The Company provides automobile, flood, commercial, homeowners and other property and casualty insurance services and products. As stated in the Development of Business segment, the Company maintains core products of nonstandard automobile and flood. It offers complementary products of commercial and homeowners in support of the Company's core businesses.
Act 154 provides to South Carolina drivers the most significant changes in automobile insurance in twenty-five (25) years. Act 154 capped recoupment at 10% of the liability premium, offers greater flexibility to insurance companies to match the rate they charge to the risk drivers present and, created the South Carolina Associated Auto Insurers Plan to provide insurance to drivers who find it difficult to obtain coverage in the private market.
The SC Facility will be replaced with SCAAIP, which is designed to provide the highest risk insureds at self-sustaining rates. The Company also writes voluntary nonstandard auto in a number of companies for those drivers who do not renew in the facility or who are referred to SCAAIP.
In December 1997, Seibels Bruce purchased Universal. SCIC had written business in North Carolina for many years. With the purchase of Universal, Seibels Bruce combined its North Carolina operations. The use of two companies in the state, each rating in two tiers is a great advantage to the nonstandard automobile operations.
Physical damage coverage is retained on voluntary business in North Carolina, as the NC Facility does not reinsure physical damage coverage. Only liability coverage is written in the NC Facility. Liability
coverage is reinsured 100% in the NC Facility and companies receive an expense allowance for processing the business and a claims allowance for adjusting the claims on that business. Every company that transacts business in North Carolina is a member of the NC Facility. SCIC is also a member of the Board of Governors of the NC Facility. Both Universal and SCIC write physical damage coverage and voluntary liability coverage, in addition to the liability coverage which is ceded to the NC Facility.
As a servicing carrier for the NFIP, the Company recognizes income for the policies it processes in the amount of 31.6% of gross premiums written. 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.
To further leverage the Company's leadership position, in March 1998, it acquired AFS. Headquartered in Gold River, California, AFS provides flood zone determinations, flood insurance and flood compliance tracking. AFS's existing book of flood business concentrated on the West Coast is a counterbalance to Seibels Bruce's East Coast business. AFS's flood operations are primarily fee based, providing an additional balance to the Company's risk-based operations.
Flood zone determinations and flood zone mapping are services provided primarily to mortgage originators, for determining whether homes are located in flood zones and require flood insurance. These capabilities, through AFS, allow the Company to offer more complete services to agents and institutions, provide it with an even stronger presence in the flood market and expand the channels of distribution for the Company's products.
As discussed, the Company had a net loss before effect of change in accounting principle of $2,293 for 1998. This included $3,056 million in one-time unusual items. The following schedule itemizes the one-time unusual items Seibels Bruce experienced in this transition year:
The schedule shows the detail of the unusual items and its effect on business segments. Nonstandard automobile was effected by
$1,724 in adjustments from severance payouts from certain downsizing; year 2000 remediation expenses for systems acquired in the Graward and Universal acquisitions; Universal losses from Hurricane Bonnie; and the reengineering of the Company's accounting systems and new general ledger installation. This illustrates that the nonstandard automobile segment, without special charges, would have produced $910 of income.
The commercial segment showed a start-up loss in 1998 of $(2,090). Total special charges of $637 came from severance payments, from Hurricane Bonnie costs of $412; and accounting reengineering costs of $182. The loss without unusual items would have been $(1,453) and, as discussed, Seibels Bruce is addressing the alliance of a reinsurance partner for this book in 1999.
The "All Other" category contains management of runoff reserves from prior business in the 1980's and runoff from a nonstandard homeowners managing general agency book in Kentucky and Tennessee entered into in early 1997. Income of $587 was due mainly to investments of reserves. With out the unusual items net income would have been $1,172. Some of the unusual items include a $200 write-off from an uncollectable receivable, arbitration and legal expenses of $549 and a benefit from accounting reengineering of $165. Also impacting this segment, but not listed, include losses from runoff of the homeowners mentioned above of $934. The Company discontinued writing new business with this MGA in October 1998 and will complete runoff in one year. The Company also strengthened workers' compensation reserves on second injury fund by $401 and $336 on loss adjustment and administrative expenses that support the Company's runoff liabilities.
