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 1995. Each of these operations were sold at a profit. During the first quarter of 1996, the Company agreed to sell Consolidated American Insur- ance Company, an inactive subsidiary.
The net income for 1995 was $1.2 million ($0.07 per share). The income came from the servicing activities of the Company, while the loss from property and casualty underwriting was significantly reduced. Both segments enjoyed reduced operating costs. The net loss for 1994 was $19.1 million ($1.72 per share). The principal factors influencing the loss were the increase in estimated losses and adjusting expenses for claims occurring in prior years of $17.0 million, the settlement of a long standing dispute at an additional cost of $2.9 million, realized losses on security sales of $6.3 million, and were offset in part by commuting outstanding liabilities with the National Council of Compensation Insurance in an amount that was $6.1 million less than the outstanding re- serves. The operating loss for 1993 was $10.2 million ($1.37 per share). An extraordinary gain from the extinguishment of debt in the amount of $9.2 million ($1.23 per share) reduced the net loss for the year to $1.0 million ($.14 per share).
Fee-generating activities are predominantly related to acting as a servicing carrier for the South Carolina and North Carolina automobile reinsurance facilities, and for the WYO National Flood Insurance Program. The Company bears no underwriting risk for the business processed and administered as a servicing carrier.
The following table reflects the major components of commission and service revenue and pre-tax operating profit for 1995, 1994, and 1993:
The Company serviced $28.6 million of flood insurance premiums through the WYO program in 1995 ($29.5 million in 1994). It is among the ten largest companies acting in that capacity. Approximately 45% of the Company's volume in this program comes from Florida. Since the Company left Florida's voluntary marketplace in 1993, the percentage of premium volume generated in that state in 1995 and 1994 has been reduced approximately 21% and 14%, respectively, due to competition from other WYO companies. While this premium decrease has not significantly influenced income in 1995, the commission income earned on claims was positively affected in 1995 due to flood claims resulting from Hurricane Opal. Commission income related to claims increased $1.1 million when compared to 1994.
In 1993, the Company took actions to significantly reduce premium writings, due in part to the impact of Hurricane Andrew. Voluntary underwriting activities were being conducted only in the five states of South Carolina, North Carolina, Georgia, Kentucky, and Tennessee through the second quarter of 1995. At that time, the Company began the year long process of non-renewing the business, with the exclusion of North and South Carolina automobile liability business which is 100% ceded to the respective reinsurance facilities. The Company's commercial business in the five states, which had been produced for its own risk, is now being produced under an MGA arrangement for the risk of an unaffiliated insur- ance carrier. The Company also withdrew from the workers' compensation market in all states.
The Company ceased to underwrite commercial lines in 1993 and has withdrawn from retaining any underwriting risk until sufficient capital has been raised to support such risks. The following table presents net premiums earned and loss ratios for the last three years:
Several key ratios are used in the industry to measure underwriting results. The pure loss ratio is the ratio of losses incurred to premiums earned. The loss adjustment expense ratio is the ratio of loss adjustment expenses incurred to premiums earned. The sum of these two ratios is called the loss ratio.
In 1993, $9.6 million of premiums written were assumed as reinsurance or pool participations, substantially all resulting from various residual market pools. The 1995 and 1994 amounts of $0.5 million and $2.2 million, respectively, were not significant due to withdrawing from the NCCI pool. Of $108.6 million of ceded premiums in 1995 ($131.5 million in 1994 and $145.2 million in 1993), $102.5 million ($122.0 million in 1994 and $120.1 million in 1993) was related to premiums written as fee-generating business.
The following is a breakdown of percentages of net premiums written in each of the Company's principal states for 1995, 1994, and 1993:
Through various types of reinsurance, the Company reduces its net liability on individual risks. Prior to suspending the underwriting of net retained risk, a significant portion of the Company's covered risks were located in areas that are vulnerable to major windstorms. These risks are mitigated in part by using selective underwriting procedures and purchasing catastrophe property reinsur- ance protection to contain major losses. The Company's decision to non-renew all personal lines of business, excluding the automobile liability fee-generating business, should adequately protect the Company in the event of a catastrophic event.
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 liabil- ity. 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 rein- surance arrangements, multiple-year retrospectively-rated reinsurance, or assumption reinsurance transfers.
