Our principal executive office is located at 26601 Agoura Road, Calabasas, California 91302, and our telephone number is (818) 880-1600.
(2) The information for the year ended December 31, 1998 includes the financial data of BIG for the period beginning December 10, 1998.
(3) Superior National's losses from discontinued operations resulted principally from contractors' and developers' liability business underwritten from 1986 to 1993.
(4) Adjusted to reflect a four-into-one reverse stock split effective as of May 24, 1995. The 1998 outstanding shares was adjusted by 245,000 shares of Treasury Stock.
During 1998, we completed three significant transactions. First, we completed the required financing to fund our acquisition of BIG by obtaining $110.0 million in senior bank debt financing and $200.1 million in equity financing. Second, we completed the acquisition of BIG and its wholly owned insurance subsidiaries (CalComp, CBIC, CCIC, and BICO) on December 10, 1998 for total consideration of $285.0 million in cash. Third, we completed the sale of BICO on December 18, 1998 to Centre Solutions Holdings (Delaware) Limited for a purchase price of approximately $12.3 million ($0.6 million of which was withheld and, subject to possible downward adjustments, will be paid in September 1999). SNIG's loss before preferred securities' dividends and accretion, discontinued operations and extraordinary items was $6.2 million in 1998, as compared to income of $0.5 million in 1997. This $6.7 million decrease was primarily the result of a $34.6 million loss associated with the Pac Rim book of business, of which $28.0 million related to claims and claim adjustment expense and $6.6 million related to the write-off of goodwill. Partially offsetting the decrease associated with the loss related to the Pac Rim book of business was a $23.2 million pre-tax reduction in commission expense net of reinsurance in 1998 and a $3.6 million pre-tax increase in investment income in 1998. Additionally, we had a $17.0 million pre-tax increase (excluding the $6.6 million write-off of unamortized goodwill) in underwriting and general and administrative expenses in 1998, which was primarily offset by a $15.7 million loss on the termination of a financing transaction with a related party reinsurer realized in 1997. The reduction of $23.2 million in commission expense net of reinsurance is mainly due to an increase in ceded commission related to the Quota-Share Arrangement. The increase of $3.6 million in net investment income is due to $1.8 million in realized gains and a $2.0 million increase in net investment income which was the result of an increase of approximately $773.6 million in assets available for investment from the acquisition of BIG.
For the year ended December 31, 1997, we recorded a net loss of $5.1 million after preferred securities' dividends and accretion, discontinued operations, and extraordinary items, as compared to net income of $2.0 million for the year ended December 31, 1996. Net loss per share for the year ended December 31, 1997 was $0.74 (diluted) versus net income per share of $0.41 (diluted) in 1996. During 1997, we recorded a $3.0 million in dividend expense and accretion on preferred securities, as compared to $1.7 million in 1996.
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO YEAR ENDED DECEMBER 31, 1997
Gross premiums written for the years ended December 31, 1998 and 1997 were $192.1 million and $159.4 million, respectively. This increase in gross premiums written represents an increase of $32.7 million or 20.5% for the 1998 policy year as compared to the 1997 policy year. This increase in gross premiums written can be primarily attributed to $25.1 million of business written by BIG insurance subsidiaries. The 1998 increase is also attributable to twelve months of additional business written in 1998 related to the SPCC acquisition as opposed to only nine months of business written in 1997. Net premiums written decreased $57.2 million or 41.8% to $79.7 million for the year ended December 31, 1998, as compared to the year ended December 31, 1997. This decrease is primarily due to a $94.1 million increase in ceded premium related to the Quota-Share Arrangement, which is partially offset by the increase reflected in gross written premium. Net premiums earned decreased $53.8 million or 38.2% to $87.1 million for the year ended December 31, 1998, as compared to the year ended December 31, 1997, reflecting the decrease in net written premiums.
Reinsurance recovery on loss reserve guarantee is $175.0 million for the year ended December 31, 1998, as compared to no such recovery for the same period in 1997. This $175.0 million was recorded in association with the Loss Reserves Guarantee.
