The following selected financial data for each of the five years ended December 31, 1996 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.
The Company provides automobile, flood and other property and casualty insurance services and products. The largest source of revenues during 1996, 1995 and 1994 was derived from the Company's participation in the South Carolina Reinsurance Facility ("S. C. Facility") and the National Flood Insurance Program ("NFIP"). Other revenues are derived from acting as a managing general agent for an unaffiliated insurance company, excess and surplus lines brokerage services and catastrophe claims services. The following table shows revenues by the various lines of operations during the years ended December 31, 1996, 1995 and 1994, respectively (in thousands): 		 					 1996 1995 1994 Current operations: Fee and service operations: S. C. Facility premiums-based fees $ 14,556 $ 13,451 $ 21,415 S. C. Facility claims-based fees 10,638 14,343 17,706 Flood premiums-based fees 8,340 9,408 10,250 Flood claims-based fees 3,581 2,863 648 Other state facilities 1,390 2,613 3,188 MGA 6,170 6,734 7,094 Brokerage and other 910 160 368 Risk operations: Nonstandard automobile 71 - - Assumed from pools and associations 5,819 1,232 2,275 Total current operations 51,475 50,804 62,944 Premiums from run-off risk operations 1,774 10,042 14,244
In 1996, 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 1996.
The Company is a servicing carrier for the NFIP. During 1996, 1995 and 1994, 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 30.6% and would increase to 32.6% if the Company is able to increase its contracts in force, as defined by the NFIP, by 10%. The rate can increase up to 34.6% for a growth rate in excess of 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.
The Company continues to maintain reserves and pay significant claims with respect to its run-off operations. These run-off operations consist primarily of workers' compensation and general liability policies that include contractors liability and environmental coverages primarily in California 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 as of December 31, 1994.
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 N. C. 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. Although the Company resumed limited insurance underwriting activities in July 1996, these activities generated less than $100,000 of earned premiums in 1996. Beginning in July, 1996, the Company began to write a very limited amount of non-standard automobile and retained an insignificant amount of private passenger automobile physical damage business.
Realized gains (losses) on investments decreased $178,000 from a gain of $164,000 for the year ended December 31, 1995 to a loss of $14,000 for the year ended December 31, 1996.
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 a litigation.
Property and casualty loss and loss adjustment expenses incurred decreased $6.6 million, or 37.7%, to $11.0 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" .
Property and casualty policy acquisition costs incurred decreased $2.0 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 N. C. Facility.
Credit life benefits incurred were $0.2 million and $0.5 million for the years ended December 31, 1996 and 1995, respectively. The Company sold this 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.
Other operating costs and expenses for the years ended December 31, 1996 and 1995 were $39.0 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.
Net investment and other interest income for the year ended December 31, 1995 decreased $1.9 million, or 30%, to $4.3 million from $6.2 million for the year ended December 31, 1994. This decrease is primarily a result of a decrease of $11.3 million, or 18%, in the Company's overall cash and investment position from $61.9 million at December 31, 1994 to $50.6 million at December 31, 1995. This decrease is due to the Company's negative cash flow from operations in 1995 described in "Liquidity and Capital Resources". Average yield on net investment income remained the same at 5.9% for both years ended December 31, 1995 and 1994.
Interest expense was $0.3 million for both years ended December 31, 1995 and 1994. 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.
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
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):
1995: Gross liability $ 145,523 $ 148,186 $ (2,663) Less reinsurance recoverable 84,492 86,038 (1,546) 				 ------- -------- ------- Net liability $ 61,031 $ 62,148 $ (1,117) 	 			 ======= ====== =======
The preceding table presents the development of balance sheet liabilities on a SAP basis for 1986 thorough 1996. 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.
The positive trend of decreasing adverse development is due to the Company's proactive approach of engaging additional actuarial reviews to perform an independent analysis of reserves as of December 31, 1994. These studies resulted in the Company recording additional reserve strengthening in the fourth quarter of 1994. Establishing reserves is an estimation process and adverse developments in future years may occur and would be recorded in the year so determined. Since that time, the Company's operating results have not been significantly impacted by incurred losses and loss adjustment expenses that relate to claims occurring in prior years compared to the impact upon operating results for the year ended December 31, 1994.
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, 1996 and 1995 (thousands of dollars): 	 	 	 1996 1995 		 	Case reserves $ 3,170 $ 2,229 	IBNR reserves 6,381 8,675 	LAE reserves 3,764 3,453 			 ------------ ------- 	Total $ 13,315 $ 14,357
The above claims involve 8 Superfund sites, 5 asbestos or toxic claims, 6 underground storage tanks and 52 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.