The following table reflects the loss and LAE development for 1995 and 1994 on a GAAP basis:
The preceding table presents the development of balance sheet liabilities on a SAP basis for 1985 through 1994. 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 "cumulative (deficiency)" represents the aggregate change in the estimates over all subsequent years. The effects on income of the past three years of changes in estimates of the liabilities for losses and LAE on a GAAP basis are shown in the reconciliation table.
The adverse loss reserve development in 1992 through 1995 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 1990, and in late 1992 made the decision to discontinue writing any new or renewal workers' compensation business. During 1994, liabilities associated with this Pool were commuted, eliminating exposure to further development for the Pool, and producing a $6.1 million reduction in the adverse development for 1994.
Of the remaining environmental, pollution and toxic tort claims, the following activity took place during 1995:
The above claims involve 11 Superfund sites, 5 asbestos or toxic tort claims, 10 underground storage tanks and 59 miscellaneous clean-up sites.
For this direct business there are usually several different insurers participating in the defense and settlement of claims made against the insured. Costs and settlements are pro-rated by either time on the risk or policy limits.
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. This review resulted in management recording additional reserve strengthening at December 31, 1994. The 1995 results along with the results of reviews performed by independent actuaries at June 30, 1995 and December 31, 1995 bear out management's belief that the reserves are sufficient to prevent prior years' losses from adversely affecting future periods; however, estab- lishing 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, 1995, 23.3% of total investments were committed to short term investments, compared to 33.0% at the end of 1994. Investments in U.S. Government bonds were 93.6% of the fixed maturities at the end of 1995,and 87.1% at the end of 1994. 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.
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 $4,000,$(677,000)and $44,000 in 1995, 1994 and 1993, respectively. The loss in 1994 was due primarily to realized investment losses, compared to gains in 1995 and 1993.
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 $74,000 in 1995, $538,000 in 1994, and $470,000 in 1993. The Company has no plans to continue its own premium financing activity.
The Company uses the liability method in accounting for income taxes. Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provision of the enacted tax laws.
Cash flows from financing activities in 1995 includes $5.3 million the Company raised from a stock rights offering and $2.0 million provided by an investor in exchange for a promissory note. 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 operations for 1996 are anticipated to use cash, the amount projected is less than the $16.6 million of cash and temporary investments held at December 31, 1995. Hence, no unplanned sales of securities are anticipated during 1996.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Seibels Bruce Group, Inc. and subsidiaries, as of December 31, 1995 and 1994 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles.
As explained in Note 2 to the financial statements, effective January 1, 1994, the Company changed its method of accounting for investments in debt securities.
The Seibels Bruce Group, Inc. (the "Company") is the parent company of South Carolina Insurance Company ("SCIC") and Seibels Bruce and Company ("SBC"). SCIC and its property and casualty insurance subsidiaries provide servicing carrier activities for several state and federal insurance facilities, and SBC provides MGA services to an unrelated insurance company. Prior to mid 1995, SCIC and its property and casualty subsidiaries also underwrote business for its own account primarily in the auto physical damage, private passenger auto liability and fire and allied lines in the Southeast.
For the fiscal years ended December 31, 1994 and 1993, the Company reported significant operating losses and net cash used in operating activities. In addition, the amended regulatory filings by the insurance subsidiaries at December 31, 1994 indicated a consolidated statutory capital and surplus which was substantially below the minimum required by the South Carolina Department of Insurance.
During 1995, new management has taken measures to improve the Company's finan= cial condition and results of operations including raising capital through 1) a rights offering completed in January 1995 and 2) borrowing from the major investor (See Note 5). The proceeds from both transactions were contributed to SCIC as statutory surplus. Continued capital transactions that have closed sub- sequent to December 31, 1995 include 1) in January 1996, a group of investors acquired 6,250,000 shares of common stock, subject to certain approvals (see Note 15 and 2) on March 29, 1996, a group of investors purchased 1,635,000 shares of common stock (see Note 15). Additional actions taken by management include insurance suspension of retaining insurance risk on contracts written, effective in the second quarter of 1995.
During the fiscal year ended December 31, 1995, the Company reported a reduction in net cash used in operating activities. In addition, the regulatory filings by SCIC at December 31, 1995 indicate that consolidated statutory capital and surplus exceed the statutory minimums.
The Company has developed and begun implementation of a business and operating plan which incorporates activities to produce siginificant cost reductions, attract additional capital, and sell Consolidated American Insurance Company (a dormant insurance subsidiary). The plan indicates a continuation of adequate statutory capital and surplus.
