The Columbia, South Carolina home office, containing approximately 148,000 square feet of occupied space, is owned by the Company and used primarily by its property and casualty insurance operations. Some additional premises are leased by the Company in locations in which they operate. Management believes that these facilities are adequate for the current level of operations.
As one of three servicing carriers, the Company earns commission and service income as a percentage of gross premiums written and also earns a fee on claims paid. Until October 1, 1994, the Company serviced the largest of three blocks of business for the S. C. Facility ("Block 1"). As the result of a competitive bid process in 1994, the Company, as the second lowest bidder, was awarded a five year contract to service the second largest block of business ("Block 2") at lower rates than its old contract. However, the Company continued to process the remaining run-off claims from Block 1 for losses incurred prior to October 1, 1994, pursuant to the rates under its prior contract. Premium-based fees under the new contract are 20.99% of gross premiums written (compared with a rate of 28.0% under its prior contract). The Company is responsible for paying all costs of processing the policies, including a mandated 12% commission on gross premiums earned to the agent. The Company also receives income on the claims it pays for the S. C. Facility in the amount of 10.98% of the gross paid claims (compared with a 15.0% rate under its prior contract). The Company is responsible for paying all costs to process these claims, including adjusting expenses. However, the S. C. Facility does reimburse the Company in full for legal expenses associated with processing these claims.
Revenues derived from pools and associations consist of mandated participation in various state associations due to the Company's participation in that state. Currently, the only association that significantly impacts the Company's operating results is the business assumed from the North Carolina Reinsurance Facility ("N. C. Facility"). The amount of risk business assumed by the Company in any given year is based upon its percentage of premiums ceded to the N. C. Facility for prior years, which is ultimately adjusted to reflect actual current year participation. The assumption of this risk business is reflected in the Company's reported premiums, losses and loss adjustment expenses incurred and policy acquisition costs.
Beginning in early 1995, the Company replaced its Chief Executive Officer and Chief Financial Officer and began an intensive and ongoing effort to recruit additional management. New management has taken a number of actions to stabilize and improve the Company's financial condition through significant cost reductions, the raising of new equity capital and a renewed emphasis on non-risk fee-based businesses. As a result of these actions and the relative stabilization of reserves, the Company was profitable in 1995 and 1996 and resumed limited underwriting activities in 1996.
Commission and service income for the year ended December 31, 1996 decreased $4.0 million, or 8%, to $45.6 million from $49.6 million for the year ended December 31, 1995. This decrease is due primarily to a decline of $3.7 million in S. C. Facility claims-based fees resulting largely from the new contract effective in October, 1994. The effect of this new contract caused an immediate reduction in premium-based fees and a more gradual reduction over an approximately eighteen month period in claims-based fees for the reasons explained in the above overview. Flood premium-based revenues for the year ended December 31, 1996, decreased $1.1 million, compared to the year ended December 31, 1995, due to a decrease in the amount of flood premiums serviced by the Company. However, this decrease was partially offset by a $0.7 million increase to claims-based revenues due to a larger amount of flood claims during 1996. The cancellation of the contract with the N.C. Facility also accounts for decreased revenues in the amount of $1.1 million.
Net credit life premiums earned for the year ended December 31, 1996 decreased $0.4 million, or 44%, to $0.5 million from $0.9 million for the year ended December 31, 1995. The Company sold this subsidiary in September, 1993. Under the sale agreement, the Company retained the responsibility and continues to run-off the policies in existence at the sales date.
Net investment and other interest income for the year ended December 31, 1996 decreased $0.5 million, or 12%, to $3.8 million from $4.3 million for the year ended December 31, 1995. This decrease is primarily a result of a decrease of $7.7 million, or 15%, in the Company's overall cash and investment position from $50.6 million at December 31, 1995 to $42.9 million at December 31, 1996. This decrease is due to the Company's negative cash flow from operations in 1996 and is described in "Liquidity and Capital Resources. However, average yield on total cash and investments improved from 5.9% for the year ended December 31, 1995 to 6.3% for the year ended December 31, 1996.
