The Columbia, South Carolina headquarters, containing approximately 141,000 square feet of occupied space, is owned by the Company, and used primarily by its property and casualty insurance operations. The Winston-Salem, North Carolina office houses Universal. That office contains approximately 18,000 square feet and is leased through an arrangement with a term through 2005. Graward is located in Nashville, Tennessee. That office consists of approximately 20,000 square feet and is leased through 2002. AFS is located in Rancho Cordova, California. AFS leases 4,000 square feet on a month to month basis. Some additional premises are leased by the Company in locations in which it operates. Management believes that these facilities are adequate for the current level of operations.
The following selected financial data for each of the five years ended December 31, 1998 is derived from the audited consolidated financial statements of the Company. The selected data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying notes included elsewhere herein.
The following table shows the results of the segments of automobile, flood, commercial and all other for 1998.
Under the Company's contract with the SC Facility premium-based fees under the contract are 21.0% of gross premiums written. The Company is responsible for paying all costs of processing the policies, including a mandated 12.0% commission on gross premiums earned to the agent. The Company also receives income on the claims it pays for the SC Facility in the amount of 11.0% 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 SC Facility does reimburse the Company in full for legal expenses associated with processing these claims.
In 1997, the South Carolina Legislature passed Act 154 which went into effect on March 1, 1999 and limits the facility for renewals only for 36 months until February 28, 2002. Therefore, the Company will receive processing fees on renewals during this period and claims fee for runoff of the current business, renewals until February 28, 2002 and complete runoff thereafter.
In May, Seibels Bruce announced the acquisition of privately held Graward in Nashville, Tennessee. The company brought access to more than 2,000 agents throughout Arkansas, Georgia, Indiana, Kentucky, Mississippi, North Carolina, Ohio, Tennessee and Virginia. As with any acquisition, Seibels Bruce is diligently reviewing operations, competition, pricing and market strategies. On an annualized basis, the Nashville operation provides the Company a premium of approximately $41 million as it begins in 1999.
Overall, in the automobile operations, during 1998 Seibels Bruce made significant investments in each of its business operations to position itself for improved future financial performance and to provide for enhanced infrastructure. Seibels Bruce actively works to capitalize on advantages and strengths it has in all markets and has designed programs to assist agents and their driver customers. This is especially true in South Carolina where Seibels Bruce assists agents in the transition from the SC Facility to the voluntary market. In addition, the Company networks with these same agents to provide them with tools to enhance risk selection and underwriting of voluntary nonstandard policies. In 1999, Seibels Bruce is embarking on similar plans with its Universal agents in North Carolina and agents who write business in all states associated with the Nashville operations.
The Company's other core product line, flood operations, experienced substantial growth in 1998. The Company's written premiums for flood increased at a rate nearly doubling that of the NFIP. Seibels Bruce added to its experienced flood sales force and was able to acquire several large books of flood business from independent agents throughout the nation. This was achieved by expanding the Company's product lines and services for the independent agent.
Prior to February 1998, the Company derived revenues from its role as a commercial lines MGA for an unaffiliated insurance company. While the Company performed all services and paid all costs (including the independent agents' commissions) related to administering and processing policies and claims, the policies were written on behalf of an unaffiliated insurance company. The Company's financial statements reflect commission income as a percentage of premiums written but do not reflect the premiums written or associated claims incurred in 1997. Beginning in February 1998, as the commercial policies renewed, the Company began to retain the risk.
In 1998, Seibels Bruce did accomplish its major strategic initiative in commercial lines--converting from a MGA role to retaining risk for commercial policies. The transition was a success, and Seibels Bruce retained more than 75 percent of the policies it had originally underwritten. This is largely attributable to the long-standing relationships Seibels Bruce has with the commercial lines agents who sell its products.
Commercial lines represents an important diversification for Seibels Bruce, further rounding out its product lines and enabling the Company's agents to bundle products for a more complete insurance portfolio. This makes Seibels Bruce more attractive to agents, makes it easier for them to work with the Company and enables them to better serve their customers.
