The Company has incurred a loss from continuing operations in each of the last five years. As the first step of a recapitalization plan, the Company enjoyed an extraordinary gain during 1993 from the extinguishment of debt, net of income taxes, in the amount of $9.2 million. In the next step of the recapitalization plan, the note payable of $10.0 million was cancelled in June of 1994 and exchanged for 7 million newly issued shares of the Company's common stock.
In the nine months following, the Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer of the Company each resigned from their respective positions, and the new 48.3% (as of December 31, 1994) owner obtained representation on the Board of Directors. The new management is developing strategic plans to focus on the Company's core operations, which have been defined to be fee income producing activities, while reducing the amount of underwriting risk to which the Company has historically been exposed. Certain operations that were not considered to be an integral part of the operations have been sold. These included the credit life and accident and health operations in 1993, the premium financing operations in 1994, and a travel agency in the first quarter of 1995. Each of these operations were sold at a profit.
During 1994, the Company elected to commute its workers compensation loss reserves associated with participation in the National Council on Compensation Insurance. In addition, a long standing dispute regarding the 1985 sale of American Star Insurance Company was settled during the year. These two transactions resulted in an increase in earnings of $3.3 million. However, the transactions also generated a cash outflow of $25.4 million and necessitated the unplanned sale of securities at a loss of $2.6 million.
The significant reserve strengthening recorded during the fourth quarter of 1994 resulted in a statutory deficit for one of the insurance company subsidiaries. During the first quarter of 1995, a common stock rights offering was successfully completed, and $5 million of additional capital was contributed to the insurance subsidiary. In addition, proceeds from a $2 million promissory note were received by the Company on April 13, 1995. The $2 million was contributed to the capital of SCIC.
The following table reflects the major components of commission and service revenue and pre-tax operating profit for 1994, 1993, and 1992:
The commission and service revenue shown above has been reduced for certain expenses related to servicing the business. The significant increase in servicing carrier revenue is primarily attributable to two factors: 1) a reduction in allocated loss adjustment expenses associated with the South Carolina Reinsurance Facility (the "Facility"), which are netted against the revenue for adjusting claims, and 2) an increase in the component of the Facility fee based upon claim payments, which rose substantially during 1994. The increase in MGA commissions is attributable to having twelve months of operations in 1994, compared to eight months in 1993. The increase in pre-tax operating profit in 1994 is due to these increased revenues, decreased direct expenses related to servicing the business and the Company's more specific identification of expenses by operating segment.
1993 commission and service revenue was reduced $1.4 million due to a refinement of its estimate of loss adjusting fees accrued on claims in process but not yet paid, for which the facility allowance will be received when the claim is paid.
In 1993, the Company took actions to significantly reduce premium writings, due to the impact of Hurricane Andrew. Voluntary underwriting activities are now being conducted only in the five states of South Carolina, North Carolina, Georgia, Kentucky, and Tennessee. The Company's commercial business in the five states, which had been produced for its
own account, is now being produced under an MGA arrangement for the account of an unaffiliated insurance carrier. The Company also withdrew from the workers' compensation market in all states.
Effective in March, 1995, all automobile liability business written in North Carolina is being fully ceded to the reinsurance facility. Additionally, the Company has instituted a plan to non-renew property business in all states no later than July, 1995. Consequently, the Company expects to significantly reduce the current $1.3 million cost of its catastrophe reinsurance program for the year beginning July 1, 1995.
A.M. Best, the industry's leading rating authority, last assigned the Company a group rating of NA-5 ("Not Assigned-Significant Change") because of the significant recapitalization in 1993. A.M. Best is an independent company which rates insurance companies based on their judgement of factors related to the ability to meet policyholder and other contractual obligations. The rating is not directed toward the protection of investors. A low rating would not directly affect the Company's servicing carrier or MGA operations. The Company believes such a rating would not have a material impact on its personal lines business as this business can be maintained because of the quality of its agency relationships and because these lines are generally not quite so sensitive to the rating of the insuring company. This rating is currently under the normal annual review by A.M. Best. The Company anticipates a rating of NA-9 ("Not Assigned - Company Request") after review.
In 1993, $9.6 million of premiums written were assumed as reinsurance or pool participations ($12.0 million in 1992), substantially all resulting from various residual market pools. The 1994 amount of $2.2 million was not significant due to withdrawing from the NCCI pool. Of $131.5 million of ceded premiums ($145.2 million in 1993 and $152.5 million in 1992), $116.1 million ($120.1 million in 1993 and $117.5 million in 1992) was related to designated carrier and flood servicing carrier business.
