The Company's primary business unit is its nonstandard automobile operation, which includes its Nashville, North Carolina and South Carolina voluntary automobile operations as well as its non-risk bearing activities as a servicing carrier for the SC Facility, the SCAAIP and the NC Facility. This business boasts operations spanning 11 states. In South Carolina, the Company is the only insurance provider with a presence in all three components of the nonstandard automobile market--the SC Facility, the SCAAIP and the voluntary market.
Complementing the Company's nonstandard automobile operation is its flood operations, which now extend well beyond simply writing flood insurance for the NFIP in 46 states. The Company also offers flood zone determinations, excess flood insurance, flood compliance tracking services and claims supervision and adjusting services.
Commercial lines and homeowners insurance round out its product lines and further complement the Company's other business units by enabling its agents to bundle its products for a more complete insurance portfolio.
Premium-based fees under the Company's contract with the SC Facility are 8.90% of gross premiums written plus commissions paid to agents. The Company is responsible for paying all costs of processing the policies. The Company also receives income on the claims it pays on behalf of the SC Facility in the amount of 10.98% of the gross paid claims. The Company is responsible for paying all costs to process
In accordance with Act 154, the SC Facility began its planned runoff effective March 1, 1999, at which time no new business was accepted into the SC Facility. Effective October 1, 1999, voluntary renewals were no longer accepted by the SC Facility. However, servicing carriers can still cede renewals to the SC Facility until March 1, 2002, at which time final runoff of the SC Facility will commence.
Act 154 provides to South Carolina drivers the most significant changes in automobile insurance in twenty-five 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 SCAAIP to provide insurance to drivers who find it difficult to obtain coverage in the private market. The SC Facility will be replaced with the SCAAIP, which is designed to provide insurance to the highest risk insureds at self-sustaining rates. The Company also writes voluntary nonstandard auto insurance for those drivers who do not renew in the SC Facility or who are referred to the SCAAIP.
The Company also writes retained physical damage and liability coverage in South Carolina on a voluntary basis. While the Company has been writing nonstandard automobile insurance in South Carolina on a voluntary basis since 1997, the premium volume has been small in comparison to the writings in 1999.
The Company's other core product line, flood operations, experienced substantial growth again in 1999. The Company's written premiums for flood in 1999 increased at a rate nearly doubling that of the NFIP. Seibels Bruce added to its experienced flood sales force and was able to acquire several large books of flood business from independent agents throughout the nation. This was achieved by expanding the Company's product lines and services available to the independent agents.
As a servicing carrier for the NFIP, the Company recognizes income for the policies it processes in the amount of 31.7% (prior rate of 31.6% was increased 0.10% in October 1999) 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 LAE 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 MGA 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 the unaffiliated insurance company. The Company's financial statements reflect commission income as a percentage of premiums written but do not reflect the premiums written or associated claims incurred in 1997. Beginning in February 1998, as the commercial policies renewed, the Company began to retain the risk.
In 1998, the Company accomplished its major strategic initiative in commercial lines--converting from a MGA role to retaining risk for commercial policies. The transition was a success, and Seibels Bruce retained more than 75 percent of the policies it had originally underwritten as an MGA. This is largely attributable to the long-standing relationships the Company has developed with the commercial lines agents that sell its products.
Commercial lines represents an important diversification for the Company, further rounding out its product lines and enabling the agents to bundle the Company's products for a more complete insurance portfolio. This diversification makes the Company more attractive to agents, makes it easier for them to work with the Company and enables them to better serve their customers.
The commercial lines operation was profitable in 1999, despite all of the hurricane activity. These results were largely due to an effective reinsurance structure implemented after the operation incurred significant losses and claims activity from Hurricane Bonnie in 1998.
floods; catastrophe claims supervision; and ordinary claims adjusting. These services expand the Company's business opportunities by complementing its core flood operations and by allowing it to adjust claims for other insurance companies. INS' operations assisted the Company in adjusting claims from Hurricanes Dennis, Floyd and Irene in 1999. The Company's experience in processing flood claims led to the award of two statewide windstorm contracts, a strong indication of its growing presence in the catastrophe claims adjusting market.