Benefit from income taxes was $131,000 and $2,000 for the years ended December 31, 1996, and 1995, respectively. During 1996 and 1995, the Company utilized net operating loss carryforwards to offset current income taxes in the amount of $1.6 million and $0.3 million, respectively. The 1996 income tax benefit resulted primarily from reversals of tax overaccruals in prior year.
Commission & Service Income 	 Commission and service income for the year ended December 31, 1995 decreased $11.1 million, or 18.3%, to $49.6 million from $60.7 million for the year ended December 31, 1994. This decrease is due primarily to a decline of $8.0 million and $3.4 million in S. C. Facility premiums-based fees and claims-based fees, respectively, resulting largely from the new contract effective in October, 1994. The effect of this new contract caused an immediate reduction in premium-based fees and a more gradual reduction over an approximately eighteen month period in claims-based fees for the reasons explained in the above overview. Flood premium-based revenues for the year ended December 31, 1995, decreased $0.8 million, compared to the year ended December 31, 1995, due to a decrease in the amount of flood premiums serviced by the Company. However, this decrease was offset by a $2.2 million increase to claims- based revenues due to a larger amount of flood claims during 1995.
Net property and casualty premiums earned for the year ended December 31, 1995 decreased $4.3 million, or 29%, to $10.4 million from $14.7 million for the year ended December 31, 1994. This decline is largely due to the suspension of risk- bearing business in the first half of 1995.
Net credit life premiums earned for the year ended December 31, 1995 decreased $0.9 million, or 51%, to $0.9 million from $1.8 million for the year ended December 31, 1994. The Company sold this subsidiary in September, 1993. Under the sale agreement, the Company retained the responsibility and continues to run-off the policies in existence at the sales date.
Realized gains (losses) on investments increased $6.4 million from a loss of $ 6.3 million for the year ended December 31, 1994 to a gain of $164,000 for the year ended December 31, 1995. As a result of negative cash flow from operations during 1994, the Company had to sell bonds in a period of declining values, resulting in the realized losses for 1994.
Other income for the years ended December 31, 1995 and 1994 was $0.8 million and $2.7 million, respectively. Other income in 1995 includes a gain from the settlement of a litigation. Other income for 1994 includes a $0.6 million gain on the sale Premium Service Corporation and $1.7 million from operations of the former premium financing and travel subsidiaries.
Property and casualty loss and loss adjustment expenses incurred for the year ended December 31, 1995 decreased $19.3 million, or 52.3%, to $17.6 million from $37.0 million for the year ended December 31, 1994. This decrease largely corresponds to the decrease in property and casualty premiums earned and also reflects a smaller provision for prior year losses of $3.4 million in 1995 as compared to $17.0 million in 1994. See "Loss and Loss Adjustment Expense Reserves" .
Property and casualty policy acquisition costs incurred decreased $1.7 million, or 32%, from $3.8 million for the year ended December 31, 1995 compared to the year ended December 31, 1994 ($5.5 million). This decrease is due to the reduction in net premiums written.
Credit life benefits incurred was $0.5 million and $0.8 million for the years ended December 31, 1995 and 1994, respectively. The Company sold this subsidiary in September, 1993. Under the sale agreement, the Company retained the responsibility and continues to run-off the policies in existence at the sales date.
Loss reserves are estimates at a given point in time of the amount of claims that the insurer expects to pay claimants plus investigation and litigation costs, based on facts and circumstances then known. It can be expected that the ultimate liability in each case will differ from such estimates. During the loss settlement period, additional facts regarding individual claims may become known and, consequently, it becomes necessary to refine and adjust the estimates of liability.
The 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 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.
severity is projected based on historical trends adjusting for changes in underwriting standards, policy provisions, and general economic trends.
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 as reported in the Company's financial statements (in thousands):
The ceded reinsurance recoverable, classified as an asset, includes $74.8 million at the end of 1996 ($76.1 million at the end of 1995 and $75.7 million at the end of 1994) of balances recoverable from various facilities (such as the S.C. Facility, N.C. Facility and NFIP). See Note #12 of Notes to Financial Statements.