The Company's premium concentration in the catastrophe heavy Southeast led it to create, in 1996, a catastrophe adjusting business, INS, to manage the Company's internal claims volume. INS currently offers three services: catastrophe claims handling for hurricanes, tornadoes, hailstorms, earthquakes and floods; catastrophe claims supervision; and ordinary claims adjusting. These services expand the Company's business by complementing its core flood operations and by allowing it to adjust claims for other insurance companies. INS's capabilities assisted the Company in adjusting claims from Hurricanes Bonnie and Georges and the 1998 winter storms. The Company's experience in processing flood claims led to the
The Company continues to maintain reserves and pay significant claims with respect to its runoff operations. These runoff operations consist primarily of general liability policies that include contractors' liability and environmental coverages primarily in California and commercial (including workers' compensation) and personal lines policies in the Southeast. The runoff of claims on these policies created substantial losses to the Company during the past 10 years. In addition, the Company's runoff segment contains the management of runoff reserves from prior business in the 1980's and runoff from a nonstandard homeowners MGA book in Kentucky and Tennessee entered into in early 1997. Seibels Bruce discontinued writing new business in this MGA in October of 1998 and will complete this runoff in one year.
Property and casualty premiums earned for the year ended December 31, 1998 increased $16.2 million, or 245.9% to $22.8 million from the year ended December 31, 1997. This increase is due to a $14 million increase in nonstandard automobile premiums and $2.2 in commercial multi-peril premiums. The increase in nonstandard automobile earned premiums is a result of re-entering the voluntary market in South Carolina, the purchase of Universal in December 1997 and the purchase of Graward in May 1998. The increase in Commercial multi-peril earned premiums is a result of switching from a MGA status to a retained risk status in February 1998.
Net investment and other interest income for the year ended December 31, 1998 increased 19.5% or $0.8 million to $4.6 million from $3.9 million as of December 31, 1997. This increase is due to a $12.5 million increase in 1998 in cash and investments. The average investment yield for the Company remained at 5.9% for the year.
Property and casualty loss and loss adjustment expenses for the year ending December 31, 1998 increased $16.4 million, or 185.8% to $25.2 million from $8.8 million for the year ended December 31, 1997. This increase is due to the Company's re-entry into the retained risk business. Of this amount, $0.5 million relates to hurricane related losses.
Property and casualty premiums earned for the year ended December 31, 1997 decreased $0.6 million, or 8.4% to $6.6 million from the year ended December 31, 1996. This decrease is due to a $0.9 million decrease in premiums assumed from pools and associations.
Net credit life premiums earned for the year ended December 31, 1997 decreased $0.4 million or 65.5% to $0.1 million from $0.5 million for the year ended December 31, 1996. The Company sold the related subsidiary in September 1993. Under the sale agreement, the Company retained the responsibility and continues to runoff the policies in existence at the sales date.
Realized gains on investments totaled $0.5 million for the year ended December 31, 1997, a $0.5 million increase over the previous year. Of this total, $0.2 million was realized on the sale of stock in an industry trade group, Insurance Services Office. In addition, the Company sold surplus real estate, which resulted in a gain of $0.3 million.
Property and casualty loss and loss adjustment expense for the year ending December 31, 1997 decreased $3.0 million, or 25.2% to $8.8 million from $11.8 million for the year ended December 31, 1996.
The decrease is due to a reduction in losses and loss adjustment expenses related to the Company's runoff business.
Policy acquisition costs for the year ended December 31, 1997 and 1996 were $1.2 and $1.8 million, respectively. The $0.6 million decrease is due to a reduction in net premiums written in the property and casualty segments and a decrease in policy acquisition costs associated with the credit life segment.
The liability for losses on direct business is determined using case-basis evaluations and statistical projections. The liabilities determined under these procedures are reduced, for GAAP purposes, by an estimated amount to be received through salvage and subrogation. The resulting liabilities represent the Company's estimate of the net cost of all unpaid losses and LAE incurred through December 31 of each year. These estimates may be affected by the frequency and/or severity of future claims. These estimates are continually reviewed and as experience develops and new information becomes known, the liability is adjusted as necessary.
