per share
reflect this transaction for all periods disclosed.
Property and Casualty Premiums
Property and casualty premiums are reflected in income when earned as
computed on a monthly pro-rata method. Written premiums and earned
premiums have been reduced by reinsurance placed with other companies,
including substantial amounts related to business produced as a
servicing carrier.
Credit Life Premiums
Credit life premiums are reflected in income when earned as computed
on a monthly pro-rata method for level term premiums and on a
sum-of-the-digits method for decreasing term premiums.
Commission and Service Income
Commission and service income is predominately derived from servicing
carrier activities. The commission income related to producing and
underwriting the business is recognized in the period in which the
business is written. A portion of commission income is also derived
from business produced by the Company as a Managing General Agent. The
Company receives commissions for producing and underwriting the
business as well as servicing such business. These revenues are
recognized on an accrual basis as earned.
Policy Acquisition Costs
Policy acquisition costs attributable to property and casualty
operations represent that portion of the cost of writing business that
varies with and is primarily related to the production of business.
Such costs are deferred and charged against income as the premiums are
earned. The deferral of policy acquisition costs is subject to the
application of recoverability tests to each primary line or source of
business based on past and anticipated underwriting results. The
deferred policy acquisition costs that are not recoverable from future
policy revenues, if any, are expensed. The Company considers
anticipated investment income in determining whether premium
deficiencies exist.
Property and Casualty Unpaid Loss and Loss Adjustment Expense
The liability for property and casualty unpaid losses and loss
adjustment expenses includes:
(1) An accumulation of case estimates for losses reported prior to
the close of the accounting period.
(2) Estimates of incurred-but-not-reported losses based upon past
experience and current circumstances.
(3) Estimates of allocated, as well as unallocated, loss
adjustment expense liabilities by applying percentage factors
to the unpaid loss reserves, with such factors determined on a
by-line basis from past results of paid loss expenses to paid
losses.
(4) The deduction of estimated amounts recoverable from salvage,
subrogation, and second injury funds.
(5) Estimated losses for reinsurance ceded and assumed.
Management, in conjunction with the Company's consulting actuaries,
performs a complete review of the above components of the Company's
loss reserves to evaluate the adequacy of such reserves. Management
believes the reserves, which approximate the amount determined by
independent actuarial reviews, are sufficient to prevent prior years'
losses from adversely affecting future periods; however, establishing
reserves is an estimation process and adverse developments in future
years may occur and would be recorded in the year so determined.
30
34
Earnings per Share
Basic per share data is based on the weighted average number of shares
outstanding of 7,001,552 in 1997 (4,918,346 in 1996 and 4,181,000 in
1995). Diluted per share data is based on the weighted average number
of shares outstanding of 7,273,971 in 1997 (5,491,553 in 1996 and
4,239,556 in 1995). Stock options and/or convertible preferred stock
had a dilutive effect on income per share in 1997, 1996 and 1995.
Allowance for Uncollectable Accounts
Allowance for uncollectable accounts for agents' balances and direct
bill balances receivable, other receivables, and premium notes
receivable were $1,095,000 and $823,000 at December 31, 1997 and
December 31, 1996, respectively.
Property, Equipment and Software
Property, equipment and software are stated at cost and, for financial
reporting purposes, depreciated on a straight-line basis over the
estimated useful lives of the assets. For income tax purposes,
accelerated depreciation methods are used for certain equipment.
Software development cost as well as purchased software is capitalized
when it is expected to have a useful life of at least three years and
is considered a major enhancement or a new project.
Goodwill
Goodwill is the excess of the amount paid to acquire a company over
the fair value of its net assets, reduced by amortization and any
subsequent valuation adjustments. The Company periodically evaluates
whether later events and circumstances have occurred that indicate
that the remaining balance of goodwill may not be recoverable or that
the remaining useful life may warrant revision. When external factors
indicate that goodwill should be evaluated for possible impairment,
the Company uses an estimate of the related subsidiary's cash flows
over the remaining life of the goodwill and compares it to the
subsidiary's goodwill balance to determine whether the goodwill is
recoverable, or if impairment exists, in which case an adjustment is
made to the carrying value of the asset. The Company amortizes
goodwill over a period of 40 years.
Other Interest Income
Other interest income includes interest received on reinsurance
balances withheld, agents' balances receivable, and balances due from
the SC Facility.
Recent Accounting Pronouncements
FASB Statement No. 130 "Reporting Comprehensive Income" has been
issued and becomes effective in 1998. This statement establishes
standards for reporting and display of comprehensive income and its
components. Comprehensive income is a measure of all changes in
equity of an entity and includes net income(loss) plus changes in
certain assets and liabilities that are reported directly in equity.
The Company has not elected early adoption of this statement and does
not believe that adoption will result in a significant impact to the
financial statements.
FASB Statement No.131 "Disclosures about Segments of an Enterprise and
Related Information" has been issued and becomes effective in 1998.
This statement requires public enterprises to report financial and
descriptive information about its reportable operating segments,
formatting those segments in a manner that coincides with the way in
which management regularly reviews the business and formulates
decisions. The Company has not elected early adoption of this
statement and does not believe that adoption will result in a
significant impact to the financial statements.
NOTE 2 INVESTMENTS
Investments in notes and other debt securities and common stocks are
all considered available-for-sale securities and are carried at market
at December 31, 1997 and 1996. Short-term investments are carried at
cost, which approximates market value.
Unrealized gains and losses on marketable debt and equity securities
are credited or charged directly to shareholders' equity. Realized
gains and losses on investments included in the results of operations
are determined using the "identified certificate" cost method.
31
35
Realized gains (losses) on investments are summarized as follows (in
thousands):
Debt Equity
Securities Securities Other Total
---------- ---------- ----- -----
Realized:
1997 $ 12 $ 227 $ 290 $ 529
1996 $ (62) $ 48 $ - $ (14)
1995 $ 240 $ (76) $ - $ 164
Change in unrealized:
1997 $ 581 $ 8 $ (6) $ 583
1996 $ (902) $ (154) $ 119 $ (937)
1995 $ 2,790 $ 237 $ (11) $ 3,016
Net bond discount accretion and premium amortization charged to income
for the years ended December 31, 1997, 1996 and 1995 was not material.
Unrealized gains and losses reflected in equity are as follows (in
thousands):
1997 1996 1995
---- ---- ----
Gross unrealized gains $ 202 $ 8 $ 577
Gross unrealized losses (155) (544) (176)
------ ------- -------
Net unrealized gain (loss) $ 47 $ (536) $ 401
====== ======== ========
Proceeds from sales of debt securities and related realized gains and
losses were as follows (in thousands):
1997 1996 1995
---- ---- ----
Proceeds from sales $ 2,145 $ 3,554 $ 10,556
Gross realized gains $ 12 $ 30 $ 267
Gross realized losses $ - $ (92) $ (27)
Proceeds from sales of equity securities and related realized gains
and losses were as follows (in thousands):
1997 1996 1995
---- ---- ----
Proceeds from sales $ 254 $ 400 $ 248
Gross realized gains $ 227 $ 75 $ -
Gross realized losses $ - $ (127) $ (76)
Investments which exceed 10% of shareholders' equity, excluding
investments in U. S. Government and government agencies and
authorities, at December 31, 1997, are as follow (in thousands):
Short-term investments: Carrying Value
----------------------- --------------
First Union Repurchase Agreements $ 11,156
There were no debt securities which were non-income producing for the
12 months ended December 31, 1997. Debt securities with an amortized
cost of $25 million and $22 million at December 31, 1997 and 1996,
respectively, were on deposit with regulatory authorities.
32
36
The amortized cost and estimated market values of investments in debt
and equity securities were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
December 31, 1997 Cost Gains Losses Market Value
----------------- ---- ----- ------ ------------
U. S. Government & government
agencies and authorities $ 38,581 $ 146 $ (103) $ 38,624
States, municipalities & political
subdivisions 2,246 43 - 2,289
Corporate bonds 1,018 4 (1) 1,021
-------- ------- ------- --------
Total debt securities 41,845 193 (104) 41,934
-------- ------- ------- --------
Non-redeemable preferred stock - - - -
Common stocks 906 9 - 915
-------- ------- ------- --------
Total equity securities 906 9 - 915
-------- ------- ------- --------
Other long-term investments 73 - (51) 22
-------- ------- ------- --------
Total $ 42,824 $ 202 $ (155) $ 42,871
======== ======= ======= ========
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1996 Cost Gains Losses Value
----------------- ---- ----- ------ -----
U. S. Government & government
agencies and authorities $ 40,601 $ - $ (499) $ 40,102
States, municipalities & political
subdivisions 108 7 - 115
--------- ------- ------- ---------
Total debt securities 40,709 7 (499) 40,217
--------- ------- ------- ---------
Non-redeemable preferred stock 17 1 - 18
Common stocks 17 - - 17
--------- ------- ------- ---------
Total equity securities 34 1 - 35
--------- ------- ------- ---------
Other long-term investments 73 - (45) 28
--------- ------- ------- ---------
Total $ 40,816 $ 8 $ (544) $ 40,280
========= ======= ======= =========
Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without penalties. The amortized cost and estimated market value of
debt securities at December 31, 1997 by contractual maturity, are as
follows (in thousands):
Total Market
Total Cost Value
---------- -----
Due in one year or less $ 14,373 $ 14,376
Due after one year through five years 11,607 11,651
Due after five years through ten years 14,932 14,937
Due after ten years 933 970
------- --------
Total $ 41,845 $ 41,934
======== ========
33
37
Investment income as of December 31 consists of the following (in
thousands):
1997 1996 1995
---- ---- ----
Debt securities $ 2,253 $ 2,122 $ 2,023
Equity securities 8 9 15
Short-term investments 855 849 1,138
Mortgage loan - - 23
Other 39 56 42
-------- -------- --------
Total investment income 3,155 3,036 3,241
Investment expenses (34) (30) (65)
-------- -------- --------
Net investment income $ 3,121 $ 3,006 $ 3,176
======== ======== ========
NOTE 3 PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows (in thousands):
Description Life in years 1997 1996
----------- ------------- ---- ----
Land - $ 1,054 $ 1,153
Buildings 10-40 4,210 4,320
Data processing equipment and software 3-7 6,115 4,963
Furniture and equipment 3-10 7,584 7,422
-------- --------
18,963 17,858
Accumulated depreciation (13,501) (12,664)
-------- --------
$ 5,462 $ 5,194
======== ========
Depreciation expense charged to operations was $0.8 million in 1997,
$1 million in 1996 and $0.9 million in 1995.