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.
Total cash and investments at December 31, 1996, 1995 and 1994 was $42.9 million, $50.6 million and $61.9 million, respectively. At December 31, 1996, 6.2% of total investments were committed to cash and short-term investments, primarily money market funds and overnight repurchase agreements compared to 32.9% at the end of 1995. Investments in U.S. Treasury and U.S. Government notes represented 93.4% of the portfolio as compared to 62.0% as of December 31, 1995. The Portfolio does not contain non-investment grade or derivative securities.
During the first quarter of 1996, the Company issued 1,635,000 shares of unregistered Company Common Stock at a price of $2.00 per share to a different group of investors. The proceeds of this stock sale were used to repay the $2 million loan described above which was due May 1, 1996. In addition, the Company has issued to this group stock options expiring December 31, 2000 to acquire an additional 1,635,000 shares at the greater of $2.50 per share or the book value per share at the date of exercise.
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 thirty 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 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 twelve-month period may not exceed the greater of (i) 10% of SCIC's surplus as regarding policyholders as of December 31 of the prior year and (ii) SCIC's statutory net income, not including realized capital gains or losses, for the prior calendar year. Payment of cash dividends by SCIC, is at the discretion of its Board of Directors, upon approval of the Director of Insurance, 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. In addition, no assurance can be given that South Carolina will not adopt statutory provisions more restrictive than those currently in effect.
Based on its recent earning history, the Company established a valuation allowance of $15.0 million against the net deferred tax asset at December 31, 1996.
In our opinion, the financial statements 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, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 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.
LIABILITIES Losses and claims: Reported and estimated losses and claims 		 - retained business $ 37,019 $ 47,445 		 - ceded business 74,735 74,918 Adjustment expenses - retained business 10,408 13,586 		 - ceded business 9,990 9,574 Unearned premiums: Property and casualty - retained business 1,380 1,900 		 - ceded business 46,118 43,469 Credit life 194 758 Balances due other insurance companies 8,736 12,438 Notes payable - 2,476 Current income taxes payable 17 191 Other liabilities and deferred items 8,084 7,063
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)
1996 1995 1994 			 Commission & service income $ 45,585 $ 49,572 $ 60,669 Premiums earned: Property & casualty 7,186 10,384 14,718 Credit life 478 890 1,801 Net investment income 3,006 3,176 5,321 Other interest income 801 1,154 905 Realized gains (losses) on investments (14) 164 (6,327) Other income 151 843 2,673 				 ------- ------- ------- 	Total revenue 57,193 66,183 79,760 				 ------- -------- ------- Expenses Property & casualty: Losses & loss adjustment expenses 10,980 17,618 36,954 Policy acquisition costs 1,777 3,794 5,538 Credit life benefits 203 545 770 Interest expense 174 308 321 Other operating costs & expenses 39,014 42,768 55,222 					 ------ ------ ------ 	Total expenses 52,148 65,033 98,805 					 ------ ------ ------- Income (loss) from operations, 	before income taxes 5,045 1,150 (19,045) 			 Provision (benefit) for income taxes (131) (2) 29 			 		------- ------ --------- Net income (loss) $ 5,176 $ 1,152 $ (19,074) 					======= ======= ========= Per share & common equivalent share: 	Net income (loss) $ 0.22 $ 0.07 $ (1.72) 					======= ======== ========= Pro forma SFAS No. 128 basic earnings 	per share (Note 1): 	 Net income (loss) $ 0.26 $ 0.07 $ (1.72) 					======= ======== ========
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 1995 1994 			 Common stock outstanding: Beginning of year $ 16,773 $ 14,501 $ 7,501 Stock issued in connection with rights offering - 2,217 - Stock issued to benefit plans, agents and others 15 55 - Stock issued in exchange for cancellation of note payable - - 7,000 Stock issued in connection with capital contributions 7,884 - - 					 --------- --------- -------- End of year $ 24,672 $ 16,773 $ 14,501 					 ========= ========= ======== Additional paid-in-capital: Beginning of year $ 34,080 $ 30,983 $ 27,983 Stock issued in connection with rights offering - 3,104 - Stock issued to benefit plans, agents and others 10 (7) - Stock issued in exchange for cancellation of note payable - - 3,000 Stock issued in connection with capital contributions, net of associated expenses 1,456 - - 					 --------- ---------- --------- End of year $ 35,546 $ 34,080 $ 30,983 			 Unrealized gain (loss) on securities: Beginning of year $ 401 $ (2,615) $ 2,404 Change during the year (937) 3,016 (5,019) 			 		 --------- ---------- ---------- End of year $ (536) $ 401 $ (2,615) 					 ========= =========== ========== Accumulated deficit: Beginning of year $ (41,067) $ (42,219) $ (23,145) Net income (loss) for the year 5,176 1,152 (19,074) End of year $ (35,891) $ (41,067) $ (42,219) 					 --------- ---------- ---------- Total shareholders' equity $ 23,791 $ 10,187 $ 650 					 ========= ========== ==========