The Company continues to maintain reserves and pay significant claims with respect to its runoff operations. These operations consist primarily of general liability policies that include contractors' liability and environmental coverages primarily in California and commercial (including workers' compensation) and personal lines policies in the Southeast. The runoff of claims on these policies created substantial losses to the Company over the past 10 years. In addition, the Company's runoff segment contains the management of runoff reserves from prior business in the 1980's and runoff from a nonstandard homeowners MGA book of business in Kentucky and Tennessee entered into in early 1997. The Company discontinued writing new business in this MGA book of business in October of 1998.
Commission and service income for the year ended December 31, 1999 decreased $3.6 million, or 7.3%, to $45.7 million from $49.3 million for the year ended December 31, 1998. The automobile and commercial segments experienced declines of $5.6 million and $0.8 million, respectively, related to the runoff of the SC Facility. Offsetting these decreases was an increase in the flood segment of $2.8 million resulting from increased storm-related activities and services.
Property and casualty premiums earned for the year ended December 31, 1999 increased $30.5 million, or 134.4%, to $53.3 million from $22.8 million for the year ended December 31, 1998. This increase is due to a $31.6 million increase in nonstandard automobile premiums offset by a $0.8 million decrease in commercial multi-peril premiums. The increase in nonstandard automobile earned premiums is a result of the Company's continued emphasis on premium growth during 1999 in addition to an entire year of sustained premium growth from Graward, which was acquired in May 1998, versus only seven comparable months during 1998. The decrease in commercial multi-peril earned premiums is a result of the unearned premium portfolio transfer associated with its 90% quota share reinsurance agreement effective March 1999. The remaining change in property and casualty premiums earned is attributable to a $0.3 million decrease in earned premium in the Company's runoff operation.
Net investment and other interest income for the year ended December 31, 1999 decreased 9.1%, or $0.4 million, to $4.2 million from $4.6 million for the year ended December 31, 1998. This decrease is due to a $4.6 million reduction in the Company's total cash and investments to fund operations and service its debt. Furthermore, the Company's average investment yield decreased to 4.7% in 1999 from 5.6% for 1998 due primarily to the Company's conservative investment portfolio consisting of significant investments in obligations of the U.S. Government and government agencies and authorities.
Policy acquisition costs increased $23.5 million for the year ended December 31, 1999 compared to 1998, or 230.4%. Policy acquisition costs for the year ended December 31, 1999 were $33.7 million, as compared to the year ended December 31, 1998 of $10.2 million. The Company attributes this increase to the costs associated with the underwriting activities necessary to generate earned premium.
Net credit life premiums earned decreased $0.1 million in 1998 compared to 1997 as the Company continues to runoff its life company operations.
Property and casualty losses and loss adjustment expenses for the year ending December 31, 1998 increased $16.5 million, or 185.8% to $25.3 million from $8.8 million for the year ended December 31, 1997. This increase is due to the Company's re-entry into the retained risk business. Of this amount, $0.5 million relates to hurricane related losses.
Other operating costs and expenses for the year ended December 31, 1998 increased $5.7 million, or 13.9% 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.
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 an estimated amount to be received through salvage and subrogation. 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 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 ceded reinsurance recoverable on paid and unpaid losses and LAE, classified as an asset, includes $66.4 million, $94.4 million and $97.6 million at the end of 1999, 1998 and 1997, respectively, of balances recoverable from the SC Facility, the NC Facility and the NFIP.
The preceding table presents the development of balance sheet liabilities on a SAP basis for 1989 through 1999. 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.
Company's obligation does not begin until the other company involved in the settled dispute pays, subsequent to the settlement date, a total of $20 million in losses and LAE. As of December 31, 1999 and 1998, $13.8 million and $8.7 million, respectively, of claims payments have been made by the other company since the settlement date.