NOTE 4 DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs incurred and amortized to income on property
and casualty business were as follows (in thousands):
1997 1996
---- ----
Deferred at beginning of year $ - $ -
-------- -------
Deferred costs acquired 1,686 -
-------- -------
Costs incurred and deferred during year:
Commissions and brokerage 1,162 1,552
Taxes, licenses and fees 10 13
Other 12 15
-------- -------
Total 1,184 1,580
Amortization charges to income during year (1,305) (1,580)
-------- -------
Deferred at end of year $ 1,565 $ -
======== =======
Deferred policy acquisition costs attributable to the credit life
operation were $15,000 and $96,000 at December 31, 1997 and 1996,
respectively. These costs represent that portion of the cost of
writing business which is deferred and charged against income, through
other operating costs and expenses, as premiums are earned.
34
38
NOTE 5 NOTES PAYABLE
Notes payable at December 31, 1997 and 1996, are summarized as follows
(in thousands):
1997 1996
---- ----
Note payable (due 6/30/98, accrued interest payable
monthly at BB&T's Prime plus 1% compounded daily) $ 1,985 $ -
Note payable (due in monthly installments ending 9/1/98,
interest accrued at 6.89%) 226 -
Note payable (due 10/04/00, payable quarterly, accrued
payable monthly at BB&T Prime plus 0.625%
compounded daily) 825 -
------- --------
Total $ 3,036 $ -
======= ========
Both of the BB&T notes payable are subject to restrictive financial
covenants pertaining to minimum levels of net worth and ratios of debt
to net worth and cash flow coverage. As of December 31, 1997, the
Company was in compliance with all these restrictive covenants.
Scheduled maturities of the notes payable are as follows (in
thousands):
1998................................................$ 2,511
1999................................................$ 300
2000................................................$ 225
NOTE 6 INCOME TAXES
The Company files a consolidated federal income tax return which
includes all companies. A formal tax-sharing agreement has been
established by the Company with its subsidiaries.
The Company uses the liability method in accounting for income taxes.
Deferred taxes are determined based on the estimated future tax
effects of difference between the financial statement and tax bases of
assets and liabilities given the provisions of the enacted tax laws.
A reconciliation of the difference between income taxes (benefit) on
income from operations computed at the federal statutory income tax
rate is as follows (in thousands):
1997 1996 1995
---- ---- ----
Federal income tax at statutory rates $ 1,376 $ 1,715 $ 391
Increase (decrease) in taxes due to:
Tax exempt interest (2) (5) (22)
Dividends received deduction (3) (2) (4)
Overaccrual from prior years - (187) -
Limitation of net operating loss carryforward
due to change in control - 3,617 18,007
Changes in valuation allowances:
Utilization of net operating loss (1,339) (1,590) (329)
Reduction due to limitation of
net operating loss - (3,617) (18,007)
Other 14 (62) (38)
------- ------- --------
Tax provision (benefit) $ 46 $ (131) $ (2)
======= ======= ========
The provision for income taxes on income from operations consists
primarily of current income taxes resulting from alternative minimum
tax. The change in deferred amounts has been offset by the valuation
allowance.
35
39
Deferred tax liabilities and assets at December 31, 1997 and 1996, are
comprised of the following (in thousands):
1997 Tax Effect 1996 Tax Effect
--------------- ---------------
Deferred tax liabilities:
Deferred acquisition costs $ 559 $ 29
Property and equipment 57 92
Net unrealized investment gains 16 -
Other 221 97
---------- ----------
Total deferred liabilities 853 218
---------- ----------
Deferred tax assets:
Net operating loss carryforwards (10,203) (11,056)
Insurance reserves (2,460) (3,127)
Net unrealized investment losses - (182)
Bad debts (475) (521)
Other (287) (306)
---------- ----------
Total deferred tax assets (13,425) (15,192)
---------- ----------
Valuation allowance 12,572 14,974
---------- ----------
Net deferred tax liabilities $ - $ -
========== ==========
The Company has determined, based on its recent earnings history, that
a valuation allowance of $12.6 million should be maintained against
the deferred tax asset at December 31, 1997. The Company's valuation
allowance decreased by $2.4 million during 1997 due to a utilization
of net operating loss.
The Company has unused tax operating loss carryforwards and capital
loss carryforwards of $92.9 million for income tax purposes. However,
due to a "change in ownership" event that occurred in January, 1995,
the Company's use of the net operating loss carryforwards are subject
to maximum limitations in future years of approximately $2 million per
year. Net operating loss carryforwards available for use in 1998 are
approximately $7.2 million due to losses incurred in 1995 after the
change in ownership event occurred and carryover of previous years'
unused limitations.
The years of expiration of the tax carryforwards are as follows (in
thousands):
Net Operating
Year of Expiration Loss Capital Loss
------------------ ---- ------------
1999 $ - $ 4,436
2000 - 825
2004 12,044 -
2006 20,411 -
2007 31,931 -
2009 19,342 -
2010 3,918 -
---------- ---------
$ 87,646 $ 5,261
========== =========
36
40
NOTE 7 PROPERTY AND CASUALTY UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE
A part of the Company's reserve for losses and LAE is set aside for
environmental, pollution, and toxic tort claims. These claims relate
to business written by the previously owned West Coast operation prior
to 1986. On June 7,1994, the Company settled a dispute relative to
approximately 400 of these claims. Any future liability on these
claims is limited to 50% of the direct loss and LAE paid. The
Company's obligation does not begin until the other company pays out
subsequent to June 7,1994, a total of $ 20 million in losses and LAE
paid, net of reinsurance. As of December 31, 1997 and 1996, $7.5 and
$4.2 million respectively of claims payments have been made (gross of
reinsurance) since June 7, 1994. A portion of the reinsurance on this
business was placed with a reinsurer currently operating under the
supervision of its state regulator. Estimates of any obligations of
the Company take into account potential recoverable amounts.
Of the remaining environmental, pollution and toxic tort claims, the
following activity took place during 1997 and 1996:
1997 1996
---- ----
Pending, January 1 71 85
New claims advised 11 16
Claims settled 35 30
-- --
Pending, December 31 47 71
== ==
The policies corresponding to these claims were written on a direct
basis. The Company has excess of loss reinsurance with company
retentions through 1980 of $ 100,000 and $ 500,000 after that date.
The claims are reserved as follows as of December 31, 1997 and 1996
(in thousands):
1997 1996
---- ----
Case reserves $ 2,960 $ 3,170
IBNR reserves 4,641 6,381
LAE reserves 1,820 3,764
-------- ---------
Total $ 9,421 $ 13,315
======== =========
The above claims involve four Superfund sites, seven asbestos or toxic
claims, four underground storage tanks and 32 miscellaneous clean-up
sites. For this direct business there are usually several different
insurers participating in the defense and settlement of claims made
against the insured. Costs and settlements are pro-rated by either
time on the risk or policy limits.
In estimating the liability for reported and estimated losses and
adjustment expenses related to environmental and construction defect
claims, management considers facts currently known along with current
state of the law and coverage litigation. Liabilities are recognized
for known claims (including the cost of related litigation) when
sufficient information has been developed to indicate the involvement
of a specific insurance policy, management can reasonably estimate its
liability. Usually there are several different insurers participating
in the defense and settlement with ultimate costs pro-rated by either
time on the risk or policy limits. In exposures on both known and
unasserted claims, estimates of the liabilities are reviewed and
updated continually. The potential development of losses is restricted
by policy limits.
Because only 47 claims remain open as of December 31,1997, the
exposure to significant additional development is less than when the
claims were less mature. In addition, the likelihood of new claims
being asserted for construction liability is lessened by the
expiration of statutes of limitations since the last policy expired
over ten years ago.