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES 		 CONSOLIDATED STATEMENTS OF CASH FLOWS 			 For the Year Ended December 31, 			 (Dollars shown in thousands)
Net cash (used in) provided by investing activities (7,920) 10,563 53,850 			 Cash flows from financing activities: Issuance of capital stock 9,340 - - Proceeds from (repayment of)notes payable(2,476) 2,000 (1,934) Stock issued under stock option plans 9 18 - Proceeds from stock rights offering - 5,321 - Net cash used in financing activities 6,873 7,339 (1,934) 			 Net increase (decrease) in cash and short term investments (13,985) (3,809) 7,308 Cash and short term investments, beginning of year 16,649 20,458 13,150 Cash and short term investments, end of year $ 2,664 $ 16,649 $ 20,458 			 Supplemental cash flow information: Interest paid $ 350 $ 96 $ 210 Income taxes paid (recovered) 43 (44) 600 			 Noncash investing activities: Notes payable exchanged for common stock $ - $ - $ 10,000 	Notes payable in lieu of interest payment - 37 439
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.
The fair value of debt was $2.5 million at December 31, 1995. The fair value of debt was estimated to be its carrying value based on the remaining short-term maturity. The Company satisfied all notes payable in May, 1996.
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. A reconciliation of direct to net premiums, on both a written and an earned basis is as follows (in thousands):
The amounts of premiums pertaining to catastrophe reinsurance that were ceded from earned premiums during 1996, 1995 and 1994 were $0.2 million, $0.8 million and $1.7 million, respectively.
Property and Casualty Unpaid Loss and Loss Adjustment Expense - -------------------------------------------------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 128, "Earnings Per Share," ("SFAS No. 128") which requires the Company to disclose both basic and diluted earnings per share. SFAS No. 128 is effective for fiscal years ending after December 15, 1997. The Company has disclosed pro forma basic earnings per share as will be required under SFAS No. 128. Weighted average number of shares outstanding used in the calculation of basic earnings per share is 19,673,386 in 1996 (16,722,107 in 1995 and 11,067,565 in 1994).
Allowance for uncollectable accounts for agents' balances receivable, other receivables, and premium notes receivable were $823,000 and $224,000 at December 31, 1996 and December 31, 1995, respectively.
Net bond discount accretion and premium amortization charged to income for the years ended December 31, 1996, 1995 and 1994 was not material.
Proceeds from sales of equity securities and related realized gains and losses were as follows (in thousands):
Proceeds from sales $ 400 $ 248 $ 9,291 Gross realized gains 75 - 1,555 Gross realized losses $ (127) $ (76) $ (625)
Investments which exceed 10% of shareholders' equity, excluding investments in U.S. Government and government agencies and authorities, at December 31, 1996, are as follows (in thousands): Carrying value Short-term investments: Evergreen Money Market Fund $ 3,301 First Union Bank - Repurchase Agreements 4,690
There were no debt securities which were non-income producing for the twelve months ended December 31, 1996. Debt securities with an amortized cost of $22.0 million and $21.9 million at December 31, 1996 and 1995, respectively, were on deposit with regulatory authorities.
Other long-term investments 73 - (45) 28 Total $ 40,816 $ 8 $ (544) $ 40,280
Due in one year or less $ 1,665 $ 1,667 Due after one year through five years 25,388 25,224 Due after five years through ten years 13,481 13,142 Due after ten years 175 184
Costs incurred and deferred during year: Commissions and brokerage 1,552 1,287 Taxes, licenses and fees 13 486 Other 15 1,415 ------ --------- Total 1,580 3,188 Amortization charges to income during year (1,580) (3,188) --------- --------- Deferred at end of year $ - $ - ========= =========
On May 1, 1996 the Company repaid both notes which were payable to a single investor of the Company. Proceeds for repayment were obtained through the sale of Company stock.