Of the remaining environmental, pollution and toxic tort claims, the following activity took place during 1999 and 1998:
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, policy fees, investment income and sales and maturities of investments. The principal uses of cash are payments of claims, interest and operating expenses. Cash outflows can be variable because of the uncertainties regarding settlement dates for liabilities for unpaid losses and because of the potential for large losses. Accordingly, the Company maintains investment and reinsurance programs generally intended to avoid the forced sale of investments to meet claims obligations.
In its investment strategy, the Company attempts to match the average duration of the investment portfolio with the approximate duration of its liabilities. Total cash and investments at December 31, 1999 and 1998 were $59.6 million and $64.3 million, respectively. All debt securities are considered available for sale and are carried at market value as of December 31, 1999 and 1998. The weighted-average maturity of the fixed income investments as of December 31, 1999 was approximately 1.57 years. The duration was lowered significantly as the Company received a $10.0 million cash payment on December 31, 1999 from the South Carolina Reinsurance Facility. Average net investment yields on the Company's cash and investments were 4.7% in 1999 and 5.6% in 1998.
Financing activities in 1999 used $1.2 million, primarily attributable to the repayment of debt issued in 1998 to fund the purchases of AFS and Graward.
The South Carolina Insurance Holding Company Regulatory Act provides that, without prior approval of the Commissioner of Insurance of the State of South Carolina, dividends within any 12-month period may not exceed the greater of (i) 10% of a domestic insurer's surplus as regarding policyholders as 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,
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. The NAIC has adopted 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, 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, 1999, all of the insurance subsidiaries have ratios in excess of the level which would prompt regulatory action.
The Company has unused tax operating loss carryforwards and capital loss carryforwards of $102.9 million for income tax purposes. However, due to "change in ownership" events that occurred in June 1998, January 1997, and January, 1995, the Company's use of the net operating loss carryforwards are subject to maximum limitations in future years of approximately $2.2 million per year. Net operating loss carryforwards available for use in 2000 are approximately $10.9 million due to losses incurred in 1998 and 1999 after the change in ownership event occurred and carryover of previous years' unused limitations.
In 1997, the Company 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 would 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 was initiated to review all arrangements with third party vendors, as well as non-information technology providers, with which the Company does business.
The Company experienced no significant problems or business interruptions resulting from Year 2000 or leap year issues. In addition, none of the Company's significant vendors or reinsurers reported any significant problems or business interruptions resulting from Year 2000 or leap year issues.
The Company estimates that it spent approximately $956 on its Year 2000 compliance and remediation efforts. These costs included approximately $571 in outside consultants, approximately $150 of internal resources, approximately $135 of AS/400 rental charges while remediation was completed on the Company's AS/400 and approximately $100 related to a new phone switch for the Company's Winston-Salem, North Carolina location.
- restrictions on the Company's ability to declare and pay dividends;
- the uncertainty associated with estimating loss reserves, and the adequacy of such reserves, capital resources and other financial items;
- other risk factors listed from time to time in the Company's Securities and Exchange Commission filings.
We have audited the accompanying consolidated balance sheets of The Seibels Bruce Group, Inc. (the Parent Company--a South Carolina corporation) and subsidiaries (collectively the "Company"), as of December 31, 1999 and 1998, 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, 1999. 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 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, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States.
As explained in Note 1 to the financial statements, effective January 1, 1998, the Company adopted the provisions of SOP 97-3, "Accounting by Insurance and Other Enterprises for Insurance Related Assessments", and changed its method of accounting for its participation in the North Carolina Reinsurance Facility.
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. In 1999, premiums earned became the Company's largest source of revenue. Prior to 1999, the Company's largest source of revenues was derived from its 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, which began runoff effective March 1, 1999. The Company also continues to be a leading provider, and is 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 SC Facility and the NFIP, the Company receives commissions and fees, but retains no underwriting risk. Prior to February 1, 1998, the Company provided other fee-based services in its capacity as a managing general agent ("MGA") for commercial insurance policies underwritten by unaffiliated insurance companies. The Company also receives fee-based income from its catastrophe and automobile claims adjusting services and liability runoff management services. The Company's premium concentration in the catastrophe heavy Southeast led to the creation of a catastrophe adjusting business, Insurance Network Services ("INS"), to manage the Company's internal claims volume. INS currently offers three services: catastrophe claims handling for hurricanes, tornadoes, hailstorms, earthquakes and floods; catastrophe claims supervision; and ordinary claims adjusting.