Losses incurred are reduced by recoveries made and to be made from
reinsurers, which also includes substantial amounts related to
business produced as a servicing carrier. Estimated reinsurance
recoveries are as follows (in thousands):
1997 1996 1995
---- ---- ----
Losses incurred $ 100,182 $ 158,307 $ 150,339
Loss adjustment expenses 4,380 5,583 5,379
--------- --------- ---------
Total $ 104,562 $ 163,890 $ 155,718
========= ========= =========
37
41
The following table summarizes net property and casualty losses and
LAE incurred (in thousands):
1997 1996 1995
---- ---- ----
Estimated losses and LAE incurred $ 113,402 $ 175,704 $ 173,336
Estimated reinsurance loss
recoveries on incurred losses (104,562) (163,890) (155,718)
--------- --------- ---------
$ 8,840 $ 11,814 $ 17,618
========= ========= =========
Activity in the liability for unpaid losses and LAE is summarized as
follows (in thousands):
1997 1996 1995
---- ---- ----
Liability for losses and LAE at the beginning of the year:
Gross liability per balance sheet $ 132,152 $ 145,523 $ 166,698
Ceded reinsurance recoverable, classified as an asset (84,725) (84,492) (88,731)
--------- --------- ---------
Net liability 47,427 61,031 77,967
--------- --------- ---------
Reserves acquired in purchase of Universal 2,655 - -
--------- --------- ---------
Provision for losses and LAE for claims
occurring in the current year 12,202 10,697 14,243
(Decrease) Increase in estimated losses and LAE for
claims occurring in prior years (3,362) 1,117 3,375
--------- --------- ---------
8,840 11,814 17,618
--------- --------- ---------
Losses and LAE payments for claims occurring during
Current year 8,845 9,151 11,711
Prior years 10,923 16,267 22,843
--------- --------- ---------
19,768 25,418 34,554
--------- --------- ---------
Liability for losses and LAE at the end of the year:
Net liability 39,154 47,427 61,031
Ceded reinsurance recoverable, classified as an asset 75,616 84,725 84,492
--------- --------- ---------
Gross liability per balance sheet $ 114,770 $ 132,152 $ 145,523
========= ========= =========
NOTE 8 ACQUISITION OF THE INNOVATIVE COMPANY
Effective December 1, 1997, the Company acquired all of the issued and
outstanding shares of common stock of Innovative, including its
subsidiaries. Consideration in the transaction consisted of 220,000
shares of new Cumulative Convertible Redeemable Nonvoting Special
Preferred Stock ("Preferred Stock") of the Seibels Bruce Group, Inc.
The Company treated the transaction as a purchase and repaid $1.8
million of debt due the shareholders of Innovative out of cash and
liquid investments. The excess purchase price over the fair value of
the assets was $2.6 million and is being amortized using the
straight-line method over 40 years. The Special Stock pays quarterly
dividends at an annual rate of $0.62 per share. On or after August
15, 2000, but prior to August 15, 2002, the Company at its option
only, may redeem in whole or in part the Special Stock at a price of
$15.00 per share. On August 15, 2002, the Company must redeem any
remaining shares at a rate of $10.00 per share. On or after August
15, 2000, but prior to August 15, 2002, holders of the shares have the
right to convert each share of the Special Stock into 1.23 shares of
Common Stock.
Innovative's subsidiary, Universal, writes property and casualty
insurance primarily in North Carolina, where the company is domiciled.
It finances a portion of its business through PBP, Inc., its premium
financing subsidiary. Universal's primary line is nonstandard
automobile insurance. The results of operations for the month of
December are included in the consolidated financial statements of the
Company.
The following unaudited proforma consolidated results of operations
for 1997 and 1996 give effect to the acquisition as though it had
occurred at the beginning of each year presented. The dividend on the
preferred stock has been considered.
38
42
Pro-forma for the Company and Innovative Unaudited Results for the year ended
December 31
(in thousands, except per share data)
1997 1996
---- ----
Revenues $ 63,136 $ 73,128
Net Income $ 2,928 $ 2,197
Basic earnings per share $ 0.42 $ 0.45
Diluted earnings per share $ 0.40 $ 0.40
NOTE 9 DIVIDEND RESTRICTIONS
The ability of the Company to declare and pay cash dividends, as well
as to service any debt, is dependent to some degree upon the ability
of South Carolina Insurance Company (SCIC) and Universal to declare
and pay dividends to the Company.
The North Carolina Insurance Holding Company System Regulatory Act
provides that, without the prior approval of the Commissioner of
Insurance of the State of North Carolina, dividends within any
12-month period may not exceed the lessor of (i) 10% of Universal's
surplus as regarding policyholders as of the preceding December 31 or
(ii) Universal's net income, not including realized capital gains, for
the 12-month period ending the preceding December 31.
The South Carolina Insurance Holding Company Regulatory Act provides
that, without the prior approval of the Director of Insurance of the
State of South Carolina, dividends within any 12-month period may not
exceed the greater of (i) 10% of SCIC's surplus as regarding
policyholders as shown in the insurer's most recent annual statement
or (ii) SCIC's net income, not including realized capital gains or
losses as shown in the insurer's most recent annual statement.
NOTE 10 STATUTORY REPORTING
The Company's insurance subsidiaries' assets, liabilities and results
of operations have been reported on the basis of GAAP, which varies
from statutory accounting practices ("SAP") prescribed or permitted by
insurance regulatory authorities. Prescribed statutory accounting
practices are found in a variety of publications of the National
Association of Insurance Commissioners ("NAIC"), state laws and
regulations, as well as through general practices. The NAIC is
currently involved in a project that would codify statutory accounting
principles, which will then constitute the only source of "prescribed"
statutory practices. When complete, that project will most likely
alter the definition of prescribed versus permitted statutory
accounting practices and may result in changes to the accounting
policies that insurance companies use to prepare their statutory
financial statements. The principal differences between SAP and GAAP,
are that under SAP: (1) certain assets that are not admitted assets
are eliminated from the balance sheet, (2) acquisition costs for
policies are expensed as incurred, while they may be deferred and
amortized over the estimated life of the policies under GAAP, (3) no
provision is made for deferred income taxes and (4) valuation
allowances are established against investments. Each of the Company's
insurance subsidiaries must file with applicable state insurance
regulatory authorities an "Annual Statement" which reports, among
other items, net income (loss) and shareholders' equity (called
"surplus as regards policyholders" in property and casualty
reporting).
39
43
A reconciliation between GAAP net income and statutory net income
(loss) of the property and casualty insurance subsidiaries is as
follows for the year ended December 31 (in thousands):
1997 1996 1995
---- ---- ----
GAAP income $ 4,003 $ 5,176 $ 1,152
Increase (decrease) due to:
Deferred policy acquisition costs 201 198 606
Salvage/subrogation recoverable and reserves 139 256 (41)
Parent company GAAP-only items and other
non-statutory subsidiaries 2,469 1,252 1,820
Mortgage loan loss recognition - - (987)
Intercompany dividends (1995 offset by increase
in statutory surplus) 32,947 2,400 (13,202)
Gain on sale of subsidiary 450 - -
Adjustment to premium and loss reserves 28 (278) (255)
Allocation of Seibels Bruce and Company expenses - - (1,574)
Other 52 50 99
-------- -------- --------
Statutory net income (loss) - (1996 as adjusted) $ 40,289 $ 9,054 $(12,382)
======== ======== ========
A reconciliation between GAAP shareholders' equity and statutory
capital and surplus, at December 31, is as follows (in thousands):
1997 1996 1995
---- ---- ----
GAAP shareholders' equity $ 37,544 $ 23,791 $ 10,187
Increase (decrease) due to:
Deferred policy acquisition costs (1,580) (96) (293)
Parent company debt contributed
to statutory surplus - - 2,400
Non-statutory companies' shareholders' equity (165) (840) 1,436
Adjustments to premium and loss reserves (1,903) (1,128) (554)
Allocation of Seibels Bruce and Company expenses 192 - (1,574)
Other - (95) (2,301)
--------- -------- --------
Statutory surplus (1996 as adjusted) $ 34,088 $ 21,632 $ 9,301
========= ======== ========
Net income and shareholders' equity of the credit life insurance
subsidiary as determined in accordance with statutory accounting
practices are as follows for the year ended December 31, is as follows
(in thousands):
1997 1996 1995
---- ---- ----
Net income $ 203 $ 460 $ 276
Shareholders' equity
("surplus as regards policyholders") $ 4,511 $ 4,769 $ 4,334
NOTE 11 BENEFIT PLANS, OPTIONS AND COMPUTATION OF EARNINGS PER SHARE
During the first quarter of 1996, the Company issued to a group of
investors stock options expiring December 31, 2000 to acquire 408,750
shares of unregistered Company Common Stock at the greater of the
price of $10.00 per share or book value at the date of exercise.
40
44
In the third quarter of 1996, the Company issued to a different group
of investors stock options to acquire 781,250 shares of unregistered
Company Common Stock at the greater of the price of $6.00 per share or
the book value at the date of exercise, expiring December 31, 1998 and
781,250 shares at the greater of the price of $8.00 or the book value
at date of exercise, expiring December 31, 2000.
During the fourth quarter of 1997, the Company issued 220,000 shares
of Preferred Stock that are convertible into 270,000 shares of the
Company's Common Stock. (see note 8)
The Company currently has three plans under which stock options,
incentive stock and restricted stock may be granted to employees,
non-employee directors, consultants and active independent agents of
the Company. Under the plan for employees and independent agents,
stock options expire five (5) years after the date of grant. Under
the plan for non-employee directors, the options expire ten (10) years
from the date of grant. Each plan is administered by a committee
appointed by the Board of Directors.