Commission and service income for the year ended December 31, 1998 increased $5.2 million or 11.8% to $49.2 million from $44.1 million for the year ended December 31, 1997. Of this increase, $2.3 million relates to flood premium-based fees on a $6.9 million increase in flood written premiums while $0.7 million relates to flood claim-based fees and $1.3 million relates to flood zone determinations. Fees generated by acting as an MGA for another insurance company decreased $4.2 million as that contract was terminated in February 1998. However, this was more than offset by a $5.2 million increase in various state facility premium and claim-based fees.
Realized gains on investments totaled $55,000 for the year ended December 31, 1998, a $0.5 million decrease from the previous year.
Policy acquisition costs increased $9.0 million for the year ended December 31, 1998 compared to 1997, or 748.1%. The Company attributes this increase to the costs associated with the underwriting activities necessary to generate earned premium.
Other operating costs and expense for the year ended December 31, 1998 increased $5.7 million, or 13.8% to $46.8 million from $41.1 million for the year ended December 31, 1997. This increase is due to the operating costs associated with the new acquisitions, AFS and Graward. In addition, the Company has experienced $0.5 million in Year 2000 remediation expenses, $0.5 million in legal expenses related to an arbitration case and approximately $2.0 million related to other one-time charges.
Other operating costs and expenses for the year ended December 31, 1997 increased $2.1 million, or 5.3% to $41.1 million from $39.0 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.
Loss and loss adjustment expense 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 ceded reinsurance recoverable, classified as an asset, includes $94.4 million at the end of 1998 ($97.6 million at the end of 1997 and $102.2 million at the end of 1996) of balances recoverable from various facilities (such as the SC Facility, NC Facility and NFIP). See Note 13 of Notes to Financial Statements.
The preceding table presents the development of balance sheet liabilities on a SAP basis for 1988 through 1998. 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. As of December 31, 1998, $8.7 million of claims payments have been made since June 7, 1994.
In its investment strategy, the Company attempts to match the average duration of the investment portfolio and the approximate duration of its liabilities. Total cash and investments at December 31, 1998, 1997 and 1996 were $64.3 million, $51.8 million and $42.9 million, respectively. All debt securities are considered available for sale and are carried at market value as of December 31, 1998 and 1997. The weighted-average maturity of the fixed income investments as of December 31, 1998 was approximately 2.4 years. Average net investment yields on the Company's cash and investments were 5.9% in 1998 and 1997.
Financing activities in 1998 provided $10.1 million in cash. These cash flows were primarily attributed to the purchase and related debt financing of AFS and Graward. Financing activities since January 1, 1997 are summarized as follows:
- In June 1997, the Company had 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
- In May 1998, the Company acquired Graward in part with $2,700,000 in Subordinated Convertible Notes. The entire principal amount is due in full on December 31, 2004. Interest payments, which are due quarterly, are being withheld pending the outcome of certain proceedings described in Part II under Item 1.
shown in the insurer's most recent annual statement or (ii) a domestic insurer's net income, not including realized capital gains or losses as shown in the insurer's most recent annual statement. Furthermore, dividends may only be paid out of positive earned surplus unless approved by the Director. As of December 31, 1998, SCIC had negative earned surplus.
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, 1998 ratios of total adjusted capital to RBC that are in excess of the level which would prompt regulatory action.
The Company has unused tax operating loss carryforwards and capital loss carryforwards of approximately $99.8 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 1999 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 determined that a valuation allowance should be maintained against the net deferred tax asset as December 31, 1998.
In 1997, Seibels Bruce initiated a company-wide program (the "Compliance Program") to identify and address issues associated with the ability of its date-sensitive information, policy and claims processing systems and other equipment to properly recognize the Year 2000 in order that the Company will not suffer any business interruptions as a result of the century change on January 1, 2000. As well as reviewing internal compliance issues, a program is actively in place to review all arrangements with third party vendors as well as non-information technology providers with which the Company does business.
THE COMPANY FACES THE FOLLOWING MAJOR RISKS RELATED TO THE YEAR 2000 COMPLIANCE ISSUE:
The Company's internal transaction systems that process and issue policies and changes to those policies, verify policyholder's coverage and process and make claim payments must be Year 2000 compliant. Without compliance, system recognition for appropriate renewal, expiration, coverage verification and all other processing would be impaired.