The Company is faced with a variety of challenges in 2000. The nonstandard automobile market continues to be intensely competitive, keeping downward pressure on insurance rates. In addition, the SC Facility will continue its runoff began in March 1999, which will have an adverse affect on the Company's commission and service income opportunities. From a regulatory and compliance standpoint, the Company's primary insurance subsidiary, South Carolina Insurance Company ("SCIC") is subject to a minimum statutory capital and surplus requirement placed by the South Carolina Department of Insurance. Further, the Company's credit facility stipulates that the Company demonstrate compliance with a number of affirmative and negative covenants on a quarterly basis. Significant financial covenants include minimum statutory capital and surplus levels, ratios of debt to total capitalization and cash flow coverage. The Company's statutory capital and surplus was in excess of the required minimum and the Company was either in compliance with, or had obtained waivers of non-compliance for, all credit facility covenants at December 31, 1999. However, the challenges facing the Company in 2000 have a significant impact on the Company's ability to maintain its regulatory and debt compliance position.
The Company is working with the South Carolina and North Carolina Departments of Insurance on an intercompany pooling arrangement whereby the property and casualty insurance subsidiaries would share proportionately in their pooled net underwriting gain or loss. The proposed pooling arrangement and related statutory restructuring would further assist the Company's management in managing its statutory operations, simplify the Company's statutory structure and eliminate the additional surplus requirements of the South Carolina Department of Insurance.
In the opinion of management, the relocation of the North Carolina operations back to Winston-Salem, North Carolina, has allowed the Company to repair damaged relationships with agents and their clients who had suffered poor customer service during the consolidation efforts.
As more fully discussed in Note 8, effective January 21, 2000, three of the Company's insurance subsidiaries collectively acquired a 30.625% equity ownership interest in QualSure Holding Corporation, the holding company parent of QualSure Insurance Corporation, a homeowners take out insurance company domiciled in the state of Florida. In connection with this investment, INS entered into a Claims Administration Services Agreement with QualSure Insurance Corporation to adjudicate all of its claims for a fee based upon subject earned premium. The Company believes this is an excellent investment that capitalizes upon its considerable experience in claims adjudication and provides a substantial source of additional fee-based income to supplement its risk bearing operations.
Premiums and agents' balances receivable are carried at historical cost which approximates fair value as a result of timely collections and evaluations of recoverability with a provision for uncollectable amounts.
In April 1997, the Company executed a 1-for-4 reverse stock split of its issued and outstanding common stock. All references in the financial statements, the notes thereto and other references to number of shares or earnings per share have been adjusted for this transaction.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CREDIT LIFE PREMIUMS
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.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) dividing (loss) income allocable to common stockholders by the weighted average number of shares outstanding during the year. Diluted per share data is calculated by dividing (loss) income allocable to common stockholders by the weighted average number of shares outstanding during the year, as adjusted for the potentially dilutive effects of stock options and/or convertible preferred stock, unless common equivalent shares are antidilutive (see Note 10).
Property and equipment is 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. Depreciation expense includes amortization of assets held under capital leases which is computed on a straight-line basis over the term of the lease. Maintenance and repairs are charged to expense as incurred.
Other interest income includes interest received on reinsurance balances withheld, agents' balances receivable, balances due from the SC Facility and the SCAAIP, and financing of premium notes receivable.
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 did not have a material impact on the Company's financial position or results of operations.
Unrealized gains and losses on 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. Realized (losses) gains and the change in unrealized losses and gains on investments are summarized as follows:
Net accretion of bond discount and amortization of bond premium charged to income for the years ended December 31, 1999, 1998 and 1997 was not significant.
Excluding investments in the U.S. Government, government agencies and authorities, no investments exceeded 10% of shareholders' equity at December 31, 1999.