The 1996 Stock Option Plan (the "1996 Plan") for Employees became
effective on November 1, 1995 and supersedes the 1987 Stock Option
Plan (the "1987 Plan"). The 1996 Plan has reserved 1,250,000 share of
Company common stock for issuance under the plan as options, incentive
stock and restricted stock to employees and consultants of the
Company. The following table shows the option under the 1987 and 1996
plans for the past three years.
1997 1996 1995
---- ---- ----
Shares under options outstanding, beginning of year 582,169 215,294 12,788
Granted under 1987 Plan - - 75,000
Granted under 1996 Plan 332,517 368,450 138,750
Exercised during year (9,375) - (5,000)
Canceled or expire during year (139,096) (1,575) (6,244)
-------- -------- --------
Shares under options outstanding, end of year 766,215 582,169 215,294
======== ======== ========
Shares under options exercisable, end of year 324,718 214,531 140,294
======== ======== ========
All grants made under the Plan have exercise prices no lower than the
market price at the date of grant. At December 31, 1997, 410,980
shares of the Company's common stock have been reserved for future
grants. The following table summarizes options outstanding and
exercisable by price range as of December 31, 1997.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Weighted-Average
Range of Exercise Remaining Weighted-Average Weighted-Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------ ----------- ---------------- -------------- ----------- --------------
$2.20 - $4.40 65,000 7.5 $3.42 65,000 $3.42
$4.40 - $6.60 83,752 2.9 $6.32 83,752 $6.32
$6.60 - $8.80 6,250 4.1 $8.17 6,250 $8.17
$8.80 - $11.00 429,126 3.7 $9.71 158,327 $9.74
$11.00 - $13.20 6,776 2.9 $11.64 6,534 $11.65
$15.40 - $17.60 85,228 3.4 $16.00 - -
$19.80 - $22.00 85,228 3.4 $22.00 - -
$42.50 - $45.00 4,855 1.9 $43.66 4,855 $43.66
----------------------------------------------------------------------------------
766,215 3.9 $11.09 324,718 $8.10
==================================================================================
41
45
Also included in the 1996 Plan are provisions for the granting of
incentive stock and restricted stock. While there were no grants of
incentive stock during 1997, 1996 or 1995, 28,279 shares of restricted
stock were granted in 1996. Of that amount, 2,175 shares were issued
in 1996 and 26,103 shares were issued in 1997 when the restrictions
lapsed. In 1997, 55,298 shares of restricted stock were granted,
10,667 shares of which were issued during the year. Of the remaining
44,631 shares, 10,772 shares were forfeited during 1997 prior to the
vesting date of January 1, 1998.
The 1995 Stock Option Plan for Non-Employee Directors became effective
June 15, 1995, with 250,000 common shares of stock reserved for
grants. Under the Plan, all non-employee directors holding office on
June 15 of each year are automatically granted 1,250 options to
purchase Company common stock. The exercise price will be the market
value on the date of grant. On June 15, 1995 and 1996, 8,750 shares
were granted at an exercise price of $3.50 and $10.50, respectively.
In addition, on June 15, 1997, 12,500 shares were granted at an
exercise price of $7.19.
The 1995 Stock Option Plan for Independent Agents became effective
December 21, 1995. The Plan has reserved 125,000 common shares for
granting under this plan. Activity may be summarized as follows:
1997 1996 1995
---- ---- ----
Shares under options outstanding, beginning of year 54,125 17,000 -
Granted during year 5,526 40,125 17,000
Exercised during year (2,749) (1,500) -
Canceled or expired during year (20,386) (1,500) -
-------- ------- -------
Shares under options outstanding, end of year 36,516 54,125 17,000
======== ======= =======
During 1996 and 1995, a total of 57,125 options were granted at an
average exercise price of $8.40 and $6.00, respectively. In 1997,
5,526 options were granted at an average exercise price of $6.37. At
December 31, 1997, 84,235 shares of the Company's common stock have
been reserved for future grants.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized
for the stock option plans. Had compensation costs for the Company's
three stock option plans been determined based on the fair value at
the grant date for awards in 1997 and 1996 consistent with the
provisions of SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the pro-forma amounts indicated below
(in thousands except per share amounts):
1997 1996
---- ----
Net income - as reported $ 4,003 $ 5,176
Net income - pro-forma $ 3,016 $ 4,026
Diluted earnings per share - as reported $ 0.55 $ 0.94
Diluted earnings per share - pro-forma $ 0.41 $ 0.73
The fair value of each option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
EMPLOYEE PLAN DIRECTORS PLAN AGENTS PLAN
------------- -------------- -----------
Expected Dividend Yield 0% 0% 0%
Expected Stock Price Volatility 52.75% 52.75% 52.75%
Risk-Free Interest Rate 6.30% 6.30% 6.30%
Expected Life of Options 5 years 10 years 4.2 years
42
46
The Company and its subsidiaries currently provide certain health care
and life insurance benefits for retired employees. The Company and
its subsidiaries recognize the projected future cost of providing
post-retirement benefits as an expense as employees render services
instead of when the benefits are paid. The cumulative effect is being
recorded as a charge against income on a prospective basis as part of
the future annual benefit cost. The post-retirement benefit expense
was approximately $77,000 in 1997 and $75,000 in 1996. The following
table presents the reconciliation of the obligation at December 31,
1997 and 1996 (in thousands):
1997 1996
---- ----
Accumulated postretirement benefit obligation:
Active employees $ 50 $ 37
Current retirees 525 511
------- -------
Total 575 548
Fair value of assets - -
------- -------
Accumulated postretirement benefit
obligation in excess of fair value of assets 575 548
Unrecognized transition obligation (471) (502)
Unrecognized net gain 14 53
------- -------
Accrued postretirement benefit cost $ 118 $ 99
======= =======
Net periodic post-retirement benefit cost includes the following
components for 1997, 1996 and 1995 (in thousands):
1997 1996 1995
---- ---- ----
Service cost $ 3 $ 3 $ 4
Interest cost 43 41 43
Amortization of transition obligation 31 31 35
Amortization of net gains - - (3)
------- ------- -------
Net periodic postretirement benefits $ 77 $ 75 $ 79
======= ======= =======
The weighted average annual assumed rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) was 8%
for 1997 and 9% for 1996 and 1995 is assumed to decrease to a 5.5%
ultimate trend (5.5% in 1996 and 1995) with a duration to ultimate
trend of six years (six years in 1996 and 1995). The health care cost
trend rate assumption has an effect on the amounts reported. For
example, increasing the assumed health care cost trend rates by one
percentage point each year would increase the post-retirement benefit
obligation as of December 31, 1997 by $9,000.
The weighted-average discount used in determining the accumulated
post-retirement benefit obligation was 7.25% for 1997, 7.75% for 1996
and 7.25% for 1995.
The company sponsors the South Carolina Insurance Company Employees'
Profit-Sharing and Savings Plan, which is a combined arrangement for
the profit-sharing and 401(k) elements for the employees of the
Company and its subsidiaries. As of December 31, 1997, the amount of
assets available for the plan benefits, based on information currently
available, was $10,900,596.
The profit-sharing element of the plan covers all full-time employees
who have met minimum eligibility requirements. There have been no
contributions to this part of the plan since 1988.
Under the 401(k) element of the plan, employees may elect to have a
portion of their salary withheld from pre-tax wages for investment in
the plan, subject to limitations imposed by IRS regulations. The
employee has several options as to how contributions will be invested.
Effective July 1, 1997 the employer reinstated the 50% match of the
employee's contribution up to the first 6%. The company match is
split evenly with 25% invested in accordance with the investment
options selected by the participant and the remaining 25% invested in
the Seibels Bruce Stock Fund. The employer contribution for the plan
on behalf of the participating employees was $72,159 in 1997 and $ -0-
in 1996.
43
47
The following table shows the computation of per share earnings.
Income Shares Per Share
For the year ended 1997 (Numerator) (Denominator) Amount
----------------------- ----------- ------------- ------
Net Income $ 4,002,587
Less: Preferred stock dividends (11,367)
-------------
Basic EPS
Income available to common stockholders 3,991,220 7,001,552 $ 0.57
==========
Effect of Dilutive Securities
Convertible preferred stock 11,367 23,356
Options - 249,063
------------- -------------
Diluted EPS
Income available to common stockholders
plus assumed conversions $ 4,002,587 7,273,971 $ 0.55
============= ============= ==========
For the year ended 1996
-----------------------
Basic EPS
Income available to common stockholders $ 5,176,204 4,918,346 $ 1.05
==========
Effect of Dilutive Securities
Warrants - 46,278
Options - 526,929
------------- -------------
Diluted EPS
Income available to common stockholders $ 5,176,204 5,491,553 $ 0.94
============== ============= ==========
For the year ended 1995
-----------------------
Basic EPS
Income available to common stockholders $ 1,152,000 4,181,000 $ 0.28
==========
Effect of Dilutive Securities
Warrants - 46,111
Options - 12,445
------------- -------------
Diluted EPS
Income available to common stockholders $ 1,152,000 4,239,556 $ 0.27
============= ============= ==========
NOTE 12 COMPANY'S OPERATIONS IN DIFFERENT BUSINESS SEGMENTS
The Company performs servicing carrier activities for state and
federal insurance facilities. Managing general agency services were
also performed for a non-affiliated insurance company until February
1, 1998 (see Note 16). Insurance products are offered through
independent agents, primarily in the southeastern United States.