As reflected in the preceding table, each year was affected by reserves from prior years having been deficient in those earlier periods. However, this impact of adverse development has decreased significantly since 1994. The amount of adverse development related to claims occurring in prior years was $1.1 million in 1996, $3.4 million in 1995, and $17.0 million in 1994. Adverse development will be fully discussed following the tabular ten-year period analysis presented later in this section. Reserve deficiencies are caused primarily by the difficulties inherent in estimating the liability for claims on the casualty lines of business, where the full extent of the damages can often be sizable, but not accurately determinable at the date of estimation. This situation is further complicated by the fact that the existence of a claim may not be reported to the Company for a number of years.
The following table reflects the loss and LAE development for 1996 and 1995 on a GAAP basis (in thousands):
1996: Gross liability $ 132,152 Less reinsurance recoverable 84,725 				 ------- Net liability $ 47,427 				 =======
The following analysis reflects loss and LAE development on a SAP basis, net of ceded reinsurance recoverable, for a ten-year period for retained business only for year ended December 31 (in millions):
In evaluating this information, it should be noted each amount includes the effects of all changes in amounts for prior periods. This table does not present accident or policy year development data, which readers may be more accustomed to analyzing. Conditions and trends that behave affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.
A part of the Company's reserve for losses and LAE is set aside for environmental, pollution, and toxic tort claims. These claims relate to business written by the West Coast operation prior to 1986. On June 7,1994, the Company settled a dispute relative to approximately 400 of these claims. Any future liability on these claims is limited to 50% of the direct loss and LAE paid. The Company's obligation does not begin until the other company pays out subsequent to June 7,1994 a total of $ 20 million in losses and LAE paid, net of reinsurance. As of December 31, 1996, $4.2 million of claims payments have been made (gross of reinsurance) since June 7, 1994. A portion of the reinsurance on this business was placed with a reinsurer currently operating under the supervision of its state regulator. Estimates of any obligations of the Company take into account potential recoverable amounts.
Of the remaining environmental, pollution and toxic tort claims, the following activity took place during 1996: 				 	Pending, December 31, 1995 85 	New claims advised 16 	Claims settled 30
The Company experienced negative cash flow from operations of $12.9 million in 1996, an improvement from $21.7 million in 1995 and $44.6 million in 1994. As a result of its decision to suspend risk-taking activities in 1995, the Company's stream of direct premium collections was eliminated for the first six months of 1996. However, the Company continued to pay losses and loss adjustment expenses totaling $24.6 million in 1996, of which $16.3 million were loss payments on prior year claims. Net income for the year ended December 31, 1996, totaled $5.2 million but cash flow from operations was not sufficient to fund claim payments from run-off operations. A minimal amount of risk activity was undertaken in the last six months of 1996, but the premium collections were not significant. During 1994, cash flows from operations was affected by $26.5 million of disbursements for the non-recurring commutation of NCCI liabilities and a dispute settlement regarding a previously sold subsidiary.
Net cash outflow from investing activities in 1996 was $7.9 million as $14.3 million in new investments were acquired. The source of cash for these investments was comprised of $7.0 million of investments that had matured or been sold and $9.3 million in new capital stock issued less $2.5 million to retire notes payable. During 1996, the Company continued to dispose of investments that were inconsistent with its current investment policy, which resulted in realized losses of $14,000. During 1995, the Company realized a $164,000 gain on its portfolio sales. As a result of negative cash flow from operations during 1994, the Company had to sell bonds, resulting in realized losses of $6.3 million.
All debt securities are considered available-for-sale and are carried at market value as of December 31, 1996 and 1995. The market values of the debt securities were $0.5 million below book value at the end of 1996, which is included as a reduction in shareholders' equity, compared to $0.4 million above book value as of December 31, 1995. The weighted average maturity of the fixed maturity investments were 3.78 years as of December 31, 1996. Average net investment yields on the Company's cash and investments were 6.3% in 1996 and 5.9% for both 1995 and 1994.