The accompanying consolidated financial statements have been prepared in con- formity with generally accepted accounting principles (GAAP) and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of con- tingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, although, in the opinion of man- agement, such differences would not be significant.
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 12):
The amounts of premiums pertaining to catastrophe reinsurance that were ceded from earned premiums during 1995, 1994 and 1993 were $0.8 million, $1.7 million and $4.4 million, respectively.
Policy acquisition costs attributable to property and casualty operations represent that portion of the cost of writing business that varies with and is primarily related to the production of business. Such costs are deferred and charged against income as the premiums are earned. The deferral of policy acquisition costs is subject to the application of recoverability tests to each primary line or source of business based on past and anticipated underwriting results. The deferred policy acquisition costs that are not recoverable from future policy revenues are expensed. The Company has considered anticipated investment income in determining premium deficiency.
(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 adjustment expenses to paid losses. (4) The deduction of estimated amounts recoverable from salvage and subro- gation. (5) Estimated losses as reported by ceding reinsurers.
Income (loss) per share is based on the weighted average number of shares outstanding. Such weighted average outstanding shares are 16,722,107 in 1995 (11,067,565 in 1994 and 7,500,534 in 1993). Outstanding stock options and warrants are common stock equivalents but have no dilutive effect on income (loss) per share.
On October 23, 1995, SFAS No. 123, "Accounting for Stock-Based Compensation" was issued. SFAS No. 123 allows companies to retain the current approach set forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for recognizing stock-based compensation expense in the basic financial statements. However, companies are encouraged to adopt a new accounting method based on the estimated fair value of employee stock options. Companies that do not follow the new fair value based method will be required to provide expanded disclosures in the footnotes. SFAS No. 123 is effective for fiscal years ended December 31, 1996, and the Company intends to provide such information in expanded disclosures in the footnotes.
(a) Investments in fixed maturities, notes, preferred stocks and common stocks are carried at market at December 31, 1995 and 1994. Short-term invest- ments are carried at cost, which approximates market value.
(b) Unrealized gains and losses on marketable 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 gains (losses) and the change in unrealized gains (losses) on investments are summarized as follows:
Proceeds from sales of investments in equity securities and related realized gains and losses were as follows:
(c) Investments which exceed 10% of shareholders' equity, excluding investments in U.S. Government and government agencies and authorities, at December 31, 1995, are as follows:
Depreciation expense charged to operations was $0.9 million in 1995 ($0.7 million in 1994 and $0.6 million in 1993).
The Company uses the liability method in accounting for income taxes. Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws.
Deferred tax liabilities and assets at December 31, 1995 and 1994, are comprised of the following:
The Company has unused tax net operating loss carryforwards and capital loss carryforwards of $97.9 million for income tax purposes. However, due to a "change in ownership" condition that occurred in 1995, the Company's use of the net operating loss carryforwards are subject to limitation in future years to an amount estimated to be in the range of approximately $2.5 million to $3.0 million per year. If not utilized against taxable income in future years, the tax carryforwards will expire as follows:
The policies corresponding to the remaining 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, 1995, the claims are reserved as follows
For this direct business there are usually several different insurers partici- pating in the defense and settlement of claims made against the insured. Costs and settlements are pro-rated by either time on the risk or policy limits.
(2) In June, 1994, the Company made a cash payment in the amount of $10.3 million for a settlement of pending arbitration relating to indemnification of American Star for certain loss and LAE reserves. Recorded reserves amounted to $7.4 million before the settlement. This transaction increased loss and LAE incurred by $2.9 million.
A reconciliation between GAAP net income (loss) and statutory net income (loss) ofthe property and casualty insurance subsidiaries is as follows:
The 1995 statutory net loss includes the dividend of one of SCIC's subsidiaries to its parent company. The $13.2 million loss is directly offset by an increase in statutory surplus for the change in the unrealized gain from the investment in the company. Additionally, the 1995 reported statutory net loss does not include an error in allocation of expenses of $1.6 million between SCIC and SBC. While this error has no effect on GAAP results, SCIC's net statutory loss is understated by this amount, and statutory surplus is overstated by this amount.