A reconciliation of the differences between income taxes (benefit) on income (loss) before extraordinary items computed at the federal statutory income tax rate is as follows (in thousands):
Increase (decrease) in taxes due to: Tax exempt interest (5) (22) (92) Dividends received deduction (2) (4) (82) 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 (1,590) (329) 6,695 Reduction due to limitation of net operating loss (3,617) (18,007) - Other (62) (38) (17) -------- --------- -------- Tax expense (benefit) from operations $ (131) $ (2) $ 29
The (benefit) provision for income taxes on income from operations consists entirely of current income taxes resulting from alternative minimum tax and overaccruals of prior years' taxes. The change in deferred amounts has been offset by the valuation allowance.
Deferred tax liabilities and assets at December 31, 1996 and 1995, are comprised of the following (in thousands):
Deferred tax assets: Net operating loss carryforwards (11,056) (15,300) Insurance reserves (3,127) (4,115) Net unrealized investment losses (182) - Bad debts (521) (449) Other (306) (376)
1999 $ - $ 5,002 2000 - 825 2004 13,986 - 2006 20,411 - 2007 31,931 - 2009 19,342 - 2010 3,918 - $ 89,588 $ 5,827
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 a 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 those 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, 1996, $4.2 million 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.
Pending, December 31, 1995 85 New claims advised 16 Claims settled 30
Case reserves $ 3,170 $ 2,229 IBNR 6,381 8,675 LAE reserves 3,764 3,453
In estimating the ultimate liability for environmental and construction defect claims, management considers facts currently known along with the 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, and 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 limitations.
Because only 71 claims remain open as of December 31, 1996, 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.
(1) Until March 31,1994, the Company participated in the National Workers' Compensation Reinsurance Pool ("NCCI"), which is a national reinsurance fund for policies allocated to insurers under various states' workers' compensation assigned risk laws for companies that cannot otherwise obtain coverage. On September 30, 1994, the Company satisfied its obligation with respect to all outstanding and future claims associated with the Company's participation for a cash payment of $ 16.2 million. The redundancy in the losses and claim reserves as a result of its settlement of $ 6.1 million, reduced 1994 loss and LAE incurred.
(2) In June, 1994, the Company made a cash payment in the amount of $ 10.3 million for a settlement of pending arbitration relating to indemnification of American Star for certain loss and LAE reserves. Recorded reserves amounted to $ 7.4 million before the settlement. This transaction increased loss and LAE incurred by $ 2.9 million.
The Act provides that, without prior approval of the South Carolina Insurance Commissioner, dividends within any twelve-month period may not exceed the greater of (1) 10% of SCIC's statutory surplus as regards policyholders as of December 31 of the prior year or (2) SCIC's statutory net income, not including the realized gains, for the prior calendar year. Notwithstanding the foregoing, SCIC may not pay any dividend in 1997 without the prior approval of the Insurance Commissioner of South Carolina.
GAAP shareholders' equity $ 23,791 $10,187 $ 650 Increase (decrease) due to: Deferred policy acquisition costs (96) (293) (899) Parent company debt contributed to statutory surplus - 2,400 - Non-statutory companies' shareholders' equity (840) 1,436 - Adjustments to premium and loss reserves (1,128) (554) (1,874) Other (95) (2,301) 508 Allocation of Seibels Bruce and Company expenses - (1,574) -
Statutory surplus (1996 as adjusted; 1995 and 1994 as amended) $ 21,632 $ 9,301 $(1,615)
The SCIC Employees' Profit Sharing and Saving Plan contains both profit-sharing and 401(k) plan elements.
The profit-sharing element of the plan covers all full-time employees. There were no contributions to this element of the plan during the last four years. The profit-sharing account held 157,979 and 214,587 shares of Company stock at December 31, 1996 and 1995, respectively.
Under the 401(k) element of the plan, employees may elect to have a portion of their salary withheld on a pre- tax basis for investment in the plan, subject to limitations imposed by IRS regulations. From January 1, 1993 through June 30, 1994, the employer matched 25% of the employee contributions, limited to a maximum of 1.5% of the employee's eligible compensation. From July 1, 1994 through June 30,1995, the employer resumed matching 50% of the employee contributions, limited to a maximum of 3% of the employee's eligible compensation. The employer discontinued matching effective July 1, 1995. The employer matched portion is invested in accordance with the investment options selected by the participant. The employer contribution to the plan on behalf of participating employees was $87,000 in 1995 and $270,000 in 1994. There was no contribution in 1996.