As of December 31, 1994, the Company had shareholders' equity of $0.7 million and its principal insurance subsidiary ("SCIC") had negative statutory surplus. In January, 1995, the Company received proceeds from a rights offering in the amount of $5.3 million and made a capital contribution of $5 million to SCIC. During the second quarter of 1995, a principal shareholder loaned the Company $2 million, which was contributed to SCIC in order to increase its statutory surplus.
During the fourth quarter of 1995, a group of investors signed a letter of intent to acquire 6,250,000 shares of unregistered Company Common Stock at a price of $1.00 per share. On September 26, 1996, the sale was consummated when the last regulatory approval was obtained and the funds released. The proceeds were used to make a $6.3 million contribution to SCIC. In conjunction with the sale of common stock, the Company also issued to these investors stock options to acquire an additional 3,125,000 shares at the greater of $1.50 per share or the book value per share at the date of exercise, expiring December 31, 1998 and 3,125,000 shares at the greater of $2.00 or the book value per share at date of exercise, expiring December 31, 2000.
The Company is a legal entity separate and distinct from its subsidiaries. As a holding company, the primary sources of cash needed to meet its obligations, including principal and interest payments with respect to any indebtedness, is dividends and other permitted payments from its subsidiaries and affiliates.
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 National Association of Insurance Commissioners has adopted risk based capital requirements for property and casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investments and insurance risks such as asset quality, asset and liability matching, loss reserve adequacy, and other business factors. The RBC formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that are potentially inadequately capitalized. Compliance is determined by the ratio of the companies' regulatory total adjusted capital to its authorized control level RBC (as defined by the NAIC). All four of the property and casualty insurance subsidiaries of the Company have December 31, 1996 ratios of total adjusted capital to RBC that are in excess of the level which would prompt regulatory action. 	 		UTILIZATION OF NET OPERATING LOSS CARRYFORWARDS
The Company has unused tax operating loss carryforwards and capital loss carryforwards of approximately $95.4 million for income tax purposes. However, due to a "change in ownership" event that occurred in January, 1995, the Company's use of the net operating loss carryforwards are subject to limitations in future years of approximately $2 million per year. Net operating loss carryforwards available for use in 1997 is approximately $7.6 million due to the tax losses incurred in 1995 subsequent to the change in ownership event occurred.
We have audited the accompanying consolidated balance sheets of The Seibels Bruce Group, Inc. ( a South Carolina corporation) (the Parent Company) and subsidiaries (collectively the "Company"), as of December 31, 1996 and 1995, 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, 1996. 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.
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES 				CONSOLIDATED BALANCE SHEETS 			 For the year ended December 31, 				(Dollars shown in thousands)
ASSETS 1996 1995 Investments: Debt securities, available-for-sale, at market (cost of $40,709 at 1996 and $33,171 at 1995) $ 40,217 $ 33,581 Equity securities, at market (cost of $34 at 1996 and $222 at 1995) 35 377 Cash and short-term investments 2,664 16,649 Other long-term investments 28 34
Total cash and investments 42,944 50,641 Accrued investment income 772 697 Premiums and agents'balances receivable, net 6,477 7,005 Reinsurance recoverable on paid losses and loss adjustment expenses 28,218 27,423 Reinsurance recoverable on unpaid losses and loss adjustment expenses 84,725 84,492 Property and equipment, net 5,194 5,396 Prepaid reinsurance premiums - ceded business 46,118 43,469 Deferred policy acquisition costs 96 293 Other assets 5,928 4,589
SHAREHOLDERS' EQUITY Special stock, no par value, authorized 5,000,000 shares, none issued and outstanding - - Common stock, $1 par value, authorized 50,000,000 shares, issued & outstanding 24,672,388 shares (16,772,686 shares at 1995) 24,672 16,773 Additional paid-in-capital 35,546 34,080 Unrealized gain/(loss) on investments (536) 401 Accumulated deficit (35,891) (41,067) 	 	Total shareholders' equity 23,791 10,187