The 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 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 following table reflects the loss and LAE development for 1998 and 1997 on a GAAP basis (in thousands):
Of the remaining environmental, pollution and toxic tort claims, the following activity took place during 1998 and 1997:
The policies corresponding to these claims were written on a direct basis. The Company has excess of loss reinsurance with company retention through 1980 of $100,000 and $500,000 after that date. The claims are reserved as follows as of December 31, 1998 and 1997 (in thousands):
The above claims involve four Superfund sites, seven asbestos or toxic claims, two underground storage tanks and 30 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.
Liquidity relates to the Company's ability to produce sufficient cash to fulfill contractual obligations, primarily to policyholders. Sources of liquidity include service fee income, premium collections, investment income and sales and maturities of investments. The principal uses of cash are payments of claims, interest and operating expenses. Cash outflows can be variable because of the uncertainties regarding settlement dates for liabilities for unpaid losses and because of the potential for large losses. Accordingly, the Company maintains investment and reinsurance programs generally intended to avoid the forced sale of investments to meet claims obligations.
Net cash provided by operations totaled $9.4 million for 1998, a substantial improvement over the use of cash of $2.6 million in 1997 and $12.9 million in 1996. Individual sources of cash flows from operating activities included changes of $9,180 in unearned premiums on retained business, a $5,838 decrease in premium and agents' balances receivable and $1,964 in balances due other insurance companies, which are related in part to the Company's continued re-entry into the retained risk business. It should be noted that a large portion of the changes in balances due other insurance companies and in premium and agents' balances receivable occurred as a result of the Graward acquisition and had very little effect on cash flow. Individual uses of cash included a reduction in reported and estimated losses and claims and loss adjustment expense on retained business due primarily to the settlement of runoff claims, reinsurance recoverable on losses and LAE and prepaid reinsurance premiums on ceded business.
Investing activities in 1998 used cash in the amount of $5.3 million as premium notes receivable grew from Universal business, the Company purchased additional software and data processing equipment and paid for its acquisition of Graward in part with cash. Investments sold or matured totaled $31.5 million and proceeds were used to purchase new investments totaling $28.5 million. Net cash flow provided in 1997 by investing activities made up for the deficit in operating cash flow for the same period, as total funds provided by investing activities equaled $2.3 million.
December 31, 1997, $1,909,000 was outstanding on this line of credit. At December 31, 1998 there was an outstanding balance of zero.
- Also in the fourth quarter of 1997, the Company issued 220,000 shares of Cumulative, Convertible, Redeemable, Nonvoting Special Preferred Stock ("Special Stock") to the previous shareholders of Innovative as consideration for the purchase of Innovative. The Special Stock pays quarterly dividends at an annual rate of $0.62 per share. On or after August 15, 2000, but prior to August 15, 2002, the Company at its option only, may redeem in whole or in part the Special Stock at a price of $15.00 per share. On August 15, 2002, the Company must redeem any remaining shares at a rate of $10.00 per share. On or after August 15, 2000, but prior to August 15, 2002, holders of the shares have the right to convert each share of the Special Stock into 1.23 shares of Common Stock.
- In March 1998, the Company closed a $15 million Credit Facility (the "Facility") with a major lending institution to facilitate the purchase of AFS and Graward. Proceeds were also used to repay in full the notes payable acquired in the forth quarter of 1997. Principal payments are due quarterly beginning March 1999 with a final payment of all remaining principal and accrued interest due in June 2004. Accrued interest is payable monthly on the outstanding balance under the Facility. As of December 31, 1998, the outstanding balance under the Facility was $13,550,000.
- Also in March 1998, the Company issued 50,000 shares, with a value of $500,000, of $0.625 Cumulative, Convertible, Redeemable, Nonvoting Special Preferred Stock ("$0.625 Special Stock") to the former owners of AFS as partial consideration in conjunction with the acquisition of AFS. The $0.625 Special Stock pays quarterly dividends at an annual rate of $0.625 per share. On or after August 15, 2000, but prior to August 15, 2002, the company may redeem, in whole or in part, the $0.625 Special Stock at a price of $15.00 per share and the holders of the $0.625 Special Stock have the right to convert each share of $0.625 Special stock into 1.25 shares of common stock, par value $1.00, of the company. On August 15, 2002, the Company must redeem any remaining shares of $0.625 Special Stock at a rate of $10.00 per share.