The percentage of all other states in 1994 is negative due to the company's withdrawal from various states during 1993, resulting in return premium volume during 1994. The percentage for Florida in 1993 is negative because the Company withdrew from that state by doing mid-term cancellations of policies in force, resulting in negative premiums written for the year.
Reserve deficiencies from prior years adversely affected 1994 by $17.0 million, 1993 by $10.5 million, and 1992 by $7.5 million. Such adverse reserve development is fully discussed following the tabular ten-year period analysis presented later in the reserves section.
Results for 1993 were impacted by losses of $4.2 million from the first quarter "Winter Storm of the Century", as well as a $1 million reduction due to a rate rollback in the state of North Carolina. The North Carolina Rate Bureau and Commissioner of Insurance of North Carolina settled litigation for private passenger auto insurance rate cases for 1987, 1988, 1989 and 1991. The resulting consent order agreed to leave the rates as filed by the Rate Bureau for 1987, 1988 and 1991. However, the settlement for 1989 cases provided the rates approved by the Commissioner (which were lower than the rates filed by the Rate Bureau) be upheld, and that member companies issue refunds of premiums and interest to policyholders affected by the rates previously implemented by the Rate Bureau, thus resulting in the rate rollback. This consent order settled the rate cases for the years stated, and there is no other litigation pending or anticipated.
Hurricane Andrew dominated 1992 results. Excluding Andrew, both the by-line and overall loss ratios would have been significantly decreased.
Beginning in 1993, the Company decided, for risk management purposes, to continue to write personal automobile business only in the states of North Carolina, South Carolina, and Tennessee.
In 1993 the Company began its withdrawal from the workers' compensation market in all states. The workers' compensation business had already been substantially downsized. As a result of participation in the National Workers Compensation Reinsurance Pool, the Company had recorded substantial losses for its allocable share of the business placed in this residual market. The total loss to the Company relative to this residual market was $2.8 million in 1993 and $3.4 million in 1992. During 1994, this residual market generated a profit of $4.9 million, largely due to a favorable impact of $6.1 million upon the commutation of outstanding losses.
from such estimates. During the loss settlement period, additional facts regarding individual claims may become known and, consequently, it becomes necessary to refine and adjust the estimates of liability.
The liability for losses on direct business is determined using case- basis evaluations and statistical projections. The liabilities determined under these procedures are reduced, for GAAP purposes, by estimated amounts to be received through salvage and subrogation. The resulting liabilities represent the Company's estimate of the ultimate net cost of all unpaid losses and LAE incurred through December 31 of each year. These estimates are subject to the effects of changing trends in future claims frequency and/or severity. These estimates are continually reviewed and, as experience develops and new information becomes known, the liability is adjusted as necessary.
The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. While anticipated price increases due to inflation are considered, an increase in average severity of claims may be caused by a number of factors that vary with the individual type of policy written. Future average severity is projected based on historical trends adjusted for changes in underwriting standards, policy provisions, and general economic trends. These anticipated trends are monitored based on actual developments and are modified as necessary. The Company does not discount its loss and LAE reserves.
In 1993, the Company adopted FASB Statement No. 113, which significantly redefines reinsurance accounting rules and provides stringent requirements with respect to risk transfer and recognition of gains. In addition, the Statement requires ceded claims liabilities and ceded unearned premiums be reported as ceded reinsurance assets, rather than as a reduction to the respective liability. For SAP purposes, the ceded reinsurance reserves are still used to reduce the liability. There were no changes in the recognition of net losses incurred as a result of adopting FASB Statement No. 113. The only effect on the Company's GAAP financial statements was the reflection of the gross liability rather than the net liability for reserves. The Company does not have surplus relief reinsurance arrangements, multiple-year retrospectively-rated reinsurance, or assumption reinsurance transfers.
The following table presents, on a GAAP basis, a three-year analysis of losses and LAE, net of ceded reinsurance recoverable, with the net liability reconciled to the gross liability per the balance sheet:
As reflected in the preceding table, each year was affected by reserves from prior years having been deficient in those earlier periods. The impact of this adverse development was $17.0 million in 1994, $10.5 million in 1993, and $7.5 million in 1992. Adverse reserve development will be fully discussed following the tabular ten-year period analysis presented later in this section.