The Company currently has three plans under which stock options, incentive stock and restricted stock may be granted to employees of the Company, non-employee directors of the Company, consultants and active independent agents representing the Company. All three plans were approved by the shareholders at a special meeting held on June 14, 1996. Options granted under all plans except the Directors' plan expire 5 years from the date of grant. Options granted under the Directors' plan expire 10 years from the date of grant.
The 1996 Stock Option Plan (the "1996 Plan") for Employees supersedes the 1987 Stock Option Plan (the "1987 Plan") and became effective November 1, 1995. The 1996 Plan reserves 5 million shares of Company stock which may be issued as stock options, incentive stock and restricted stock to employees and consultants of the Company. The following table shows option activity under the 1987 and 1996 plans for the three years.
All grants made under the Plan have exercise prices no lower than the market price at the date of grant. At December 31, 1996, 2,558,209 shares of the Company's stock have been reserved for future grant. The following table summarizes options outstanding and exercisable by price range as of December 31, 1996:
$0.00 - $1.50 340,000 $ 0.9163 336,250 $ 0.9098 $1.51 - $2.50 1,433,050 2.2281 502,000 1.9752 $2.51 - $4.00 284,000 3.8713 - - $4.51 - $5.50 251,750 5.5000 - - $11.25 9,225 11.2500 9,225 11.2500 $10.625 10,650 10.6250 10,650 10.6250
The 1995 Stock Option Plan for Non-employee Directors became effective June 15, 1995. Under the Plan, all non-employee directors are automatically granted 5,000 options to purchase Company stock on an annual basis every June. The exercise price will be the market value on the date of grant. On June 15, 1995 and 1996, 35,000 options were granted at an exercise price of $ 0.875 and $2.625, respectively.
Shares under options outstanding, beginning of year 68,000 - - Granted during year 160,500 68,000 - Exercised during year (6,000) - - Canceled or expired during year (6,000) - - Shares under options outstanding, end of year 216,500 68,000 -
During 1996 and 1995, a total of 228,500 options were granted at an average exercise price of $2.10 and $1.50, respectively. At December 31, 1996, 271,500 shares of Company's stock have been reserved for future grant.
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:
Service cost $ 3 $ 4 $ 4 Interest cost 41 43 52 Amortization of transition obligation 31 35 35 Amortization of net gains 0 (3) -
In the third quarter of 1996, the Company issued to a different group of investors stock options to acquire 3,125,000 shares of unregistered Company Common Stock at the greater of the price of $1.50 per share or the book value at the date of exercise, expiring December 31, 1998 and 3,125,000 shares at the greater of the price of $2.00 or the book value at date of exercise, expiring December 31, 2000.
The Company had 185,858 warrants outstanding at an exercise price of $0.01 per share at December 31, 1996 and 1995.
In February, 1994, substantially all of the assets of the former premium financing subsidiary, Premium Service Corporation, were sold, and a new company, Policy Finance Company, ("PFC") was formed to handle the administration of the assets retained. The pre-tax income (loss) of PFC was $(4,000) in 1996; $74,000 in 1995 and $ 538,000 in 1994. The Company has no plans to continue its own premium financing activity. Effective January 1, 1995, Forest Lake Travel Service (FLT), a subsidiary travel agency, was sold. FLT's pre- tax income was $95,000 in 1994 and $ 420,000 in 1993.
1996 1995 1994 Identifiable Assets Property and casualty insurance underwriting segment,including related investment activity $ 55,427 $ 82,493 $117,761 Commission and service activities segment 158,237 134,598 127,628 Other business segments 5,187 5,697 8,449 General corporate assets 1,621 1,217 2,097
In 1996, depreciation and amortization charges for the various property and casualty insurance underwriting and commission and service activities segments, combined, were $1.0 million ($0.9 million in 1995 and $ 0.8 million in 1994.) These amounts exclude policy acquisition costs of $1.6 million in 1996, ($3.2 million in 1995 and $5.5 million in 1994).
Unearned premiums $ 46,118 $ 43,469 Unpaid losses and LAE 84,725 84,492 Paid losses and LAE 28,218 27,423
(a) A contingent liability exists with respect to reinsurance placed with other companies. (see Note 12)
SUPPLEMENTARY DATA QUARTERLY FINANCIAL INFORMATION (unaudited) (Thousands of dollars, except in share amounts)
The following is a summary of unaudited quarterly information for the years ended December 31, 1996 and 1995:
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.