The South Carolina Insurance Holding Company Regulatory Act provides that, without prior approval of the Director of Insurance of the State of South Carolina, dividends within any 12-month period may not exceed the greater of (i) 10% of a domestic insurer's surplus as regarding policyholders as
In regard to internal systems, the Compliance Program calls for full conformity to meet all internal policy expiration dates. Work on the Compliance Program began in 1997 since the Company issues three-year commercial policies. All other internal systems processing policies with expiration dates of shorter terms of one year and of six months are currently on target for completion to process all policy contract obligations. Remediation has been completed on the Company's Nashville, Tennessee system and it has been issuing policies with expiration dates beyond the year 2000 since November 30, 1998. The Company believes that its Columbia, South Carolina processing system has been fully compliant since mid December 1998 and the Company has been issuing policies with expiration dates beyond the year 2000 on that system since that time. The processing system in Winston-Salem, North Carolina is currently being remediated and is expected to be completed by April 1, 1999. The Company has until May 15, 1999 to complete the process before it would have an impact on its operations.
With regard to the third party vendor, which processes the Company's flood policies, processing systems; the Company has reviewed the compliance status of this company. The vendor has been processing three-year policy contracts beginning in 1997 on a Year 2000 compliant basis and is currently on target to process policies of shorter terms. This company's compliance plan calls for full remediation of their system by the end of the first quarter of 1999. The Company's overall Year 2000 plan includes procedures for assessing all third party vendors. While not processing policies on their systems, the Company must submit statistical data to several reporting bureaus, which, if not Year 2000 compliant, could impede the Company's ability to collect funds owed to it by the agencies for which these bureaus collect data. The largest of these bureaus believes that it has been compliant since June, 1998 and the other government agency bureau is not issuing any statements as to its readiness. The Company has no plans to conduct independent testing of these bureaus. The Company is also in the process of surveying all of its major reinsurers to evaluate their Year 2000 compliance.
The Audit Committee of the Company's Board of Directors is updated monthly as to the status of the Company's readiness. In addition, the Company's Vice President of Audit and Planning monitors the status of all Year 2000 projects and has direct access to all Information Services personnel and the Audit Committee of the Board of Directors.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Seibels Bruce Group, Inc. and subsidiaries, as of December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles.
As explained in Note 1 to the financial statements, effective January 1, 1998, the Company adopted the provisions of SOP 97-3, "Accounting by Insurance and Other Enterprises for Insurance Related Assessments", and changed its method of accounting for the Company's participation in the North Carolina Reinsurance Facility.
(DOLLARS AND WEIGHTED AVERAGE SHARES OUTSTANDING SHOWN IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Seibels Bruce Group, Inc. ("SBIG", or the "Company") provides automobile, flood, and other property and casualty insurance services and products to customers located primarily in the southeastern United States. The Company's largest source of revenues derives from its role as one of three servicing carriers for the South Carolina Reinsurance Facility (the "SC Facility"), a state-sponsored plan for insuring South Carolina drivers outside of the voluntary market. 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 SC Facility and the NFIP, the Company receives commissions and fees, but retains no underwriting risk. Prior to February 1, 1998, the Company provided other fee-based services in its capacity as a managing general agent ("MGA") for commercial insurance policies underwritten by unaffiliated insurance companies. The Company also receives fee-based income from its catastrophe claims adjusting services, excess and surplus lines brokerage services and liability runoff management services.
The accompanying consolidated financial statements have been prepared in conformity 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.
Certain classifications previously presented in the consolidated financial statements for prior years have been changed to conform to current classifications.
For purposes of the Consolidated Statements of Cash Flows, the Company considers both cash and short-term investments within the caption "cash and short-term investments" to be those highly liquid investments purchased with an initial maturity of three months or less.