The following table reflects the loss and LAE development for 1994 and 1993 on a GAAP basis:
The preceding table presents the development of balance sheet liabilities on a SAP basis for 1984 through 1993. 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 preceding 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. Additionally, a ceded reinsurance commutation during 1993 for $43 million reduced the gross asset for reinsurance recoverable on losses and loss adjustment expenses. Since investments were increased $42.9 million, total assets were basically unchanged. Under the gross method of reporting the liability for losses and LAE, the commutation had no effect on liabilities. The 1993 expense for losses and LAE was also unaffected, because the reduction in the asset for reinsurance recoverable served to increase the expense, while the securities received served to decrease the expense. For these same reasons, the re-estimated liability shown on the ten-year development table was also not affected. The 1993 impact on the cumulative liability paid on the ten-year development table, which was reduced by the value of the securities received, was as follows (in millions of dollars):
The adverse loss reserve development in 1994, 1993 and 1992 is primarily attributable to business other than the Company's core southeastern business. Business the Company is required to accept through various mandated pools and associations contributed $2.9 million in 1993 ($1.7 million in 1992). This business relates primarily to the National Workers' Compensation Reinsurance Pool. The Company started limiting the burden from this pool by restricting direct workers' compensation premiums beginning in
Of the remaining environmental, pollution and toxic tort claims, the following activity took place during 1994:
The Company has consistently strived for reserve adequacy. Prior to 1992, thorough actuarial reviews were performed only at year-end. In 1992, an interim review was done. Additionally, the Company refined its estimate of the IBNR component of loss reserves to help ensure the timely recognition of current year losses and the adequacy of the IBNR for prior years' losses. At the end of 1994, the new management engaged an additional consultant to review the adequacy of loss reserves. Management believes the reserves, which approximate the amount determined by independent actuarial reviews, are sufficient to prevent future 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.
At December 31, 1994, 33.0% of total investments were committed to short term investments, compared to 9.4% at the end of 1993. Investments in U.S. Government bonds were 87% of the fixed maturities at the end of 1994, and 96% at the end of 1993. The Company has no "junk bonds" in its portfolio.
In May 1993, FASB issued Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Statement No. 115 classified securities into three categories: held-to-maturity, trading, and available-for-sale. The Company's securities are currently classified as, and will continue to be classified as, available-for-sale. Statement No. 115 requires available-for-sale securities to be reported at estimated market value and the unrealized gains and losses be reported in a separate component of shareholders' equity. The Company adopted Statement No. 115 effective January 1, 1994.
Given the negative cash flow of operations, all fixed maturities are considered available-for-sale. Accordingly, they are carried at market value as of December 31, 1994 (lower of amortized cost or market value at December 31, 1993). The market values of the fixed maturity investments were $2.4 million below book value at the end of 1994 compared to $.8 million greater than the book value at the end of 1993. The weighted average yield of the fixed maturity investments was 6.0% at the end of 1994 and 4.4% at the end of 1993.
Investors National Life Insurance Company of South Carolina was formed in 1993 to assume the run-off of the business written through Investors National Life Insurance Company, which, prior to its sale late in 1993, had provided credit life and credit accident and health insurance through banks, savings and loan institutions and automobile dealers. The pre-tax (loss) income of Investors National was $(677,000), $44,000 and $179,000 in 1994, 1993 and 1992, respectively. The loss in 1994 is due primarily to realized investment losses, compared to gains in prior years.
In February 1994, Policy Finance Company was formed to handle the administration of the assets retained in the sale of Premium Service Corporation. Pre-tax income of PFC was $538,000 in 1994. PSC's pre- tax income in 1993 was $470,000 and $262,000 in 1992. The Company has no plans to continue its own premium financing activity.
All of the above operations were sold because of management's emphasis on restructuring the Company's core business. All of these sales were made at a gain. Future years' operations are not anticipated to be significantly impacted by these sales.
Subsequent to year-end, the Company completed a right's offering and there has been a stock purchase by investors. The possibility exists that a change in ownership, as defined by the Internal Revenue Code, may have occurred, although an actual determination with respect thereto has not been definitely made. If a change in ownership has occurred or does occur, the unused loss carryforwards will be subject to certain limitations.
Based on its recent earning history, the Company has determined that an asset valuation allowance of $46.0 million should be established against deferred taxes at December 31, 1994.