Effective in mid-1995, the Company voluntarily suspended underwriting
new and renewal business for which the risks were not reinsured to an
unaffiliated party. After both the Company and its regulators became
satisfied that the capital level was adequate to undertake such risk,
underwriting on a risk retention basis was resumed at very modest
levels in mid-1996.
44
48
Information on the Company's various business segments are as follows:
1997 1996 1995
---- ---- ----
Revenue:
Property and casualty insurance segments $ 6,580 $ 7,186 $ 10,384
Commission and service activities segments 44,105 46,419 49,572
Net investment income and other interest income 3,633 3,516 4,038
Realized gains (losses) on investments 529 (179) 150
-------- -------- --------
Total for property & casualty insurance segments 54,847 56,942 64,144
Other business revenue 577 1,085 2,039
-------- -------- --------
Total revenue $ 55,424 $ 58,027 $ 66,183
======== ======== ========
Operating profit (loss):
Property and casualty insurance segments $ 1,783 $ 25 $ (6,719)
Commission and service activities segment (2,735) 1,595 5,641
Net investment income 3,633 3,516 4,038
Realized gains (losses) on investments 529 (179) 150
-------- -------- --------
Subtotal 3,210 4,957 3,110
Other business segments 463 441 (47)
-------- -------- --------
Operating income 3,673 5,398 3,063
General corporate expenses, net of miscellaneous
income and expense 495 (179) (1,605)
Interest expense (119) (174) (308)
-------- -------- --------
Consolidated income before income taxes $ 4,049 $ 5,045 $ 1,150
======== ======== ========
Operating income represents revenue less related operating expenses.
Identifiable assets by business segments or combined segments
represent assets directly identified with those operations and an
allocable share of jointly used assets. For the year ended December
31, (in thousands):
1997 1996 1995
---- ---- ----
Identifiable Assets
Property and casualty insurance underwriting
segment, including related investment activity $ 92,896 $ 55,427 $ 82,493
Commission and service activities segment 133,722 158,237 134,598
Other business segments 4,743 5,187 5,697
General corporate assets 3,257 1,621 1,217
--------- --------- ---------
Total assets $ 234,618 $ 220,472 $ 224,005
========= ========= =========
In 1997, depreciation and amortization charges for the various
property and casualty insurance underwriting and commission and
service segments, combined were $0.8 million ($1.0 and $0.9 million
for 1996 and 1995 respectively). These amounts exclude policy
acquisition costs of $1.3 million in 1997 ($1.6 and $3.2 million in
1996 and 1995 respectively).
Costs of additions to property and equipment for the property and
casualty insurance underwriting and commission and service segments
combined amounted to $1.1 million in 1997, $0.8 million in 1996 and
$0.1 million in 1995. Additions in
45
49
1997 were primarily due to data processing software development to
start the voluntary auto and commercial lines programs.
NOTE 13 REINSURANCE
The Company's property and casualty insurance operations include a
retained risk bearing component, and a servicing carrier component.
The risk business is ceded through several reinsurance programs
including pro-rata and excess of loss. In its servicing carrier
operation, premiums are ceded entirely to the applicable state's
reinsurance facility. A reconciliation of direct to net premiums, on
both a written and an earned basis is as follows (in thousands):
1997 1996 1995
---- ---- ----
Written Earned Written Earned Written Earned
------- ------ ------- ------ -------- ------
Direct $ 108,395 $ 109,277 $ 106,925 $ 105,212 $ 114,184 $ 122,912
Assumed 5,386 5,529 6,235 5,819 422 1,232
Ceded (107,155) (108,226) (106,494) (103,845) (108,560) (113,760)
--------- --------- --------- --------- --------- ---------
Net $ 6,626 $ 6,580 $ 6,666 $ 7,186 $ 6,046 $ 10,384
========= ========= ========= ========= ========= =========
The amounts of premiums pertaining to catastrophe reinsurance that
were ceded from earned premium during 1996 and 1995 were $0.2 million
and $0.8 million respectively. The Company carried no catastrophe
reinsurance in 1997.
Reinsurance contracts do not relieve the Company of its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities, or economic
characteristics of the reinsurer to minimize its exposure to
significant losses from reinsurers insolvency. Amounts due from
reinsurance companies are for the following amounts for unearned
premiums, unpaid losses and LAE, and paid losses and LAE (in
thousands):
1997 1996
---- ----
Unearned premiums $ 50,602 $ 46,118
Unpaid losses and LAE $ 75,616 $ 84,725
Paid losses and LAE $ 30,244 $ 28,218
Five reinsurers comprise a significant portion of the Company's
reinsurance recoverable on paid and unpaid losses and loss adjustment
expense, as well as prepaid reinsurance at December 31, 1997. The
reinsurers and related balances are as follows (in thousands):
Reinsurance Prepaid
Recoverable Reinsurance
----------- -----------
South Carolina Reinsurance Facility $ 70,841 $ 24,041
North Carolina Reinsurance Facility 23,812 4,701
National Flood Insurance Program 2,942 20,430
Swiss Reinsurance Corp 5,586 -
National Reinsurance Corp 632 -
Gerling Global Reinsurance Corp 623 631
TIG Reinsurance Company 622 631
All others 802 168
---------- ---------
Totals $ 105,860 $ 50,602
========== =========
The Company believes that the balances from the various Facilities are
fully collectable due to the governmental agency's ability to assess
policyholders and member companies for deficiencies. The remaining
recoverables due from nonaffiliated reinsurance companies have also
been deemed fully collectable by the Company.
With respect to credit concentrations, most of the Company's business
activity is with agents and policyholders located within the five
operating states. The primary reinsurance recoverables are from the
state and federal servicing carrier
46
50
activities. There are otherwise no material credit concentrations
related to premiums receivable, agents' balances, and premium notes
receivable.
NOTE 14 COMMITMENTS AND CONTINGENCIES
(a) The Company's and its subsidiaries lease office space,
computer equipment and automobiles under several operating
leases that expire at various times. Approximate minimum
future lease payments under these operating leases at December
31, 1997 are as follows (in thousands):
Fiscal year ending December 31,
-------------------------------
1998...................................................$897
1999...................................................$814
2000...................................................$379
2001...................................................$146
2002...................................................$148
Thereafter.............................................$381
(b) A contingent liability exists with respect to reinsurance
placed with other companies. (see Note 13)
(c) Due to the nature of their business, certain subsidiaries are
parties to various other legal proceedings, which are
considered routine litigation incidental to the insurance
business.
(d) The Company was served with a complaint dated November 7, 1997
by the Municipal Association of South Carolina which claimed
it has potential deficiency of approximately $1.75 million
with respect to certain South Carolina municipality taxes.
Management and legal counsel believe that the Company has
basis for nonpayment of such amounts and the Company believes
that it has adequately reserved in its financial statements
with respect to this claim.
(e) The Company was served with a complaint dated November 19,
1997 by Norwest Financial Resources, Inc. ("Norwest") that
claimed indemnification against the Company pursuant to the
Asset Purchase Agreement dated as of July 2, 1993 by and among
Premium Service Corporation of Columbia ("Premium"), the
Company and Norwest. The indemnification claim relates to
certain loans which were recorded on the books of Premium but
which later were discovered to be incorrectly recorded as
realizable assets. Management believes the Company has no
liability in the case.
NOTE 15 RELATED PARTY TRANSACTIONS
A non-employee Director of the Company is also a member of the Board
of Directors of Policy Management Systems Corporation ("PMSC"), which
provided services to the Company prior to September 30, 1996. The
Company paid data processing charges of $0.9 million in 1996 and $1.8
million in 1995.
NOTE 16 SUBSEQUENT EVENTS
The Company, in its relationship with the unaffiliated insurer
underwrote, processed, issued and settled claims on behalf of the
issuing carrier. For these services, the Company was paid a fee.
During 1997, 1996 and 1995 the Company was unable to make a profit on
the fee income produced. Pursuant to a mutual agreement in August
1997 to cancel its Agreement, the Company discontinued its commercial
lines managing general agency operation in February 1998. Policies
previously underwritten on behalf of an unaffiliated issuing carrier
began to be underwritten by the Company in the capacity of a risk
taker. During 1997, $20.1 million of direct written premium was
written under the arrangement and the book of business produced
favorable loss ratios. A comparable amount is anticipated to be
written as an issuing carrier in 1998. Under the terms of the
cancellation agreement, all agents and policies remain with the
Company. The Company has reissued licenses to these agents under the
Company's name. The Company will also continue to run-off claims for
the unaffiliated carrier until such time as the carrier wishes to take
this responsibility. The Company is in the process of re-underwriting
all of these policies.
On March 16, 1998 the Company signed an agreement to acquire America's
Flood Services, Inc. ("AFS") and a letter of intent to acquire Graward
General Companies, Inc. ("Graward"). AFS manages flood zone
determinations, flood insurance
47
51
and flood compliance tracking. Graward is a general agent that writes
non standard automobile insurance. The combined purchase price for
the transactions is estimated at $12.9 million and will be funded
through a bank loan of $9.7 million and convertible debt and preferred
stock for a total of $3.2 million.