Under the 401(k) element of the plan, employees may elect to have a portion of their salary withheld on a pre-tax basis for investment in the plan, subject to limitations imposed by IRS regulations. From January 1, 1993 through June 30, 1994, the employer matched 25% of the employee contributions, limited to a maximum of 1.5% of the employee's eligible compensation. From July 1, 1994 through June 30, 1995, the employer resumed matching 50% of the employee con- tributions, limited to a maximum of 3% of the employee's eligible compensation. The employer discontinued matching effective July 1, 1995. The employer matched portion is invested in accordance with the investment options selected by the participant. The employer contribution to the plan on behalf of participating employees was $87,000 in 1995 ($270,000 in 1994 and $82,000 in 1993).
The 1996 Stock Option Plan (the "1996 Plan") for Employees supersedes the 1987 Stock Option Plan (the "1987 Plan") and became effective November 1, 1995, subject to shareholder approval. The 1996 Plan reserves 5 million shares of Company stock which may be issued as stock options, incentive stock and re- stricted stock to employees and consultants to the Company. The following table shows stock option activity under the 1987 and 1996 plans for the three years ended December 31, 1995. There were no grants of incentive stock or restricted stock under the 1996 Plan during 1995. The activity with a "*" denoted indicates grants under the 1996 plan pending shareholder approval.
(c) 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 effect 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 $79,000 in 1995, $91,000 in 1994, and $91,000 in 1993.
Net periodic postretirement benefit cost includes the following components for 1995 and 1994:
The Company's business has changed significantly in recent years. Operating losses were experienced for several consecutive years as a consequence of un- favorable underwriting experience. In particular, the wind losses of Hurricanes Hugo in 1989 and Andrew in 1992, as well as loss reserve development from en- vironmental and construction defect exposures on the West Coast depleted the capital base of the Company and hindered its ability to write and retain business. The Company ceased to underwrite commercial lines of insurance in the second quarter of 1993, then voluntarily suspended underwriting personal lines of insurance in the second quarter of 1995.
New management was put in place in mid-1995, and a transitional operating plan was generated to change the core operations from those of a risk taker to acti- vities which generate fee income. These activities were designed to stabilize the financial condition of the Company. During the last three quarters of 1995, the Company operated profitably. Although there can be no certainty of successful operations, the Company anticipates that continued favorable results will permit the re-entry into risk business during mid-1996. When the Company resumes underwriting insurance risks to be retained, it will be on a more modest volume than in the past, and will generally focus on the personal lines that have less exposure to long periods of time between earning the premiums and determining the ultimate development of losses.
The Company acts as a servicing carrier for certain state and federal insurance facilities on a commission basis. The Company is also engaged in the under- writing of property and casualty insurance through its subsidiary property and casualty insurance group.
Effective January 1, 1995, Forest Lake Travel Service (FLT), a subsidiary travel agency, was sold. FLT's pre-tax income was $95,000 in 1994 and $420,000 in 1993.
Costs of additions to property and equipment for the property and casualty insurance underwriting and commission and service activities segments, combined, amounted to $0.1 million, $2.4 million and $41,000 in 1995, 1994 and 1993, 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) A contingent liability exists with respect to reinsurance placed with other companies. (See Note 12.)
(c) 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 subsequent subject 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 in- surance company's consolidated statutory surplus above $20 million, exclusive of direct contributions to capital. At December 31, 1995, the other party reported payments of $2.7 million and additional liabilities of $18.4 million, net of reinsurance. The Company has evaluated the estimated ultimate liability of this business and has concluded that the development of this settlement should not have a material impact on the Company.
A non-employee Director of the Company is also a member of the Board of Directors of Policy Management Systems Corporation ("PMSC"), which provides data processing services to the Company. The term of this contract expires June 30, 1996. The Company paid data processing charges of $1.8 million in 1995 ($3.4 million in 1994 and $6.1 million in 1993). The amount payable to PMSC at year-end was $112,000 at 1995 and $203,000 at 1994.
Another 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 paid directly to PSI during 1995 was not material, but the amount earned by PSI on trading activity by the Company cannot readily be determined. The Director is no longer an employee of PSI, and PSI's services have since been terminated.
During the first quarter of 1996, the Company entered into a contract to sell Consolidated American Insurance Company, an inactive insurance company subsid- iary. The sale will generate a gain of approximately $0.9 million in 1996.
The following is a summary of unaudited quarterly information for the years ended December 31, 1995 and 1994:
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 runoff 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.