For the year ended December 31, 1997, net claim and claim adjustment expenses increased $34.8 million or 62.6% to $90.4 million as compared to $55.6 million for the year ended December 31, 1996. The entire increase of claim and claim adjustment expense relates to the acquisition of SPCC. The net claim and claim adjustment expense ratio increased to 64.2% for the year ended December 31, 1997, as compared to 62.8% for the year ended December 31, 1996. The increase in the claim and claim adjustment expense ratio is due primarily to the 1997 accident year. Although we have continued to experience a reduction in the frequency of claims, at the same time there has been an increase in claims severity for injuries sustained in 1995 and thereafter. To address the increasing severity trend, management has put into place the Claims Severity Management Program that is intended to reduce our average ultimate loss cost per claim and claim adjustment expense for 1995 and subsequent dates of injury. See "Business-- Claim Severity Management Program."
No policyholder dividends were paid during the year ended December 31, 1997, as compared to $1.3 million of such dividends during fiscal 1996. Prior to open rating in California, policyholder dividends served both as an economic incentive to employers for safe operations and as a means of price differentiation. As a result of consumers' preference for the lowest price at a policy's inception under open rating, dividends are currently no longer a significant factor in the marketing of workers' compensation insurance in California. In 1995, as a result of the diminishing value of policyholder dividends as a marketing tool, we declared a moratorium in the payment of policyholder dividends for California policies. In December 1996, we discontinued policyholder dividend payments. Estimated amounts to be returned to policyholders were accrued when the related premium was earned by us. As a result of the change in policyholder dividend practices, a $5.9 million accrual (pre-tax) was reversed in 1996. Dividends were paid to the extent that a surplus was accumulated from premium paid on the specific workers' compensation policies.
Discontinued operations claim counts and net claim and claim adjustment expense reserves as of December 31, 1997 were 215 and $13.5 million, respectively. These amounts and estimates are consistent with management's expectations. We have significant exposure to construction defect liabilities on P&C insurance policies underwritten from 1986 to 1993. Management continues to monitor closely our potential exposure to construction defect claims and has not changed our estimates of ultimate claim and claim adjustment expense on discontinued operations since 1995. Management believes our current reserves are adequate to cover our claim liabilities. There can be no assurance, however, that further upward development of ultimate loss costs associated with construction defect claims will not occur. See "Business--Discontinued Operations."
The acquisition of BIG was funded with (a) senior debt financing in the amount of $110.0 million and (b) equity financing in the amount of $200.1 million. The senior debt financing was obtained pursuant to the terms of a Credit Agreement dated as of December 10, 1998, among SNIG, Chase, as administrative agent, and various lending institutions. In addition, we obtained a working capital credit facility under the terms of the Credit Agreement, and had $15.0 million in unused availability as of December 31, 1998. Prior to incurring the indebtedness, we obtained the consent of holders of the outstanding Trust Preferred Securities of the Trust, a subsidiary of SNIG, authorizing the Preferred Trustee of the Trust to waive a provision of the covenant limiting the incurrence of indebtedness set forth in the Senior Subordinated Indenture dated as of December 3, 1997 between SNIG, as issuer, and Wilmington Trust Company, as trustee. This waiver was effected pursuant to the First Supplemental Indenture, dated as of November 17, 1998, between SNIG and the Wilmington Trust Company, as trustee.
Pursuant to the terms of the Stock Purchase Agreement dated as of May 5, 1998 (the "Stock Purchase Agreement") among SNIG and IP Delaware, IP Bermuda and Cap Z (Cap Z subsequently assigned its rights and obligations thereunder to IP II) (collectively, the "Purchasers"), SNIG agreed to pay a commitment fee in the form of warrants to purchase an aggregate of 734,000 shares of our common stock at $16.75 per share to the Purchasers or their designees (or, in the case of Cap Z, assignee) and Zurich Centre Investments Limited ("ZCIL") or its designee as compensation, in the case of the Purchasers, for agreeing to purchase that number of shares necessary to bring the total proceeds of the Rights Offering, Employee Participation and the IP Stock Issuance to $200.0 million, and, in the case of ZCIL, for ZCIL's providing certain financing commitments to the Purchasers under the Stock Purchase Agreement. See "Certain Relationships and Related Transactions--Sale of Common Stock to the IP Partnerships and Limitations on Related Party Control of Superior National." In addition, SNIG paid to designees of the Purchasers fees totaling $3.9 million in consideration of their providing SNIG with the opportunity to undertake the acquisition of BIG, originating a portion of the financing for the acquisition of BIG and assisting in negotiating the terms of the acquisition of BIG.