Cash flows from operating activities: 1996 1995 1994 Net income (loss) $ 5,176 $ 1,152 $ (19,074) Adjustments to reconcile net loss to net cash used in operating activities: 		 Depreciation 979 925 739 Realized losses (gains) on investments 14 (164) 6,327 Stock issued as compensation 16 31 - Change in assets and liabilities: Accrued investment income (75) 112 278 Premium and agents' balances receivable, net 528 6,023 690 Premium notes receivable - - 11,120 Reinsurance recoverable on losses and loss adjustment expenses (1,028) 7,093 (8,943) Prepaid reinsurance premiums-ceded business (2,649) 5,014 6,443 Deferred policy acquisition costs 197 606 2,943 Unpaid losses and loss adjustment expenses (13,371) (21,175) (26,837) Unearned premiums 1,565 (10,164) (8,719) Balances due other insurance companies (3,702) (6,681) (8,657) Current income taxes payable (174) 42 (571) Outstanding drafts and bank overdraft - (3,891) (3,336) Other-net (414) (634) 2,989
Net cash used in operating activities (12,938) (21,711) (44,608) 			 Cash flows from investing activities: Proceeds from investments sold 3,954 10,804 143,609 Proceeds from investments matured 3,095 2,030 45 Cost of investments acquired (14,288) (4,201) (88,041) Proceeds from mortgage loan receivable - 1,965 - Proceeds from property and equipment sold 116 57 655 Purchases from property and equipment (797) (92) (2,418)
The accompanying notes are an integral part of these consolidated financial statements
The Seibels Bruce Group, Inc. ("SBIG") provides automobile, flood, and other property and casualty insurance services and products to customers located primarily in the southeastern United States. The Company's largest source of revenues derives from the Company's role as one of three servicing carriers for the South Carolina Reinsurance Facility (the "Facility"), a state-sponsored plan for insuring South Carolina drivers outside of the voluntary market. The Company also is a leading provider, and 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 Facility and the NFIP, the Company receives commissions and fees, but reinsures all of the underwriting risk. The Company provides other fee-based services, including services in its capacity as a managing general agent ("MGA") for commercial insurance policies underwritten by unaffiliated insurance companies, catastrophe claims services, excess and surplus lines brokerage services and liability run-off management services. Recently, the Company began marketing and underwriting nonstandard automobile insurance on a risk-bearing basis.
From the mid-1980's through the middle of 1995, the Company experienced significant operating losses due primarily to environmental and construction defect claims on general liability policies written by the Company prior to 1985, losses from Hurricane Hugo in 1989 and from Hurricane Andrew in 1992, and losses on workers' compensation insurance policies written by the Company. Despite a significant recapitalization in 1994, these operating losses reduced the Company's shareholders' equity to $650,000 by the end of 1994, and the Company suspended its underwriting operations in early 1995. Beginning in 1995, new management took a number of actions to stabilize and improve the Company's financial condition through significant cost reductions and the investment of new equity capital as well as a renewed emphasis on the Company's fee- based businesses. As a result of these actions, the Company realized net income in both 1995 and 1996 and was able to resume limited insurance underwriting activities in 1996.
The fair value of debt and equity securities, short-term investments, other long-term investments, cash and accrued investment income was $43.7 million and $51.3 million at December 31,1996 and 1995, respectively. The fair values of cash and short-term investments approximate carrying value because of the short maturity of those instruments.
The fair values of debt securities and equity securities 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 market value of certain municipal bonds is assumed to be equal to amortized cost where no market quotations exist. Premium and agents' balances receivable are carried at their historical costs which approximate fair value as a result of timely collections and evaluations of recoverability with a provision for uncollectable amounts.