NOTE 2 INVESTMENTS (CONTINUED) The amortized cost and estimated market values of investments in debt and equity securities were as follows:
Depreciation expense charged to operations was $1.8 million in 1999, $1.5 million in 1998 and $0.9 million in 1997.
On May 1, 1998, the Company issued subordinated convertible notes payable (the "Notes") (See Note 8). The Notes bear interest at a rate equal to 5% per annum. The entire principal amount due under the Notes is payable in full on December 31, 2004, provided, however, that if certain outstanding debt is paid in full and proper notice, as defined, is given, the Notes will become payable six months after such debt is paid in full. However, in no event will the Notes become payable earlier than April 1, 2003. At the election of the holder of the Notes, the Notes may be converted into 300,000 shares of common stock on the maturity date, provided however, that proper notice, as defined, has been given of such election.
The Company files a consolidated federal income tax return which includes all subsidiaries. A formal tax-sharing agreement has been established by the Company with its subsidiaries.
The Company has unused tax operating loss carryforwards and capital loss carryforwards of $102.9 million for income tax purposes. However, due to "change in ownership" events that occurred in June 1998, January 1997, and January 1995, the Company's use of the net operating loss carryforwards are subject to maximum limitations in future years of approximately $2.2 million per year. Net operating loss carryforwards available for use in 2000 are approximately $10.9 million due to losses incurred in 1998 and 1999 after the change in ownership event occurred and carryover of previous years' unused limitations.
NOTE 7 PROPERTY AND CASUALTY UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE (CONTINUED) Of the remaining environmental, pollution and toxic tort claims, the following activity took place during 1999 and 1998:
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 laws 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. 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.
NOTE 7 PROPERTY AND CASUALTY UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE (CONTINUED) Losses incurred are reduced by recoveries made and estimated to be made from reinsurers based on projected ultimate losses. Such amounts also include substantial amounts related to the business produced as a servicing carrier. Estimated reinsurance recoveries are as follows:
The following table summarizes net property and casualty losses and loss adjustment expenses incurred:
Effective January 21, 2000, three of the Company's insurance subsidiaries made investments totaling $4,900 in the common stock of QualSure Holding Corporation, representing a combined ownership interest of 30.625%. QualSure Holding Corporation owns 100% of the issued and outstanding stock of QualSure Insurance Corporation ("QualSure), a homeowners take out insurance company domiciled in the state of Florida, and QualSure Underwriting Agencies, Inc., a managing general agent for QualSure Insurance Corporation. QualSure was formed to take out approximately 44,000 homeowners policies from the Florida Windstorm Underwriting Association and approximately 40,000 homeowners policies from the Florida Residential Property & Casualty Joint Underwriting Association. In connection with this investment, INS entered into a Claims Administration Services Agreement with QualSure to adjudicate all of its claims for a fee based upon subject earned premium.
NOTE 8 SALE, MERGERS AND ACQUISITIONS (CONTINUED) 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 Company. 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. On July 1, 1998, Innovative was merged into the Company. The Board of Directors of the Company approved the Plan of Merger (the "Plan") on February 10, 1998. The Plan did not require approval of the shareholders of either company. The capital stock of Innovative was cancelled and no cash, securities or other consideration of any kind was issued or paid for the shares.
The following pro forma unaudited 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.
The South Carolina Insurance Holding Company Regulatory Act provides that, without prior approval of the Commissioner of Insurance of the State of South Carolina, dividends within any 12-month period may not exceed the greater of (i) 10% of a domestic insurer's surplus as regarding policyholders as 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 Commissioner. As of December 31, 1999, SCIC had an accumulated deficit.
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:
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 common stock at the greater of the price of
In the third quarter of 1996, the Company issued to a different group of investors stock options expiring December 31, 2000 to acquire 781,250 shares of unregistered common stock at the greater of the price of $8.00 or the book value at the date of exercise. These shares were registered effective March 17, 1997.