In accordance with FASB (Financial Accounting Standards Board) Statement No. 115, investments in debt and equity securities are classified as either held-to-maturity, available-for-sale or trading. The Company currently holds all securities as available-for-sale, and reports them at fair value, with subsequent changes in value reflected as unrealized investment gains and losses credited or charged directly to other accumulated comprehensive income included in shareholders' equity. The fair values of cash and short-term investments approximate carrying value because of the short maturity of those instruments.
In April, 1997, the Company executed a 1-for-4 reverse stock split of its common stock. All references in the financial statements, notes thereto and other references to number of shares or earnings per share reflect this transaction for all periods disclosed.
Property and casualty premiums are reflected in income when earned as computed on a monthly pro-rata basis. 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.
The Company offers premium financing arrangements which require a down payment and is collected in equal installments over the policy term.
(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.
Basic per share data is based on the weighted average number of shares outstanding. Diluted per share data is based on the weighted average number of shares outstanding including the effects of stock options and/or convertible preferred stock (See Note 9).
The Company routinely evaluates the collectibility of receivables and has established an allowance for uncollectable accounts for agents' balances and direct bill balances receivable, other receivables, and premium notes receivable in the amount of approximately $2,935 and $1,321 at December 31, 1998 and December 31, 1997, respectively.
Intangible assets consist primarily of goodwill and deferred loan costs. Goodwill is the excess of the amount paid to acquire a company over the fair value of its net assets, reduced by amortization and any subsequent valuation adjustments. The Company amortizes goodwill over a period of 40 years. Deferred loan costs are the costs associated with issuing long term debt. The costs are amortized over the life of the debt. Intangible assets are evaluated regularly for other-than-temporary impairment. If circumstances suggest that their value may be impaired and the write-down would be material, an assessment of recoverability is performed and any impairment is recorded through a valuation allowance with a corresponding charge recorded in the income statement.
Effective January 1, 1998, the Company adopted the provisions of SOP 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments", and recorded it as a cumulative effect of a change in accounting principle of $601. As a result, the Company's participation in the North Carolina Reinsurance Facility ("NC Facility") is no longer being treated as assumed reinsurance and all amounts assumed from the NC Facility have been eliminated. The NC Facility is now treated as an assessment organization. The effect of the change in accounting principle was a reduction of $.08 per share on both a basic and diluted basis. Below are the actual and pro forma EPS for the twelve months ended December 31, 1998 and 1997, respectively assuming the change in accounting principle was applied retroactively.
severance and other termination benefits incurred in connection with moving the processing of the Company's automobile insurance business from Winston-Salem, North Carolina to Nashville, Tennessee and from the consolidation of claims management and staff positions in the Columbia, South Carolina office. All liabilities associated with the restructuring were paid in 1998.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statements establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. This statement could increase volatility in earnings and other comprehensive income. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company will adopt SFAS No. 133 effective January 1, 2000; it is not expected to have a material impact on the Company's financial position or results of operations.
There were no debt securities which were non-income producing for the 12 months ended December 31, 1998. Debt securities with an amortized cost of $25 million at both December 31, 1998 and 1997, were on deposit with regulatory authorities.
The amortized cost and estimated market values of investments in debt and equity securities were as follows:
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, 1998 by contractual maturity, are as follows:
On May 1, 1998, the Company issued subordinated convertible notes (the "Notes") (See Note 8). The Notes bear interest at a rate equal to 5% per annum. The entire principal amount due under the Notes is payable in full on December 31, 2004, provided however, that if certain outstanding debt is paid in full and upon 60 days prior written notice, the Notes will become payable six months after such debt is paid in full provided, however, that in no event will the Notes become payable earlier than April 1, 2003. At the election of the holder of the Notes, the Notes may be converted into 300,000 shares of Common Stock on the maturity date, provided, however, that notice has been given of such election at any time on or after the 45(th) day prior to the maturity date of the Notes up to but not including the 15(th) day prior to the maturity date.
Effective March 31, 1998 the Company closed a $15,000,000 Credit Facility (the "Facility") with a major lending institution for the purpose of financing its acquisition activity and other general corporate purposes. Principal payments are due quarterly beginning March 1999 with a final payment of all remaining principal and accrued interest due in June 2004. Accrued interest is payable monthly on the outstanding balance under the Facility and is calculated, at the Company's discretion, using a pre-determined spread over LIBOR or the prime interest rate of the lending institution. The effective interest rate as of December 31, 1998 was 8.3125%. The Facility is secured by a lien on the assets of the Company. As of December 31, 1998, the outstanding balance under the Facility was $13,550,000.