The 1994 cash used in operating activities necessitated unplanned liquidation of long term bonds. Because this occurred during a period of declining bond values, the Company incurred $6.3 million of realized losses on the sale of these securities. While additional cash drain from operations is anticipated for 1995, the expected amount is less than the $20.4 million of cash and temporary investments held at December 31, 1994. Hence, no unplanned sales of securities are anticipated during 1995.
One of the Company's insurance subsidiaries fell below the minimum required statutory surplus at December 31, 1994. During the first quarter of 1995, the Company completed a stock rights offering and contributed $5 million of additional capital to the subsidiary. In addition, an investor has provided $2 million additional capital in exchange for a promissory note during April, 1995 to strengthen the statutory surplus for the subsidiary. These capital infusions will allow the subsidiary to meet the minimum capital requirements, but will leave little margin for additional operating losses without further capital infusions. The subsidiary has submitted a plan to the regulators which includes further reductions in the level of direct written premiums.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our report.
As more fully discussed in Note 1, the Company has sustained significant operating losses during each of the past three years. Further, as of December 31, 1994, the Company s primary insurance subsidiary, South Carolina Insurance Company ( SCIC ), reported an adjusted consolidated statutory capital and surplus deficiency of approximately $1.6 million, which is substantially below the minimum required by the State of South Carolina, Department of Insurance ( DOI ). Failure to meet statutory capital minimums exposes the parent company and such subsidiary insurance companies to regulatory actions and or agreements with the DOI. The regulators have the authority to take control of the subsidiary insurance companies if sufficient capital levels are ultimately not achieved. In the event the DOI should take control of the subsidiary insurance companies, the shareholders would lose their respective ownership interests, therein. Subsequent to year end and as discussed in Note 13, $7 million of additional statutory capital was contributed directly to SCIC and its subsidiaries. Although results of operations for the period subsequent to December 31, 1994 have not been quantified, management believes that SCIC currently meets the minimum statutory capital and surplus requirements of the DOI. The Company is being closely monitored by the DOI as it formulates its future operating plans which include restructuring of its business to minimize operating losses and restore future profitable operations, controlling the significant operating cash outflows and raising additional capital. There can be no assurance that the Company will be successful in consummating and executing such a plan or in raising additional capital. If the Company is unable to achieve such an operating plan or raise additional capital, continuing operating losses could further deplete statutory capital to a level which would prompt regulatory action, including taking control of SCIC. SCIC owns substantially all assets of the Company and all subsidiaries with operations. Because of the erosion of the Company s capital base and the inability to limit losses from claims, many of which occurred years ago, it is unlikely that the Company can continue to operate indefinitely in the absence of raising additional capital.
Significant losses and uncertainties existed in prior years and our reports on the 1993 and 1992 financial statements expressed substantial doubt about the ability of the Company to continue as a going concern. The continuing nature of these matters during 1994 again raise substantial doubt about the ability of the Company to continue as a going concern. The ability of the Company to continue as a going concern is dependent on many factors including regulatory action and third-party reactions to the minimal statutory capital and continuing operations. The consolidated financial statements have been prepared based on the company continuing as a going concern, generally reflecting the historical cost basis of accounting. Accordingly, the consolidated balance sheet does not include the fair value or liquidation value of all assets and liabilities. In addition, the consolidated financial statements do not include any adjustments that might result from the Company not continuing as a going concern, regulatory actions or third-party reactions to the minimal statutory capital and surplus levels and continuing operating losses.
The Seibels Bruce Group, Inc. ( SBIG and the Company ) has reported operating losses for each of the past three years. For the years ended December 31, 1994, 1993 and 1992, losses before extraordinary items were $19,074,201, $10,249,226 and $32,666,452, respectively; and net cash used in operating activities was $44,607,519, $43,587,265, and $22,265,777, respectively. These results have impaired the underwriting operations of the Company, including the ability to write and retain business. The Company voluntarily curtailed premium writing and has changed its core operations from a risk taker to activities generating fee income to function as a general agent for insurers. New management is developing and implementing a responsive operating plan. All of these activities are designed to stabilize the financial condition of the Company. There is, however, no certainty that the Company can or will achieve its operating objectives.