Vendor systems that process policies and claims outside the Company's internal system present the same exposure as above and an identical impairment.
The Company's telecommunication systems, if not compliant, would impair the ability to adequately communicate with policyholders and related constituency at current service levels.
In accordance with the Compliance Program, the Company expects to complete an upgrade of its phone system by June 1, 1999, and any other equipment that is not Year 2000 compliant by October 1, 1999. An inventory has been taken of all software, equipment and facilities related items that may be date sensitive, such as elevators, alarm systems and heating and cooling systems, and a log is kept showing the Year 2000 compliance status. The Company anticipates successful remediation in accordance with the Compliance Plan.
The Company expects to spend between $750,000 and $1,000,000 on Year 2000 compliance covering both external and internal costs through out the remediation process, of which a significant portion, approximately $650,000, was allocated as an expense in 1998. Of the 1998 portion of such expenses, approximately $520,000 was paid to outside providers. The Company also spent approximately $25,000 in 1997. All charges in 1998 were to modify software; all 1997 charges were paid to consultants to identify Year 2000 issues.
Even though the Company has had much success with the remediation process to date, it has developed a contingency plan should the Winston-Salem, North Carolina processing system not be compliant in time. The Company has the capability and capacity to use its Columbia processing system, which has already been remediated, to process those policies currently processed on the Winston-Salem system. The Company also believes that the completed and planned modifications of its internal systems and equipment will allow it to be Year 2000 compliant in a timely manner. However, there can be no assurance that the Company's internal systems or equipment, or those of third parties on which the Company relies, will be Year 2000 compliant in a timely manner or that contingency plans of any third parties will mitigate the effects of noncompliance. The failure of systems or equipment of the Company or
third parties could have a material adverse effect on the Company's business and consolidated financial statements.
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, 1998 and 1997, 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, 1998. 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.
In the first quarter of 1998, the Company purchased America's Flood Services, Inc. ("AFS") located in California. AFS offers flood zone determinations and compliance tracking for a fee. In the second quarter of 1998, the Company acquired Graward General Companies, Inc. ("Graward") located in Tennessee. Graward acts as an MGA for the Company and offers nonstandard automobile insurance in the Southeast and Midwest. In the fourth quarter of 1998, the Company was awarded fifty percent of the business, as a servicing carrier, in the new South Carolina Associated Auto Insurers Plan ("SCAAIP"), a joint underwriting association which takes effect March 1, 1999. The SCAAIP will survive the SC Facility and offers the Company access to additional fee-based revenue with no underwriting risk.
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.
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. Debt is carried at the outstanding balance which approximates fair value as a result of the debt at a market rate.
Credit life premiums are reflected in income when earned as computed on a monthly pro-rata basis for level term premiums and on a sum-of-the-digits method for decreasing term premiums.
(1) An accumulation of case estimates for losses reported prior to the close of the accounting period.
Other interest income includes interest received on reinsurance balances withheld, agents' balances receivable, balances due from the SC Facility, and financing of premium notes receivable.
During the second quarter of 1998, the Company recorded a pre-tax restructuring charge of $546 related to the consolidation of its automobile and claims operations. The charges relate to employee
During the first quarter of 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires capitalization of computer software costs that meet certain criteria. The statement is effective for fiscal years beginning after December 15, 1998. The Company adopted SOP 98-1 effective January 1, 1999. SOP 98-1 is not expected to have a material impact on the Company's financial position or results of operations.
Effective January 1, 1998, the Company adopted FASB Statement No. 130 "Reporting Comprehensive Income". This statement establishes standards for reporting and display of comprehensive income and its components. Comprehensive income is a measure of all non-owner changes in equity of an entity and includes net income (loss) plus changes in certain assets and liabilities that are reported directly in equity.
Investments in notes and other debt securities and common stocks are all considered available-for-sale securities and are carried at market value at December 31, 1998 and 1997. 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 accumulated other comprehensive income and included in shareholders' equity. Realized gains and losses on investments included in the results of operations are determined using the "identified certificate" cost method.
Net bond discount accretion and premium amortization charged to income for the years ended December 31, 1998, 1997 and 1996 was not material.