On December 3, 1997, the Trust, a wholly owned subsidiary of SNIG, issued its Trust Preferred Securities, having an aggregate liquidation amount of $105 million, in a private placement and also issued to SNIG, for an aggregate consideration of approximately $3.25 million, all of the Trust's common securities. The proceeds from the sale of these securities were used by the Trust to purchase SNIG's Senior Subordinated Notes. On January 16, 1998, SNIG and the Trust completed the registration with the Securities and Exchange Commission of an exchange offer for the outstanding Trust Preferred Securities, Senior Subordinated Notes and related Company Guarantee, pursuant to which substantially all of these securities were exchanged for substantially similar securities. SNIG used the proceeds it received from the issuance of the Senior Subordinated Notes to repay the $40.3 million outstanding balance on the term loan used to acquire SPCC, to redeem approximately $27.7 million in preferred stock issued by one of our affiliates to an affiliate of Zurich, to pay approximately $4.0 million in related transaction costs, and for general corporate purposes, including a $15.0 million contribution to the surplus of SNIC.
Distributions on the Trust Preferred Securities (and interest on the related Senior Subordinated Notes) are payable semi-annually, in arrears, on June 1 and December 1 of each year, commencing June 1, 1998. Subject to certain conditions set forth in the Indenture pursuant to which the Senior Subordinated Notes were issued (the "Subordinated Notes Indenture"), on or after December 1, 2005, SNIG has the right to redeem the Senior Subordinated Notes, in whole or in part at any time, at call prices ranging from 105.375% at December 1, 2005 to 101.792% at December 1, 2007, and 100% thereafter. The proceeds from any redemption will be immediately applied by the Trust to redeem Trust Preferred Securities and the Trust's common securities at such redemption prices. In addition, SNIG has the right, at any time, subject to certain conditions, to defer payments of interest on the Senior Subordinated Notes for Extension Periods (as defined in the Subordinated Notes Indenture), each not exceeding 10 consecutive semi-annual periods; provided that no Extension Period may extend beyond the maturity date of the Senior Subordinated Notes. As a consequence of any such extension by SNIG of the interest payment period, distributions on the Trust Preferred Securities would be deferred (though such distributions would continue to accrue interest at a rate of 10.75% per annum compounded semi-annually). Upon the termination of any Extension Period and the payment of all amounts then due, SNIG may commence a new Extension Period, subject to certain requirements.
In addition, during 1997 we repaid approximately $0.6 million of an existing bank loan and, at the time due, $3.7 million of the principal of the term loan used to acquire SPCC.
In November 1996, we entered into a financing transaction involving Centre Re and The Chase Manhattan Bank ("Chase") pursuant to which Chase extended a $93.1 million term loan, net of transaction costs. We used the proceeds from the transaction to purchase from SNIC reinsurance receivables due from Centre Re. As a result, our investable assets increased $93.1 million. The additional investments contributed to the increase in investment income in 1997.
In June 1997, the term loan was retired when $110.5 million of receivables from Centre Re were transferred to Chase in exchange for cancellation of our $94.9 million debt due to Chase under the term loan. The retirement of the term loan resulted in our recognizing a $15.7 million charge.
We have identified the stages involved in managing Year 2000 issues which include (a) identifying information technology ("IT") and non-information technology ("non-IT") systems that are non-compliant, (b) formulating strategies to remedy any problems, (c) making the changes necessary to upgrade existing systems to Year 2000 compliance, (d) testing the changes, and (e) developing contingency plans.
Summarized quarterly financial data for 1998 and 1997 is as follows (in thousands, except per share data):
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS 130"). Effective for periods beginning in 1998, including interim periods, SFAS 130 requires companies to report comprehensive income and its components in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital. Comprehensive income includes all changes in equity during a period except those resulting from investments by stockholders and distributions to stockholders. We have adopted SFAS 130 in the first quarter of 1998.
on securities. We have not adopted SFAS 133. However, the effect of adoption on the consolidated financial statements at December 31, 1998 would not be material.