1996 1995 1994 Written Earned Written Earned Written Earned ------------------- --------------------- ------------------ Direct $ 106,925 $ 105,212 $ 114,184 $ 122,912 $ 140,683 $ 146,481 Assumed 6,235 5,819 422 1,232 5,332 2,275 Ceded (106,494) (103,845) (108,560) (113,760) (131,478) (134,038) --------- --------- --------- --------- --------- --------- Net $ 6,666 $ 7,186 $ 6,046 $ 10,384 $ 14,537 $ 14,718
The liability for property and casualty unpaid losses and loss adjustment expenses includes:
(1) An accumulation of formula and case estimates for losses reported prior to the close of the accounting period. (2) Estimates of incurred-but-not-reported losses based upon past experience and current circumstances. (3) Estimates of allocated, as well as unallocated, loss adjustment expense liabilities by applying percentage factors to the unpaid loss reserves, with such factors determined on a by-line basis from past results of paid loss expenses to paid losses. (4) The deduction of estimated amounts recoverable from salvage and subrogation. (5) Estimated losses for reinsurance ceded and assumed.
Per share and common equivalent share is based on the weighted average number of shares outstanding (25,529,527 in 1996, 16,722,107 in 1995 and 11,067,565 in 1994). Outstanding stock options and warrants are common stock equivalents and had a dilutive effect in 1996, but had no dilutive effects on income per share in 1995 and 1994.
Property and equipment are 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 for certain equipment.
On January 1, 1996, the Company adopted Statement No. 123 of the Financial Accounting Standards Board, "Accounting for Stock-Based Compensation". The Statement requires that companies with stock-based compensation plans either recognize compensation expense based on new fair value accounting methods or continue to apply the provisions of Accounting Principles Board Opinion No. 25 ("APB 25") and disclose pro forma net income and earnings per share assuming the fair value method had been applied. The Company has elected to adopt the disclosure alternative in its annual financial statements and to continue accounting for its stock-based compensation plans in accordance with APB 25 (see Note 10).
Investments in notes and other debt securities, preferred stocks and common stocks are all considered available- for-sale securities and are carried at market at December 31, 1996 and 1995. Short-term investments are carried at cost, which approximates market value.
Unrealized gains and losses on marketable debt and equity securities are credited or charged directly to shareholders' equity. Realized gains and losses on investments included in the results of operations are determined using the "identified certificate" cost method.
Realized: 1996 $ (62) $ 48 $ - $ (14) 1995 240 (76) - 164 1994 (7,019) 930 (238) (6,327) Change in unrealized: 1996 $ (902) $ (154) $ 119 $ (937) 1995 2,790 237 (11) 3,016 1994 (3,222) (1,657) (140) (5,019)
Gross unrealized gains $ 8 $ 577 $ 136 Gross unrealized losses (544) (176) (2,751) -------- ------ ---------- Net unrealized gain (loss) $ (536) $ 401 $ (2,615)
Proceeds from sales $ 3,554 $ 10,556 $ 34,318 Gross realized gains 30 267 98 Gross realized losses $ (92) $ (27) $ 7,517)
The amortized cost and estimated market values of investments in debt and equity securities were as follows (in thousands): December 31, 1996
U.S. Government & government agencies and authorities $ 40,601 $ - $ (499) $ 40,102 States, municipalities & political subdivisions 108 7 - 115
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value
U. S. Government & government agencies and authorities $ 31,068 $ 348 $ - $ 31,416 States, municipalities & political subdivisions 931 62 - 993 All other corporate 1,168 - - 1,168 Redeemable preferred stocks 4 - - 4
Total equity securities 222 167 (12) 377 Other long-term investments 198 - (164) 34
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 debt securities at December 31, by contractual maturity, are as follows (in thousands):
Debt securities $ 2,122 $ 2,023 $ 4,348 Equity securities 9 15 266 Short-term investments 849 1,138 626 Mortgage loan - 23 255 Other 56 42 -
Total investment income 3,036 3,241 5,495 Investment expenses (30) (65) (174)
Land - $ 1,153 $ 1,153 Buildings 10-40 4,320 4,323 Data processing equipment 3-7 4,963 4,218 Furniture and equipment 3-10 7,422 7,387 17,858 17,081
Depreciation expense charged to operations was $1.0 million in 1996, $0.9 million in 1995 and $0.7 million in 1994.
Deferred policy acquisition costs attributable to the credit life operation were $96,000 and $293,000 at December 31, 1996 and 1995, respectively. These costs represent that portion of the cost of writing business which is deferred and charged against income, through other operating costs and expenses, as premiums are earned.