Proceeds from sales of debt securities and related realized gains and losses were as follows:
Proceeds from sales of equity securities and related realized gains and losses were as follows:
Investments which exceed 10% of shareholders' equity, excluding investments in U. S. Government and government agencies and authorities, at December 31, 1998, are as follows:
Depreciation expense charged to operations was $1.5 million in 1998, $.9 million in 1997, and $1 million in 1996.
Deferred policy acquisition costs attributable to the credit life operation were none in 1998 and $15 in 1997. 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.
The Credit Agreement stipulates that the Company demonstrate compliance with a number of affirmative and negative covenants on a quarterly basis. Significant financial covenants include minimum statutory surplus levels, ratios of debt to total capitalization and cash flow coverage. As of December 31, 1998, the Company was either in compliance or obtained waivers of non-compliance for all covenants. Management is of the opinion that it will maintain compliance with the covenants.
The Company uses the liability method in accounting for income taxes. Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given currently enacted tax laws. A reconciliation of the difference between income tax provision (benefit) on income from operations computed at the federal statutory income tax rate is as follows:
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.
Deferred tax liabilities and assets at December 31, 1998, 1997 and 1996 are comprised of the following:
The Company has determined, based on its recent earnings history, that a valuation allowance should be maintained against the deferred tax asset at December 31, 1998.
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. As of December 31, 1998 and 1997, $8.7 and $7.5 million respectively of claims payments have been made since June 7, 1994.
The claims involve four Superfund sites, seven asbestos or toxic claims, two underground storage tanks and 30 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.
Because only 43 claims remain open as of December 31,1998, 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.
Effective May 1, 1998, the Company acquired all of the issued and outstanding shares of common stock of Graward. Consideration in the transaction included cash of $7.5 million and Subordinated Convertible Notes ("Notes") with a principal amount of $2.7 million (See Note 5). The Company accounted for the transaction as a purchase. The excess purchase price over the fair value of the assets was $16.2 million The Company has delivered to the seller of Graward, a final balance sheet as required under the purchase agreement (See Note 14(e)). The final balance sheet identifies significant purchase price adjustments which the Company believes are valid reductions in the resolution of the purchase price and expects an eventual reduction in the purchase price and a resulting reduction in the goodwill recorded above. Interest accruals and payments on the notes were suspended after the delivery of the final balance sheet.
Effective March 31, 1998, the Company acquired all of the issued and outstanding shares of common stock of AFS. Consideration in the transaction included cash of $2.1 million and 50,000 shares of $0.625 Cumulative, Convertible, Redeemable, Nonvoting Special Preferred Stock (See Note 9) of The Seibels
Bruce Group, Inc. The Company accounted for the transaction as a purchase. The excess purchase price over the fair value of the assets was $2.3 million.
Effective December 1, 1997, the Company acquired all of the issued and outstanding shares of common stock of Innovative, including its subsidiaries, Universal and PBP. Consideration in the transaction consisted of 220,000 shares of Cumulative, Convertible, Redeemable, Nonvoting Special Preferred Stock of The Seibels Bruce Group, Inc. The Company accounted for 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.
The following pro forma un-audited consolidated results of operation for 1998 and 1997 give affect to the acquisitions as though they had occurred at the beginning of the year they were acquired. The dividends on the preferred stock and interest of the notes have been considered.
NOTE 9 SPECIAL STOCK, DIVIDEND RESTRICTIONS AND COMPUTATION OF EARNINGS PER SHARE
On December 1, 1997, the Company issued 220,000 shares of Cumulative, Convertible, Redeemable, Nonvoting Special Preferred Stock ("Special Stock") in connection with an acquisition. The Company determined the value of the Special Stock at issuance date to be $2,200. The Special Stock pays quarterly dividends at an annual rate of $0.62 per share. The Company paid $136 in Special Stock dividends in 1998 and $11 in 1997. 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, or a total of 270,600 shares of Common Stock.
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 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).