48
52
SUPPLEMENTARY DATA
QUARTERLY FINANCIAL INFORMATION (unaudited)
(in thousands, except per share amounts)
The following is a summary of unaudited quarterly information for the
years ended December 31, 1997 and 1996:
1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---- ---------- ----------- ----------- -----------
Commission & service income $ 11,257 $ 11,521 $ 11,082 $ 10,245
Property & casualty and credit life premiums
earned 2,323 913 1,673 1,827
Net investment income 708 799 785 829
Other interest income 297 79 95 295
Realized gains (losses) on investments 219 (1) 326 (15)
Net income $ 703 $ 1,075 $ 1,008 $ 1,217
Basic earnings per share $ 0.11 $ 0.17 $ 0.13 $ 0.16
Diluted earnings per share $ 0.11 $ 0.16 $ 0.13 $ 0.15
Commission and service income fell in the first quarter of 1997 as the
claims related to flood activity subsided from the very active 1996
storm season. Commission and service income remained fairly constant
through the first three quarters of the year and fell during the
fourth quarter due to a lack of storm related claims. Premiums earned
fell in the second quarter due to lower assumed premiums than in the
prior two quarters. Premiums earned increased in both the third and
fourth quarters of 1997 as the Company began its voluntary nonstandard
program in the fourth quarter of 1997. Net income for the year fell
by $1.2 million mainly due to a lack of flood related claims.
1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---- ----------- ----------- ----------- -----------
Commission & service income $ 10,096 $ 11,254 $ 11,522 $ 13,547
Property & casualty and credit life premiums
earned 3,124 926 2,360 1,254
Net investment income 660 588 798 960
Other interest income 118 69 441 173
Realized gains (losses) on investments 194 - 2 (210)
Net income $ 632 $ 1,217 $ 1,497 $ 1,830
Basic earnings per share $ 0.15 $ 0.28 $ 0.32 $ 0.30
Diluted earnings per share $ 0.14 $ 0.25 $ 0.28 $ 0.27
Commission and service income continued its trend of decreasing every
quarter until the second quarter of 1996. Since that time, this
income has increased due to increased claims activity on the Flood
program related to two storms that hit the East Coast in the second
half of 1996. Premiums earned continued to be minimal during 1996 due
to the Company having very small amounts of business retained on its
books. Net income for the year ended December 31, 1996 has increased,
when compared to the year ended December 31, 1995, due to the
Company's constant monitoring of loss development on business written
in prior years and monitoring of expenses across all profit centers in
which the Company operates. The figures reported above reflect a
$500,000 downward revision from previously reported unaudited revenues
and net income for the year. Each of the four quarters of 1996 were
adjusted down by $125,000, aggregating the $500,000 annual adjustment.
49
53
ITEM 9. Changes In and Disagreements With Accountants On Accounting
And Financial Disclosure
Inapplicable.
PART III
ITEM 10. Directors, Executive Officers, Promoters, and Control
Persons of the Registrant
Information other than the listing of executive officers of the
Company (which is presented in Part I of this document) is contained
under the heading "Election of Directors" in the proxy statement
relating to the annual meeting of shareholders to be held May 20, 1998
and is incorporated herein by reference since the Company files such
definitive proxy materials pursuant to Regulation 14A on or prior to
April 10, 1998.
ITEM 11. Executive Compensation
The information contained under the headings "Compensation of
Executive Officers", Directors' Compensation," and "Compensation Plans
and Arrangements" in the proxy statement relating to the annual
meeting of shareholders to be held May 20, 1998 is incorporated herein
by reference since the Company files such definitive proxy materials
pursuant to Regulation 14A on or prior to April 10, 1998.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management
The information contained under the headings "Principal Shareholders"
and "Election of Directors" in the proxy statement relating to the
annual meeting of shareholders to be held May 20, 1998 is incorporated
herein by reference since the Company files such definitive proxy
materials pursuant to Regulation 14A on or prior to April 10, 1998.
ITEM 13. Certain Relationships and Related Transactions
The information contained under the heading "Certain Transactions" in
the proxy statement relating to the annual meeting of shareholders to
be held May 20, 1998 is incorporated herein by reference since the
Company files such definitive proxy materials pursuant to Regulation
14A on or prior to April 10, 1998.
PART IV
ITEM 14. Exhibits, Financial Statements, Schedules and Reports
On Form 8-K
(a) (1) and (2)- List of Financial Statements and Financial Statements
Schedules
The following consolidated financial statements of The Seibels Bruce
Group, Inc. and subsidiaries are included in Item 8:
Report of Independent Public Accountants- Arthur Andersen LLP
Consolidated Balance Sheets- December 31, 1997 and December 31, 1996.
Consolidated Statements of Operations-Years ended December 31, 1997,
December 31, 1996 and December 31, 1995.
Consolidated Statement of Cash flows-Years ended December 31, 1997,
December 31, 1996 and December 31, 1995.
The notes to the consolidated financial statements included in Item 8
pertain both to the consolidated financial statements listed above and
the condensed financial information of the registrant included in
Schedule 3 under Item 14.
The following financial statement schedules are included in Item
14(d):
Schedule I- Summary of Investments Other than Investments in
Related Parties
Schedule II- Condensed Financial Information of Registrant
Schedule III- Supplementary Insurance Information
Schedule IV- Reinsurance
Schedule V- Valuation and Qualifying Accounts
Schedule VI- Supplemental Information Concerning Property/
Casualty Insurance Operations
50
54
All other schedules to the consolidated financial statements required
by Article 7 of Regulation S-X are not required under the related
instructions or are inapplicable and therefore have been omitted.
(a) (3) List of Exhibits
3.1 Articles of Incorporation of the Registrant, as amended, incorporated
herein by reference to the Annual Report, Exhibit (3)(1)-1, for the
year ended December 31, 1989. Articles of Amendments dated June 18,
1994, June 13, 1995 and June 14, 1996, incorporated herein by
reference to the Annual Report, Exhibit 3.1, for the year ended
December 31, 1996. Articles of Amendments dated April 10, 1997 and
November 26, 1997. Articles of Correction dated May 13, 1997.
3.2 By-Laws of the Registrant, as amended February 25, 1992, incorporated
herein by reference to the Annual Report on Form 10-K, Exhibit
(3)(1)-1, for the year ended December 31, 1991. Amendments of By-Laws
dated June 18, 1994, October 14, 1994 and June 13, 1995.
10.1 South Carolina Insurance Company Employee's Profit Sharing and Savings
Plan, dated June 30, 1992, as amended January 4, 1993, incorporated
herein by reference to the Annual Report on Form 10-K(10)(9)-9, for
the year ended December 31, 1992. Amendments dated June 2, 1993,
April 21, 1994, July 1, 1994, July 1, 1995, July 1, 1996 and September
26, 1997.
10.2 Stock Purchase Agreement, date January 29, 1996, by and between the
Registrant and Charles H. Powers and Walker S. Powers, and amendment
thereto, incorporated herein by reference to submission DEF 14-A,
filing date May 10, 1996, file number 000-08804, accession number
0001005150-96-000127, accepted May 9, 1996.
10.3 Stock Option Agreement, dated January 30, 1996, by and between the
Registrant and Charles H. Power, Walker S. Powers and Rex and Jane
Huggins, incorporated herein by reference to submission DEF 14-A,
filing date May 10, 1996, file number 000-008804, accession number
0001005150-96-00127, accepted May 9, 1996.
10.4 Stock Purchase Agreement, dated March 28, 1996, by and between the
Registrant and Fred C. Avent, Frank H. Avent and PepsiCo of Florence,
incorporated herein by reference to submission Form S-2, filing date
October 15, 1996, file number 333-14123, accession number
0000276380-96-00017, accepted October 15, 1996.
10.5 Stock Purchase Agreement, dated March 28, 1996, by and between
Registrant and Junius DeLeon Finklea, Joseph K. Newsom, Sr., Mark J.
Ross, Larry M. Brice, J. Howard Stokes, Winston W. Godwin, IRA and
Peter D. and Vera C. Hyman, incorporated herein by reference to
submission Form S-2, filing date October 15, 1996, file number
333-14123, accession number 0000276380-96-00017, accepted October 15,
1996.
10.6 Stock Option Purchase Agreement, dated November 20, 1997, by and
between the Registrant; Charles H. Powers, Walker S. Powers and Rex
and Jane Huggins; and High Ridge Capital LLC.
10.7 Stock Option Purchase Agreement, dated November 20, 1997, by and
between the Registrant; Charles H. Powers, Walker S. Powers and
Rex and Jane Huggins; and High Ridge Capital Partners Limited
Partnership.
10.8 The Seibels Bruce Group, Inc. 1996 Stock Option Plan for Employees,
dated November 1, 1995, incorporated herein by reference to submission
DEF 14-A, filing date May 10, 1996, file number 000-08804, accession
number 0001005150-96-000127, accepted May 9, 1996.
10.9 The Seibels Bruce Group, Inc. 1995 Stock Option Plan for Independent
Agents, dated June 14, 1996, incorporated herein by reference to
submission DEF 14-A, filing date May 10, 1996, file number 000-08804,
accession number 0001005150-96-000127, accepted May 9, 1996.
10.10 The Seibels Bruce Group, Inc. 1995 Stock Option Plan for Non-Employee
Directors, dated June 14, 1996, incorporated herein by reference to
submission DEF 14-A, filing date May 10, 1996, file number 000-08804,
accession number 0001005150-96-000127, accepted May 9, 1996.