Notes payable at December 31, 1996 and 1995, are summarized as follows (in thousands):
Note payable (due 5/1/96, interest accrued at a rate equal to NationsBank's Prime Rate (8.5%) plus 2%, compounded daily) $ - $ 2,000 Interest note payable, due 5/1/96, interest at 8.5% - 476
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.
Federal income tax (benefit), at statutory rates $ 1,715 $ 391 $ (6,475)
The Company has unused tax operating loss carryforwards and capital loss carryforwards of $95.4 million for income tax purposes. However, due to a "change in ownership" event that occurred in January, 1995, the Company's use of the net operating loss carryforwards are subject to limitations in future years of approximately $2 million per year. Net operating loss carryforwards available for use in 1997 is approximately $7.6 million due to the losses incurred in 1995 after the change in ownership event occurred.
The years of expiration of the tax carryforwards are as follows (in thousands):
Of the remaining environmental and toxic tort claims, the following activity took place during 1996:
The policies corresponding to the pending claims were written on a direct basis and the Company has excess of loss reinsurance above Company retentions through 1980 of $100,000 and $ 500,000 after that date. At December 31, 1996 and 1995, the claims are reserved as follows (in thousands):
The above claims involve 8 Superfund sites, 5 asbestos or toxic tort claims, 6 underground storage tanks and 52 miscellaneous clean-up sites.
Losses incurred are reduced by recoveries made and to be made from reinsurers, which also includes substantial amounts related to business produced as a servicing carrier. Reinsurance recoveries are as follows (in thousands):
Losses incurred $ 158,307 $ 150,339 $ 145,930 Loss adjustment expenses 5,583 5,379 19,429 ---------- ---------- ---------- $ 163,890 $ 155,718 $ 165,359
The ability of the Company to declare and pay cash dividends, as well as to service any debt , is dependent to some degree upon the ability of South Carolina Insurance Company ("SCIC") to declare and pay dividends to SBIG. SCIC is regulated as to its payment of dividends by the South Carolina Insurance Holding Company Regulatory (the "ACT").
The Company's insurance subsidiaries' assets, liabilities and results of operations have been reported on the basis of GAAP, which varies from statutory accounting practices ("SAP") prescribed or permitted by insurance regulatory authorities. The principal differences between SAP and GAAP, are that under SAP: (1) certain assets that are not admitted assets are eliminated from the balance sheet, (2) acquisition costs for policies are expensed as incurred, while they may be deferred and amortized over the estimated life of the policies under GAAP, (3) no provision is made for deferred income taxes, (4) the timing of establishing certain reserves is different than under GAAP, and (5) valuation allowances are established against investments. Each of the Company's insurance subsidiaries must file with applicable state insurance regulatory authorities an " Annual Statement" which reports, among other items, net income (loss) and shareholders' equity( called "surplus as regards policyholders" in property and casualty reporting).
Net income $ 460 $ 276 $ 750 Shareholders' equity ("surplus as regards policyholders") $ 4,769 $ 4,334 $ 4,036
Options outstanding Options exercisable Weighted average Weighted average Range of price Outstanding exercise price Exercisable exercise price
The 1995 Stock Option Plan for Independent Agents became effective December 21, 1995. The Plan authorizes a total grant of 500,000 options. Activity may be summarized as follows:
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation costs for the Company's three stock option plans been determined based on the fair value at the grant date for awards in 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except per share amounts).