A reconciliation between GAAP net (loss) income and statutory net (loss) income of the property and casualty insurance subsidiaries is as follows for the year ended December 31:
A reconciliation between GAAP shareholders' equity and statutory capital and surplus, at December 31, is as follows:
The Company currently has three plans under which stock options and incentive 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 2,500,000 share of Company common stock for issuance under the plan as options and incentive stock to employees and consultants of the Company. The following table shows the options under the 1987 and 1996 plans for the past three years.
future grants. The following table summarizes options outstanding and exercisable by price range as of December 31, 1998.
with the provisions of SFAS No. 123, the Company's net (loss) income and (loss) earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except per share amounts):
In April 1998, The Financial Accounting Standards Board issued Statement No. 132, "Employers' Disclosures about Pension and Other Post Retirement Benefits". This statement only modifies the disclosures companies make about their pension and non-pension benefit plans and does not alter the accounting for these plans. The FASB's intention in modifying the disclosures for post-retirement benefits
is to make the disclosures more uniform and to provide better information to investors about the economics of the benefit plans rather than focusing on current period costs. The provisions of the statement are effective for years beginning after December 15, 1997. FASB Statement No. 132 disclosures have been incorporated in this document.
The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was 7% for 1998, 8% for 1997 and 9% for 1996 is assumed to decrease to a 5% ultimate trend (5% in 1997 and 5.5% in 1996) with a duration to ultimate trend of three years (four years in 1997 and six years in 1996). 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, 1998 by $7.
FASB Statement No.131 "Disclosures about Segments of an Enterprise and Related Information" requires public enterprises to report financial and descriptive information about its reportable operating segments, and the formatting of those segments in a manner that coincides with the way in which management regularly reviews the business and formulates decisions.
The reportable segments were determined based on management's internal reporting approach which is based on product line and complementary coverages. The reportable segments are comprised of Automobile, Flood, Commercial and All Other. The Automobile segment includes all personal lines components of retained risk nonstandard automobile, NC Facility and SC Facility operations. The Flood segment contains all flood operations including NFIP, flood zone determinations, excess flood and flood
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:
(a) The Company's and its subsidiaries lease office space, computer equipment and automobiles under several operating leases that expire at various times. Lease expense amount to $1,543, $425 and $24 in 1998, 1997 and 1996 respectively. Approximate minimum future lease payments under these operating leases at December 31, 1998 are as follows (in thousands):
(d) 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.
(e) On May 1, 1998, the Company completed its acquisition of Graward. In completing the final balance sheet in accordance with the stock purchase agreement for the Graward acquisition, the Company identified certain purchase price adjustments which it believes were known to certain of the sellers, but were not disclosed to the Company during its due diligence process. The stock purchase agreement with Graward provides methods for resolving the differences as to the appropriate adjustments to the final balance sheet. On December 7, 1998, the sellers notified the Company that they intended to submit to arbitration two matters currently in dispute between the parties. Management believes that the purchase price will be adjusted appropriately under the purchase agreement.
(f) 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.
Mr. John C. West, chairman emeritus of the Board of Directors of the Company, is of counsel to the law firm of Bethea, Jordan & Griffin. Bethea, Jordan & Griffin has been retained by the Company to perform legal services. During the fiscal years ended December 31, 1998 and 1997, the Company paid a total of $40 and $40 to Bethea, Jordan & Griffin respectively.
The following is a summary of unaudited quarterly information for the years ended December 31, 1998 and 1997:
Commission and service income grew during the first three quarters of 1998 due to an increase in storm related claims. During the fourth quarter of 1998, commission and service income decreased slightly due to a decrease in written premiums for the SC Facility. Premiums earned continued to increase throughout 1998 due to the Company's nonstandard automobile program and commercial lines premium writings. During the second quarter of 1998, the Company booked a $0.5 million restructuring charge related to the consolidation of its automobile and claims operations. Effective January 1, 1998, the Company adopted SOP 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments", and recorded it as a cumulative effect of a change in accounting principle of $0.6 million. As a result, the Company's participation in the NC Facility is no longer being treated as assumed resinurance and all amounts assumed from the NC Facility have been eliminated. The NC Facility is now treated as an assessment organization. Net income fell during 1998 due to several one time charges, the gradual build up of earned premiums for the Company's new commercial lines book of business, and losses from the Company's runoff.
During the first quarter of 1998, the Company purchased AFS for $2.6 million, consisting of $2.1 million in cash and $0.5 million in cumulative, convertible, redeemable, nonvoting, special preferred stock. During the second quarter of 1998, the Company acquired Graward for a tenative purchase price of $10.3 million, consisting of $7.5 million in cash and $2.7 million in subordinated convertible notes.