10.11 Agreement, dated October 1, 1994, by and between Catawba Insurance
Company and the SC Facility, incorporated herein by reference to the
Annual Report, Exhibit 10.12, for the year ended December 31, 1996.
10.12 Managing General Agent Agreement, dated January 1, 1996, by and
between Seibels Bruce & Company and Agency Specialty of Kentucky, Inc.
and Generali - US Branch, incorporated herein by reference to the
Annual Report, Exhibit
51
55
10.13, for the year ended December 31, 1996. (Portions of this
exhibit have been omitted pursuant to a request for confidential
treatment.)
10.13 Termination Agreement, dated August 27, 1997, by and between Seibels
Bruce & Company and Agency Specialty of Kentucky, Inc. and Generali -
US Branch.
10.14 Arrangement, dated October 1, 1996, by and between Catawba Insurance
Company, Kentucky Insurance Company and South Carolina Insurance
Company and The United States of America Federal Emergency Management
Agency, incorporated herein by reference to the Annual Report, Exhibit
10.14, for the year ended December 31, 1996.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule (electronic filing only).
28.1 Schedule P of Annual Report on Form 10-K/405 for the fiscal year ended
December 31, 1997, incorporated herein by reference to Form SE, dated
March 20, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
(c) and (d) Exhibits and Financial Statement Schedules
The applicable exhibits and financial statement schedules are included
immediately after the signature pages.
For the purpose of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act
of 1933, the undersigned registrant hereby undertakes as follows,
which undertaking shall be incorporated by reference into registrant's
Registration Statements on Form S-8 Numbers 333-14135, 333-15457,
2-70057, 2-83595, 33-34973, 33-43618, 33-43601, and 2-48782, as
amended.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of 1933
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
52
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
The Seibels Bruce Group, Inc.
-----------------------------
(Registrant)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 11, 1998 By /s/ John C. West
----------------- -------------------------------------
John C. West
Chairman of the Board and Director
Date: March 11, 1998 By /s/ Ernst N. Csiszar
----------------- -------------------------------------
Ernst N. Csiszar
President and Director
Date: March 11, 1998 By /s/ John A. Weitzel
----------------- -------------------------------------
John A. Weitzel
Chief Financial Officer and Director
Date: March 11, 1998 By /s/ Frank H. Avent
----------------- -------------------------------------
Frank H. Avent
Director
Date: March 11, 1998 By/s/ A. Crawford Clarkson, Jr.
----------------- -------------------------------------
A. Crawford Clarkson, Jr.
Director
Date: March 11, 1998 By /s/ Susie H. VanHuss, Ph D.
----------------- -------------------------------------
Susie H. VanHuss, Ph D.
Director
Date: March 11, 1998 By /s/ Claude E. McCain
----------------- -------------------------------------
Claude E. McCain
Director
Date: March 11, 1998 By /s/ Kenneth A. Pavia
----------------- -------------------------------------
Kenneth A. Pavia
Director
Date: March 11, 1998 By /s/ Charles H. Powers
----------------- -------------------------------------
Charles H. Powers
Director
53
57
Date: March 11, 1998 By: /s/ Walker S. Powers
----------------- ---------------------------------
Walker S. Powers
Director
Date: March 11, 1998 By /s/ John P. Seibels
----------------- ---------------------------------
John P. Seibels
Director
Date: March 11, 1998 By /s/ George R.P. Walker, Jr.
----------------- ---------------------------------
George R.P. Walker, Jr.
Director
Date: March 11, 1998 By /s/ James L. Zech
----------------- ---------------------------------
James L. Zech
Director
Date: March 11, 1998 By /s/ Kenneth W. Marter
----------------- ---------------------------------
Kenneth W. Marter
Controller (Principal Accounting
Officer)
54
58
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE I- SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 1997
(Dollars shown in thousands)
Balance Sheet
Type of Investment Cost Market Value Value
------------------ ---- ------------ -----
Debt securities*
----------------
Bonds and Notes:
U. S. Government and government agencies
and authorities $ 38,581 $ 38,624 $ 38,624
State, municipalities and political subdivisions 2,246 2,289 2,289
Corporate bonds 1,018 1,021 1,021
---------- --------- ---------
Total debt securities 41,845 41,934 41,934
---------- --------- ---------
Equity securities
-----------------
Common stocks:
Banks, trusts and insurance companies 906 915 915
Non-redeemable preferred stocks:
Public utilities - - -
---------- --------- ---------
Total equity securities 906 915 915
---------- --------- ---------
Other long-term investments 73 22 22
Cash and short-term investments 8,922 8,922 8,922
---------- --------- ---------
Total cash and investments $ 51,746 $ 51,793 $ 51,793
========== ========= =========
* These debt securities are classified as debt securities available for sale
and are valued at market.
55
59
SCHEDULE II- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE SEIBELS BRUCE GROUP, INC. (PARENT COMPANY)
BALANCE SHEET
As of December 31,
(Dollars shown in thousands)
1997 1996
---- ----
ASSETS
Cash $ 263 $ 231
Investment in subsidiary companies* 32,887 23,409
Other investments 868 -
Intercompany recoverables* 4,936 216
Other assets 2,351 5
-------- --------
Total assets $ 41,305 $ 23,861
======== ========
LIABILITIES
Intercompany payable* $ 1,550 $ -
Other liabilities 11 70
-------- --------
Total liabilities 1,561 70
-------- --------
COMMITMENTS AND CONTINGENCIES
CUMULATIVE CONVERTIBLE REDEEMABLE
NONVOTING SPECIAL PREFERRED STOCK,
Redemption value $2,200, 220,000 shares issued and outstanding 2,200 -
-------- --------
SHAREHOLDERS' EQUITY
Special stock, no par value, authorized 5,000,000 shares, none outstanding
Common stock, $1 par value, authorized 12,500,000 shares, issued
and outstanding 7,730,725 shares (6,168,097 in 1996) 7,731 6,168
Additional paid-in-capital 61,665 54,050
Unrealized (loss) gain on investments owned by subsidiaries 47 (536)
Accumulated deficit (31,899) (35,891)
-------- --------
Total shareholders' equity 37,544 23,791
-------- --------
Total liabilities and shareholders' equity $ 41,305 $ 23,861
======== ========
* Eliminated in consolidation.
The accompanying notes are an integral part of these financial statements
56
60
SCHEDULE II (CONTINUED)- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE SEIBELS BRUCE GROUP, INC. (PARENT COMPANY)
STATEMENTS OF INCOME /LOSS
As of December 31,
(in thousands, except per share amounts)
1997 1996 1995
---- ---- ----
Total revenue $ 177 $ 191 $ 650
-------- -------- --------
Expenses:
Interest 115 90 199
Other 21 17 851
-------- -------- --------
Total expenses 136 107 1,050
-------- -------- --------
Income before income taxes and equity in undistributed
loss of subsidiary 41 84 (400)
Tax benefit (18) (1) (18)
-------- -------- --------
Income (loss) before equity in undistributed
loss of subsidiary 59 85 (382)
Equity in undistributed income of subsidiary companies* 3,944 5,091 1,534
-------- -------- --------
Net income $ 4,003 $ 5,176 $ 1,152
======== ======== ========
Basic earning per share $ 0.57 $ 1.05 $ 0.28
======== ======== ========
Diluted earnings per share $ 0.55 $ 0.94 $ 0.27
======== ======== ========
* Eliminated in consolidation.
The accompanying notes are an integral part of these financial statements.
57
61
SCHEDULE II (CONTINUED)- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE SEIBELS BRUCE GROUP, INC. (PARENT COMPANY)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
As of December 31,
(in thousands)
1997 1996 1995
---- ---- ----
Common stock outstanding:
Beginning of year $ 6,168 $ 4,193 $ 3,625
Stock issued in connection with offerings 1,428 - 554
Stock issued to benefit plans, agents and others 135 4 14
Stock issued-capital contribution - 1,971 -
--------- --------- ----------
End of year $ 7,731 $ 6,168 $ 4,193
========= ========= ==========
Additional paid-in capital:
Beginning of year $ 54,050 $ 46,660 $ 41,859
Stock issued in connection with offerings 7,175 - 4,767
Stock issued to benefit plans, agents and others 440 21 34
Stock issued - capital contribution - 7,369 -
--------- --------- ----------
End of year $ 61,665 $ 54,050 $ 46,660
========= ========= ==========
Unrealized gain (loss) on securities:
Beginning of year $ (536) $ 401 $ (2,615)
Change in unrealized gains on securities 583 (937) 3,016
--------- --------- ----------
End of year $47 $ (536) $ 401
========= ========= ==========
Accumulated deficit:
Beginning of year $ (35,891) $ (41,067) $ (42,219)
Net income 4,003 5,176 1,152
Preferred stock dividend (11) - -
--------- --------- ----------
End of year $ (31,899) $ (35,891) $ (41,067)
========= ========= ==========
Total shareholders' equity $ 37,544 $ 23,791 $ 10,187
========= ========= ==========
The accompanying notes are an integral part of these consolidated statements.