Net income - as reported 5,176 1,152 Net income - pro forma 4,026 597 Earnings per share - as reported 0.22 0.07 Earnings per share - pro forma 0.18 0.04
Expected Dividend Yield 0 0 0 Expected Stock Price Volatility 84.92% 84.92% 84.92% Risk-free Interest Rate 5.92% 6.47% 5.61% Expected Life of Options 5 years 10 years 4.2 years
The Company and its subsidiaries currently provide certain health care and life insurance benefits for retired employees. The projected future cost of providing postretirement benefits, such as health care and life insurance, is being recognized as an expense as employees render service. The cumulative affect of accruing said expenses versus expensing the benefits when paid is being recorded as a charge against income on a prospective basis as part of the future annual benefit cost. The postretirement benefit expense was approximately $75,000 in 1996, $79,000 in 1995, and $91,000 in 1994. The following table presents the reconciliation of the obligation at December 31, 1996 and 1995 (in thousands):
Net periodic postretirement benefit cost includes the following components for 1996, 1995, and 1994 (in thousands):
The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was 9% for 1996 and 1995, and 12% for 1994 is assumed to decrease to a 5.5% ultimate trend (5.5% in 1995; 7% in 1994) with a duration to ultimate trend of 6 years (6 years in 1995 and 9 years in 1994). The health care cost trend rate assumption has an effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the postretirement benefit obligation as of December 31, 1996 by $9,000.
The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.75% for 1996, 7.25% for 1995 and 7.5% for December 31, 1994.
During the first quarter of 1996, the Company issued to a group of investors stock options expiring December 31, 2000 to acquire 1,635,000 shares of unregistered Company Common Stock at the greater of the price of $2.50 per share or book value at the date of exercise.
Founded in 1869, the Company performs servicing carrier activities for state and federal insurance facilities. Managing general agency services are also performed for a non-affiliated insurance company. Insurance products are offered through independent agents, primarily in the southeastern states. During 1993 and 1994, the Company began to withdraw from selected states and selected risk retained products, and changed its emphasis to fee income generating activities. Effective in mid-1995, the Company voluntarily suspended underwriting new and renewal business for which the risks were not reinsured to an unaffiliated party. After both the Company and its regulators became satisfied that the capital level was adequate to undertake such risk, underwriting on a risk retention basis was resumed at very modest levels in mid 1996.
The following sets forth certain information with respect to the Company's operations in different business segments for the year ended December 31, (in thousands):
Costs of additions to property and equipment for the property and casualty insurance underwriting and commission and service activities segments, combined, amounted to $0.8 million in 1996, $0.1 million in 1995 and $ 2.4 million in 1994. Additions in 1996 were primarily for data processing needs and enhancements. 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.
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; consequently, allowances are established for amounts deemed uncollectable. 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 reinsures to minimize its exposure to significant losses from reinsurers insolvency. Reinsuring companies are obligated for the following amounts for unearned premiums, unpaid losses and LAE, and paid losses and LAE (in thousands): 1996 1995
Five reinsurers comprise a significant portion of the Company's reinsurance recoverable on paid and unpaid losses and loss adjustment expense, as well as prepaid reinsurance at December 31, 1996. The reinsurers and related balances are as follows (in thousands):
South Carolina Reinsurance Facility $ 70,770 $ 24,195 National Flood Program 26,325 19,005 Swiss Reinsurance Corp 7,027 - North Carolina Reinsurance Facility 5,104 1,036 Kentucky Insurance Placement Facility 2,209 1,745 All others 1,508 137
A former non-employee Director of the Company was an employee of Prudential Securities, Inc. ("PSI") through mid-1995. From 1994 through mid 1995, PSI acted as investment manager for the Company and for its retirement plan. The amount of fees earned by PSI on trading activity by the Company cannot readily be determined, but the amount paid directly to PSI during 1995 and 1994 was not material. The former Director is no longer an employee of PSI, and PSI's services have since been terminated.
On February 27, 1997, the Board of Directors voted to recommend for approval by the shareholders a reverse stock split. If approved by the shareholders at the Annual Meeting of Shareholders on April 9, 1997, one share of common stock will be exchanged for each four shares of common stock currently outstanding.
Property and casualty premiums earned continue to decrease as a result of the Company suspending writing of retained "risk" business. However, losses incurred on this business have stabilized due to the adequacy of reserves. The net loss in the first quarter is due to management setting aside additional reserves for future development. The negative effect on net income due to this run-off business in the remaining quarters has been insignificant. Additionally, while the Company's commission and service income has decreased due to lower commission rates and volume, ongoing cost reductions have mitigated the effect to net income.