As of February 28, 1995, regulatory filings by the subsidiary insurance companies indicated consolidated statutory capital and surplus of approximately $7.3 million at December 31, 1994, which was in excess of required minimums. Subsequent thereto, management obtained input from additional actuarial consultants and determined that additional reserve strengthening was required. Such adjustments, if reflected retroactively in the regulatory filings, would have resulted in a deficiency in the December 31, 1994 consolidated statutory capital and surplus of approximately $1.6 million, which is substantially below the minimum required by the State of South Carolina, Department of Insurance ("DOI"). Failure to meet statutory capital minimums exposes the parent company and such subsidiary insurance companies to regulatory actions and or agreements with the DOI. The regulators have the authority to take control of the subsidiary insurance companies if sufficient capital levels are ultimately not achieved. In the event the DOI should take control of the subsidiary insurance companies, the shareholders would lose their respective ownership interests, therein. Subsequent to year-end, $7 million of additional statutory capital was contributed directly and indirectly to SCIC (See Note 13) as follows:
The Company raised approximately $5.1 million through a rights offering, which was recorded in the equity accounts in January, 1995, $5 million of which was contributed as statutory surplus to SCIC. See Note 13.
In December, 1993, the Company and new investors implemented a recapitalization plan whereby the previous $23 million loan and accrued interest was purchased from the original holder by the new investors and exchanged for a new $10 million note, at 8.5%, due June 30, 1994 and secured by 100% of the stock of South Carolina Insurance Company. The new investors then agreed to exchange the new $10 million note for 7,000,000 shares of the Company s common stock. In June, 1994, the note was returned to the Company, the shares were delivered to the investors and an interest note equal to the accrued interest was given to the new investors. In 1993, the Company recognized an after tax gain of $9,235,065 due to reducing the debt to $10 million. In June 1994, the Company recognized an increase in shareholders equity of $10 million.
The Company is the parent company of SCIC. SCIC and its property and casualty insurance subsidiaries underwrite multi-line property and casualty insurance, provide servicing carrier activities for several large state and federal insurance facilities and provide MGA services to another insurance company.
A reconciliation between GAAP net loss and statutory net income (loss) of the property and casualty insurance subsidiaries is as follows:
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 (See Note 10):
The policies corresponding to these claims were written on a direct basis. The Company has 100% excess of loss reinsurance through 1980 of $100,000, and $500,000 after that date. At December 31, 1994, the claims are reserved as follows ($ in thousands):
The above claims involve 11 Superfund sites, 5 asbestos or toxic tort claims, 11 underground storage tanks and 62 miscellaneous clean-up sites.
(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.
For purposes of the Statements of Cash Flows, the Company considers both cash and temporary cash investments within the caption "Cash and temporary cash investments" to be those highly liquid investments purchased with an initial maturity of three months or less. At December 31, 1994, the Company had cash overdrafts of $3.9 million which are classified "other liabilities" in the accompanying balance sheet.
The fair value of fixed maturities, equity securities, short- term investments, mortgage loans on real estate, other long- term investments, cash and accrued investment income was $62,676,810 and $122,408,087 at December 31, 1994 and 1993, respectively. Fair values of cash and short-term investments approximates carrying value because of the short maturity of those instruments. Fixed maturities and equity securities fair values were determined in accordance with methods prescribed by the National Association of Insurance Commissioners, which do not differ materially from nationally quoted market prices. The fair value of certain municipal bonds is assumed to be equal to amortized cost where no market quotations exist. The fair value of mortgage loans on real estate is a net realizable value. Premium and agents' balances receivable are carried at their historical costs which approximate fair value as a result of timely evaluation of recoverability and allowance for uncollectible amounts.
The fair value of debt was $439,167 and $11,933,511 at December 31, 1994 and 1993 respectively. The fair value of debt is estimated to be its carrying value based on the current rates offered for debt having the same or similar terms, and remaining maturities.
(a) Investments in fixed maturities, notes and redeemable preferred stocks are carried at market at December 31, 1994 and at the lower of aggregate cost or market value at December 31, 1993. Investments in common stocks and nonredeemable preferred stocks are carried at market value. The mortgage loan on real estate is carried at the estimated realizable value. Short-term investments are carried at cost, which approximates market value.
At December 31, 1992, net unrealized gains included in shareholders equity were $865,445 after charging deferred taxes of $618,291. In 1993, the previously recognized deferred taxes of $618,291 were reversed due to the tax loss carryforward position of the Company.
Fixed maturity investments with an amortized cost of $21,873,897 at December 31, 1994 ($21,393,010 at 1993) are on deposit with regulatory authorities.