58
62
SCHEDULE II (CONTINUED)-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE SEIBELS BRUCE GROUP, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
As of December 31,
(Dollars shown in thousands)
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 4,003 $ 5,176 $ 1,152
------- ------- --------
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Equity in undistributed income (loss) of subsidiaries (3,944) (5,091) (1,534)
Changes in assets and liabilities:
Income tax payable to subsidiaries - - (41)
Other (net) (3,649) (476) 513
------- ------- --------
Total adjustments (7,593) (5,567) (1,062)
------- ------- --------
Net cash (used in) provided by operating activities (3,590) (391) 90
------- ------- --------
Cash flows from investing activities:
Contributions of capital to subsidiaries (1,653) (6,288) (7,400)
Cost of investments acquired (1,054) - -
------- ------- --------
Net cash (used in) investing activities (2,707) (6,288) (7,400)
------- ------- --------
Cash flows from financing activities:
Proceeds from stock rights offering - - 5,321
Proceeds from stock issued under employee benefit plans 575 9 18
(Repayment of) proceeds from notes payable (2,849) (2,476) 2,000
Issuance of stock 8,603 9,340 -
------- ------- --------
Net cash provided by financing activities 6,329 6,873 7,339
------- ------- --------
Net increase in cash 32 194 29
Cash January 1 231 37 8
------- ------- --------
Cash December 31 $ 263 $ 231 $ 37
======= ======= ========
Supplemental Cash Flow Information:
Income taxes recovered from subsidiary $ 1 $ 77 $ 27
Interest paid - 271 -
Noncash financing activities:
Notes payable in exchange for common stock - - 37
Acquisition
Preferred stock issued (2,200) - -
Assets acquired 36,831 - -
Liabilities assumed (37,224) - -
------- ------- --------
Goodwill (2,593) - -
Stock issued for consulting services/compensation 81 16 31
The accompanying notes are an integral part of these financial statements.
59
63
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE III- SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
Net
investment
Deferred Future policy income (1)
policy benefits losses, and other
acquisition claims and loss Unearned Premium interest
Segment costs expenses premiums revenue income
- ------- ----- -------- -------- ------- ------
Year ended December 31, 1997
Property and casualty insurance $ 1,565 $ 114,770 $ 54,341 $ 6,580 $ 472
Credit life insurance 15 117 41 156 248
Commission and service activities - - - - 3,167
Other - - - - -
---------- ---------- --------- ---------- ---------
Total $ 1,580 $ 114,887 $ 54,382 $ 6,736 $ 3,887
========== ========== ========= ========== =========
Year ended December 31, 1996
Property and casualty insurance $ - $ 132,152 $ 47,498 $ 7,186 $ 482
Credit life insurance 96 145 194 478 270
Commission and service activities - - - - 3,055
Other - - - - -
---------- ---------- --------- ---------- ---------
Total $ 96 $ 132,297 $ 47,692 $ 7,664 $ 3,807
========== ========== ========= ========== =========
Year ended December 31, 1995
Property and casualty insurance $ - $ 145,523 $ 45,369 $ 10,384 $ 699
Credit life insurance 293 199 758 890 291
Commission and service activities - - - - 3,340
Other - - - - -
---------- ---------- --------- ---------- --------
Total $ 293 $ 145,722 $ 46,127 $ 11,274 $ 4,330
========== ========== ========= ========== ========
Benefits,
claims, losses Amortization of
and settlement deferred policy Other operating Premiums
Segment expenses acquisition costs expenses (1) written
- ------- -------- ----------------- ------------ -------
Year ended December 31, 1997
Property and casualty insurance $ 8,840 $ 1,305 $ (4,036) $ 6,626
========
Credit life insurance 70 (98) 55
Commission and service activities - - 45,005
Other - - 60
----------- ------------ ----------
Total $ 8,910 $ 1,207 $ 41,084
=========== ============ ==========
Year ended December 31, 1996
Property and casualty insurance $ 11,814 $ 1,580 $ 58 $ 6,666
========
Credit life insurance 203 (207) 74
Commission and service activities - - 38,881
Other - - -
----------- ------------ ----------
Total $ 12,017 $ 1,373 $ 39,013
=========== ============ ==========
Year ended December 31, 1995
Property and casualty insurance $ 17,618 $ 3,188 $ 1,680 $ 6,046
========
Credit life insurance 545 (655) 92
Commission and service activities - - 40,996
Other - - -
----------- ------------ ----------
Total $ 18,163 $ 2,533 $ 42,768
=========== ============ ==========
(1) Allocations of net investment income and other operating expenses are
based on a number of assumptions and estimates.
Results would change if different methods were applied.
60
64
SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
(in thousands)
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Percentage of
Ceded to other Assumed from amount assumed to
Year ended December 31, 1997 Gross Amount* companies other companies Net amount net
---------------------------- ------------- --------- --------------- ---------- ---
Credit life insurance in force $ 1,466 $ - $ - $ 1,466 -%
========== ========== ========= ========== ===========
Premiums earned:
Property/casualty insurance 109,277 108,226 5,529 6,580 84.0%
Credit life insurance 51 - - 51 -
Accident/health insurance 105 - - 105 -
---------- ---------- --------- ----------
Total $ 109,433 $ 108,226 $ 5,529 $ 6,736
========== ========== ========= ==========
Year ended December 31, 1996
----------------------------
Credit life insurance in force $ 5,908 $ - $ - $ 5,908 -%
========== ========== ========= ========== ===========
Premiums earned:
Property/casualty insurance $ 105,212 $ 103,845 $ 5,819 $ 7,186 81.0%
Credit life insurance 265 (1) - 266 -
Accident/health insurance 211 (1) - 212 -
---------- ---------- --------- ----------
Total $ 105,688 $ 103,843 $ 5,819 $ 7,664
========== ========== ========= ==========
Year ended December 31, 1995
----------------------------
Credit life insurance in force $ 16,717 $ - $ - $ 16,717 -%
========== ========== ========= ========== ===========
Premiums earned:
Property/casualty insurance $ 122,912 $ 113,760 $ 1,232 $ 10,384 11.9%
Credit life insurance 737 (4) - 741 -
Accident/health insurance 147 (2) - 149 -
---------- ---------- --------- ----------
Total $ 123,796 $ 113,754 $ 1,232 $ 11,274
========== ========== ========= ==========
* Includes amount written as designated carrier for two state sponsored
automobile facilities, a homeowners' residual market and the WYO National Flood
Insurance Program.
61
65
THE SEIBELS BRUCE GROUP, INC.
SCHEDULE V- VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at
beginning of Balance at
Description year Additions Deductions end of year
----------- ---- --------- ---------- -----------
Year ended December 31, 1997
----------------------------
Allowance for uncollectable:
Agents' balances receivable $ 669 $ 2,016 $ 1,728 $ 957
========= ========= ======== =========
Other receivable $ 79 $ 29 $ 45 $ 63
========= ========= ======== =========
Premium notes receivable $ 75 $ 226 $ - $ 301
========= ========= ======== =========
Year ended December 31, 1996*
-----------------------------
Allowance for uncollectable:
Agents' balances receivable $ 70 $ 738 $ 139 $ 669
========= ========= ======== =========
Other receivable $ 79 $ - $ - $ 79
========= ========= ======== =========
Premium notes receivable $ 75 $ - $ - $ 75
========= ========= ======== =========
Year ended December 31, 1995*
-----------------------------
Allowance for uncollectable:
Agents' balances receivable $ 70 $ - $ - $ 70
========= ========= ======== =========
Other receivable $ 151 $ 79 $ 151 $ 79
========= ========= ======== =========
Premium notes receivable $ 245 $ - $ 170 $ 75
========= ========= ======== =========
* Includes amounts written as designated carrier for two state-sponsored
automobile facilities, a homeowners, residual market and the WYO NFIP.
62
66
THE SEIBELS BRUCE GROUP, INC.
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE
OPERATIONS
(in thousands)
Column A Column B Column C Column D Column E Column F Column G
-------- -------- -------- -------- -------- -------- --------
Reserves for
Deferred Unpaid Claims Net Investment
Policy and Claim Discount, if income and
Acquisition Adjustment any, Deducted Unearned Earned Other Interest
Costs Expenses in Column C* Premiums Premiums Income
----- -------- ------------ --------- -------- ------
Affiliation with
Registrant
Company and
consolidated
subsidiaries
Year Ended
December 31, 1997 $ 1,565 $ 114,770 $ - $ 54,341 $ 6,580 $ 3,639
========== ========= =========== ========= ========== ==========
Year Ended
December 31, 1996 $ - $ 132,152 $ - $ 47,498 $ 7,186 $ 3,537
========== ========= =========== ========= ========== ==========
Year Ended
December 31, 1995 $ - $ 145,523 $ - $ 45,369 $ 10,384 $ 4,039
========== ========= =========== ========= ========== ==========
Column H Column I Column J Column K
-------- -------- -------- --------
Amortization
of Deferred Paid Claims and
Claims and Claim Incurred Policy Claim
Related to (1) Current Acquisition Adjustment Premiums
Year(2) Prior Years Costs Expenses Written
------------------- ----- -------- -------
Affiliation with
Registrant
Company and
consolidated
subsidiaries
Year Ended
December 31, 1997 $ 12,202 $ (3,362) $ 1,305 $ 19,768 $ 6,626
======== ======== ========== ======== ==========
Year Ended
December 31, 1996 $ 10,697 $ 1,117 $ 1,580 $ 25,418 $ 6,666
======== ======== ========== ======== ==========
Year Ended
December 31, 1995 $ 14,243 $ 3,375 $ 3,188 $ 34,554 $ 6,046
======== ======== ========== ======== ==========
* The Company does not discount loss and LAE reserves.
63