The Company has unused tax operating loss carryforwards and capital loss carryforwards of $99.8 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 maximum limitations in future years of approximately $2 million per year. Net operating loss carryforwards available for use in 1999 are approximately $7.2 million due to losses incurred in 1995 after the change in ownership event occurred and carryover of previous years' unused limitations.
The policies corresponding to these claims were written on a direct basis. The Company has excess of loss reinsurance with company retention through 1980 of $ 100 and $ 500 after that date. The claims are reserved as follows as of December 31, 1998 and 1997:
The following table summarizes net property and casualty losses and LAE incurred:
The results of operations in the consolidated financial statements of the Company include the following number of months of operations of the Companies acquired above:
On July 1, 1998, Innovative was merged into the Company. The Board of Directors of the Company approved the Plan of Merger (the "Plan") on February 10, 1998. The Plan did not require approval of the shareholders of either company. The capital stock of Innovative was cancelled and no cash, securities or other consideration of any kind was issued or paid for the shares.
On March 31, 1998, the Company issued 50,000 shares of $0.625 Cumulative, Convertible, Redeemable, Nonvoting Special Preferred Stock ("$0.625 Special Stock") in connection with an acquisition. The Company determined the value of the $0.625 Special Stock at issuance date to be $500. The $0.625 Special Stock pays quarterly dividends at an annual rate of $0.625 per share. The Company paid $24 in special stock dividends in 1998. On or after August 15, 2000, but prior to August 15, 2002, the Company at its option only, may redeem in whole or in part the $0.625 Special Stock at a price of $15.00 per share. On August 15, 2002, the Company must redeem any remaining shares at a rate of $10.00 per share. On or after August 15, 2000, but prior to August 15, 2002, holders of the shares have the right to convert each share of the $0.625 Special Stock in 1.23 shares or a total of 61,500 shares of Common Stock.
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 SCIC and Universal to declare and pay dividends to the Company.
The North Carolina Insurance Holding Company System Regulatory Act provides that, without prior approval of the Commissioner of Insurance of the State of North Carolina, dividends within any 12-month period may not exceed the lessor of (i) 10% of a domestic insurer's surplus as regarding policyholders as of the preceding December 31 or (ii) the net income, not including realized capital gains, for the 12-month period ending the preceding December 31. For 1999, no dividends are available from Universal to the Company.
The following table shows the computation of per share earnings (the following table is not in thousands).
Net income and shareholders' equity of the credit life insurance subsidiary as determined in accordance with statutory accounting practices are as follows for the year ended December 31, is as follows:
In the third quarter of 1996, the Company issued to a different group of investors stock options to acquire 781,250 shares of unregistered Company Common Stock at the greater of the price of $8.00 or the book value at date of exercise, expiring December 31, 2000.
During the first quarter of 1998, the Company granted a warrant to purchase up to 57,971 shares of Common Stock in connection with its Credit Facility (See Note 5).
The 1995 Stock Option Plan for Non-Employee Directors became effective June 15, 1995, with 250,000 common shares of stock reserved for grants. Under the Plan, all non-employee directors holding office on June 15 of each year are automatically granted 1,250 options to purchase Company common stock. The exercise price will be the market value on the date of grant. On June 15, 1996, 8,750 shares were granted at an exercise price of $10.50. In addition, on June 15, 1997, and on June 15, 1998, 12,500 shares were granted at an exercise price of $7.19 and $7.00 respectively.
The 1995 Stock Option Plan for Independent Agents became effective December 21, 1995. The Plan has reserved 125,000 common shares for granting under this plan. Activity may be summarized as follows:
In 1998, 9,400 options were granted at an average exercise price of $6.97. At December 31, 1998, 84,547 shares of the Company's common stock have been reserved for future grants.