(e) Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. The amortized cost and estimated market value of fixed maturities at December 31, 1994, by contractual maturity, are as follows:
Notes payable at December 31, 1994 and 1993, are summarized as follows:
Principal on the new interest note payable is not due until called by the holders, and the interest is accrued yearly, on the anniversary date of the transaction. If the accrued interest is not paid by the anniversary date, that accrued interest will be added to the principal amount of the note.
In June 1994, the $10 million note payable was exchanged for 7 million shares of common stock. This exchange resulted in $7 million of capital for Common Stock issued at a $1 par value and $3 million of additional paid in capital based upon the Company's estimate that the $10 million note approximated the value of the stock issued.
The extraordinary gain from the extinguishment of debt recognized in 1993 is as follows (000's omitted):
(b) The Company has a plan under which SBIG stock options may be granted to officers and key employees of the Company and its subsidiaries. SBIG option activity for the three years ended December 31, 1994 is summarized as follows:
The postretirement benefit expense was approximately $91,300 in 1994, $90,764 in 1993, and $292,000 in 1992.
The Company files a consolidated federal income tax return which includes all companies. A formal tax-sharing agreement has been established by the Company with its subsidiaries.
A reconciliation of the differences between income taxes (benefit) on loss before extraordinary items computed at the federal statutory income tax rate and tax expense (benefit) from operations is as follows:
The Company has 185,858 outstanding warrants at an exercise price of $.01 per share.
Loss per share is based on the weighted average number of shares outstanding. Such weighted average outstanding shares are 11,067,656 in 1994 (7,500,534 in 1993 and 7,500,461 in 1992). Outstanding stock options and warrants are common stock equivalents but have no dilutive effect on income per share.
In the third quarter of 1993, Investors National Life Insurance Company, the Company's credit life and credit accident and health insurance subsidiary, transferred all of its assets, other than bonds pledged to various state insurance departments, and all of its liabilities to Investors National Life Insurance Company of South Carolina. Immediately following, all of the outstanding stock of Investors National Life Insurance Company was sold. The runoff of the business was assumed by Investors National Life Insurance Company of South Carolina. The pretax income (loss) of Investors National was $(677,000), $44,000 and $179,000 in 1994, 1993 and 1992, respectively.
Operating loss represents revenue less operating expenses. Net investment income is that related to, but not individually identifiable with, the various property and casualty insurance underwriting and commission and service activities business segments.
Identifiable assets by business segment or combined segments represent assets directly identified with those operations and an allocable share of jointly used assets.
Costs of additions to property and equipment for the property and casualty insurance underwriting and commission and service activities segments, combined, amounted to $2,418,219, $41,015 and $67,882 in 1994, 1993 and 1992, respectively. The majority of the additions in 1994 were due to purchases made to begin the conversion to bring the Company's data processing in-house.
(a) The Company's property and casualty insurance subsidiaries are involved in several types of reinsurance arrangements. Ceding reinsurance programs include quota share, pro-rata surplus and excess of loss. In its servicing carrier operations, premiums are ceded entirely to the applicable state's reinsurance facility.
Reinsurance recoverable on paid and unpaid losses and LAE and prepaid reinsurance at December 31, 1994, reflecting the five largest balances with reinsurers, were: (000's omitted)
(a) A contingent liability exists with respect to reinsurance placed with other companies. (See Note 10.)
(d) The 1994 results include a settlement of a dispute which was in pending arbitration. The settlement agreement resolved all issues arising from an indemnification dispute as well as a commutation of the Company's associated reinsurance obligation. Under the settlement, the Company paid $10.3 million to the other party and such party agrees to pay up to $20 million in direct losses on all American Star claims. Any loss payments in excess of $20 million will be shared equally between the parties net of any reinsurance collections. The Company will only share in those payments to the extent of 50% of its insurance company's consolidated statutory surplus above $20 million, exclusive of direct contributions to capital. At December 31, 1994, such statutory deficit, as adjusted, was $1.6 million. Therefore, the Company has recorded no liability at this time.
During 1994, both the Chief Executive Officer and the President of the Company resigned. They received termination agreements that provide for severance. The former President received a one-time lump sum payment in the fourth quarter of 1994. The former Chief Executive Officer received a severance arrangement whereby half was received in a lump-sum payment in the fourth quarter of 1994 with two additional payments in the future.
On April 13, 1995, the Company received $2 million proceeds from a promissory note payable to the investors who acquired approximately 49% of the outstanding common shares. The debt accrues interest at prime rate plus 2%, and is payable in full no later that May 1, 1996. The note is secured by certain property and equipment of the Company and its subsidiaries.