The 1995 Stock Option Plan for Non-Employee Directors (the Directors Plan) became effective June 15, 1995, with 250,000 shares of the Company's common shares reserved for grants. Under the Directors Plan, all non-employee directors holding office on June 15 of each year are granted 1,250 options to purchase the Company's common stock. The exercise price of the options is the market value on the date of grant. On June 15, 1997,1998 and 1999, 12,500 shares were granted at exercise prices of $7.19, $7.00 and $4.75, respectively.
The 1995 Stock Option Plan for Independent Agents (the Agents Plan) became effective December 21, 1995, with 125,000 common shares of the Company's stock reserved for grants. Activity in Agents Plan is summarized as follows:
Options granted during 1997, 1998 and 1999 were granted at average exercise prices of $6.37, $6.97 and $4.68, respectively. At December 31, 1999, 71,426 shares of the Company's common stock have been reserved for future grants.
The profit-sharing element of the Plan covers all full-time employees who have met minimum eligibility requirements. There were no contributions to this part of the Plan in 1999.
The Company currently provides certain health care and life insurance benefits for certain retired employees. The projected future cost of providing post-retirement benefits is reflected as an expense as employees render services instead of when the benefits are paid. The net transition obligation is being recorded as a charge against income on a prospective basis as part of the future annual benefit cost. Post-retirement benefit expense was approximately $115 in 1999, $90 in 1998 and $77 in 1997.
SFAS 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 determination of those segments in a manner consistent with the way in which management regularly reviews the business and formulates decisions.
NOTE 14 REINSURANCE (CONTINUED) 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 reinsurer insolvency. Amounts due from reinsurance companies are for the following amounts for unearned premiums, unpaid losses and LAE, and paid losses and LAE:
With respect to credit concentrations, most of the Company's business activity is with agents and policyholders located within the southeastern United States. There are no other material credit concentrations related to premiums receivable, agents' balances, and premium notes receivable.
(c) 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"), Seibels, Bruce & Company and Norwest. The indemnification claim relates to certain loans of Premium which later were discovered to be incorrectly recorded as realizable assets. Management believes the Company has no liability in the case.
(e) On May 1, 1998, the Company completed its acquisition of Graward. In completing the Final Balance Sheet in accordance with the related purchase agreement, the Company identified purchase price adjustments totaling approximately $6 million that it believes were known to certain of the sellers, but were not disclosed to the Company during its due diligence process. The purchase agreement provides methods for resolving the differences as to the appropriate adjustments to the purchase price. On December 18, 1998 the sellers filed a demand for arbitration regarding the parties dispute over the purchase price adjustments. Thereafter, the parties reached tentative agreement regarding some, but not all, of the disputed purchase price adjustments. The parties then agreed to limit the scope of the arbitration to a determination whether an adjustment was required for the way in which the sellers had previously accounted for loss adjustment expenses at Graward. On February 7, 2000, the arbitration panel ruled that the Company was not entitled to the requested $1.08 million purchase price adjustment on the loss adjustment expenses issue, although the panel left open the question of whether a new independent audit of Graward's 1997 financial statements could result in such an adjustment. The Company is continuing to evaluate its options regarding the arbitration ruling. Management continues to believe that the purchase price will be adjusted in its favor based on subsequent negotiation and/or litigation with the sellers of Graward.
NOTE 15 COMMITMENTS AND CONTINGENCIES (CONTINUED) (f) On March 1, 2000, the Company received a demand from Generali-U.S. Branch ("Generali") for arbitration of claims arising under the April 1995 Agency Agreement between Generali and Graward. Generali seeks to recover approximately $7.64 million plus interest, costs, disbursements, and attorneys' fees. The Company has not yet responded to this demand.
Mr. John C. West, chairman emeritus of the Company's Board of Directors, 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, 1999, 1998 and 1997, the Company paid a total of $1, $40 and $40 to Bethea, Jordan & Griffin respectively.
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 reinsurance and all amounts assumed from the NC Facility have been eliminated. The NC Facility is now treated as an assessment organization. Net income decreased during 1998 in comparison with 1997 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.