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 1998 and 1997 consistent
The Company sponsors the South Carolina Insurance Company Employees' Profit-Sharing and Savings Plan, which is a combined arrangement for the profit-sharing and 401(k) elements for the employees of the Company and its subsidiaries. As of December 31, 1998, the amount of assets available for the plan benefits, based on information currently available, was $10,932.
Under the 401(k) element of the plan, employees may elect to have a portion of their salary withheld from pre-tax wages for investment in the plan, subject to limitations imposed by IRS regulations. The employee has several options as to how contributions will be invested. Effective July 1, 1997, the employer reinstated the 50% match of the employee's contribution up to the first 6%. The Company match is split evenly with 50% invested in accordance with the investment options selected by the participant and the remaining 50% invested in the Seibels Bruce Stock Fund. The employer contribution for the plan on behalf of the participating employees was $68 in 1998 and $72 in 1997.
The Company and its subsidiaries currently provide certain health care and life insurance benefits for retired employees. The Company and its subsidiaries recognize the projected future cost of providing post-retirement benefits as an expense as employees render services instead of when the benefits are paid. The cumulative effect is being recorded as a charge against income on a prospective basis as part of the future annual benefit cost. The post-retirement benefit expense was approximately $90 in 1998, $77 in 1997 and $75 in 1996.
compliance tracking, as well as the complementary homeowners product line and the Company's insurance adjusting business. The Commercial segment includes all commercial operations, as well as the commercial automobile activity for the NC Facility and SC Facility. The All Other segment includes the runoff operations of the Company. The results of the reportable segments are included in the following tables:
For comparison purposes, the table below presents 1997 and 1996 segment results:
For comparison purposes, the table below presents 1997 and 1996 segment identifiable assets (in thousands):
The Company's property and casualty insurance operations include a retained risk component, and a servicing carrier component. A significant percentage of the risk business is ceded through several reinsurance programs including pro-rata and excess of loss. In its servicing carrier operation, premiums are
Reinsurance contracts do not relieve the Company of its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurer to minimize its exposure to significant losses from reinsurers insolvency. Amounts due from reinsurance companies are for the following amounts for unearned premiums, unpaid losses and LAE, and paid losses and LAE:
Four 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, 1998. The reinsurers and related balances are as follows:
The Company believes that the balances from the various Facilities are fully collectable due to the governmental agency's ability to assess policyholders and member companies for deficiencies. The remaining recoverables due from nonaffiliated reinsurance companies have also been deemed fully collectable by the Company.
(b) A contingent liability exists with respect to reinsurance placed with other companies (See Note 13).
(c) The Company was served with a complaint dated November 19, 1997 by Norwest Financial Resources, Inc. ("Norwest") that claimed indemnification against the Company pursuant to the Asset Purchase Agreement dated as of July 2, 1993 by and among Premium Service Corporation of Columbia ("Premium"), the Company and Norwest. The indemnification claim relates to certain loans of Premium which later were discovered to be incorrectly recorded as realizable assets. Management believes the Company has no liability in the case.
A non-employee Director of the Company is also a member of the Board of Directors of Policy Management Systems Corporation ("PMSC"), which provided services to the Company prior to September 30, 1996. The Company paid data processing charges of $0.9 million to PMSC in 1996.
During the fiscal year ended December 31, 1998 and 1997, the Company paid a total of $522 and $483 to SADISCO Corporation ("SADISCO") respectively, of which $54 and $96 respectively was for salvage and disposal services provided to the Company in the ordinary course of business and $468 and $386 respectively was for reimbursement of expenses advanced by SADISCO on behalf of the Company in connection with such services. Charles H. Powers, chairman of the Board of Directors of the Company, is the owner and operator of SADISCO.
Commission and service income fell in the first quarter of 1997 as the claims related to flood activity subsided from the very active 1996 storm season. Commission and service income remained fairly constant through the first three quarters of the year and decreased during the fourth quarter due to a lack of storm related claims. Premiums earned decreased in the second quarter due to lower assumed premiums than in the prior two quarters. Premiums earned increased in both the third and fourth quarters of 1997 as the Company began its voluntary nonstandard automobile program in the fourth quarter of 1997. Net income for the year by $1.2 million mainly due to a lack of flood related claims.