The Columbia, South Carolina headquarters, containing approximately 125,000 square feet, is owned by Charles H. Powers, the Company's majority shareholder, Chairman of the Board of Directors and Chief Executive Officer, and leased by the Company through 2003 for the property and casualty insurance and claims operations of SCIC, CAIC, Catawba and INS, as well as the managing general agent operations of SBC. The Winston-Salem, North Carolina office is the base for the operations of UIC and PBP. That office contains approximately 18,000 square feet and is leased through 2005. AFS is located in Rancho Cordova, California. AFS leases approximately 5,300 square feet, with the lease expiring in May 2005. Some additional premises are leased by the Company in other locations in which it operates. Management believes that these facilities are sufficient for the Company's current and foreseeable future needs.
The following selected historical financial data for each of the five years ended December 31 is derived from the Company's audited consolidated financial statements. The selected data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of
The selected financial data and consolidated financial statements and related notes thereto should be read in conjunction with the following discussion as they contain important information for evaluation of the Company's financial condition and operating results.
The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management has identified the following policies as critical in understanding and evaluating the Company's reported financial results:
The Company's debt securities are reported at fair values in the consolidated balance sheets. Fair values are generally based on quoted market prices. The impact of changes in the reported values of the Company's debt securities is recorded through accumulated other comprehensive income, a separate component of shareholders' equity.
At December 31, 2002, the Company's equity securities consist of its investments in Sunshine State, representing an ownership interest of 21.49%. As the investment exceeds 20% of Sunshine State's equity, the Company's equity in the undistributed earnings of the unconsolidated affiliate, using the equity method, are included in current earnings.
If any decline in value of an investment is considered to be other than temporary, a write down of the investment through a charge to current earnings is required. Factors the Company considers in evaluating whether a decline in value is other than temporary include: 1) the Company's intent and ability to hold the investment long enough to allow for an expected recovery in value; 2) the duration and extent to which the fair value has been less than cost; and 3) the financial condition, operating environment and forecasted operations of the issuer.
The Company routinely evaluates the collectability of its agents' balances receivable and premium notes receivable based upon historical aging analyses, past experience, and known economic trends or conditions and has established reserves for estimated uncollectable accounts amounting to $2,681 and $3,763 at December 31, 2002 and 2001, respectively, representing 43.2% and 37.5%, respectively, of gross agents' balances receivable and premium notes receivable. The large reserve estimate is a direct result of the continuing runoff of the Company's Nashville operation begun in June 2000, the runoff of its premium finance operation begun in December 2001, and UIC's retention of receivables previously financed. Though the Company believes its current estimated allowances for doubtful accounts are adequate and not excessive, it is possible that the accuracy of the estimation process could be materially impacted as current economic trends or conditions change or develop.
The Company has recorded reinsurance recoverables on paid and unpaid losses and LAE amounting to $38,075 and $51,078 at December 31, 2002 and 2001, respectively, from a variety of reinsurers. 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. Therefore, the Company routinely evaluates the collectability of these recoverables by monitoring the financial condition of the reinsurer, primarily through the use of A.M. Best ratings and reports. For recoverables from the SC Facility, the NC Facility and the NFIP, aggregating to $29,690 and $39,383 at December 31, 2002 and 2001, respectively, the Company believes that any collections risk is mitigated due to each governmental
(4) The deduction of estimated amounts recoverable from salvage, subrogation and second injury funds.
of incurred but not reported claims. Except for the layer of losses retained by SCIC and CAIC ($4,000 in excess of $1,000 per occurrence), changes in the estimated liability for losses and LAE for the program are not expected to have a net impact on SCIC and CAIC results of operations. The estimated recoveries under this program related to the first $1,000 per occurrence, and reinsurance recoverable related to $15,000 in excess of $5,000 per occurrence, are expected to vary by the same amount as any change in the estimated reserves for losses and LAE in those layers, offsetting any impact on operations. Due to limited historical loss experience for the population of insureds participating in the HDC Program, estimates of the liability for losses and LAE and the related deductibles and reinsurance recoverable may vary significantly from amounts recorded at December 31, 2002. Additionally, estimated deductibles recoverable from the insured have reduced the Company's direct reserves for losses and LAE. The Company, in consultation with its consulting actuary, has estimated that the deductibles recoverable from the insured may be as much as $9,800 as of December 31, 2002. Approximately $4,300 of these recoverables has been collateralized as of the filing of this document as a result of various Court proceedings related to the program.
The Company is party to significant litigation with respect to the HDC Program. The ultimate outcome of this litigation cannot be reasonably determined at this time.
The Company and its subsidiaries are parties to various other lawsuits generally arising in the normal course of their insurance and ancillary businesses. The Company does not believe that the eventual outcome of such suits will have a material effect on the financial condition or results of operations of the Company. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company's assumptions, or the effectiveness of its strategies, related to legal proceedings. Management consults with the Company's legal counsel in developing estimates of ranges of potential loss and in estimating any required legal reserves.
Included in other liabilities and deferred items as of December 31, 2002 and 2001 is $1,046 and $368, respectively, of deferred revenue for services to be performed in the future.
The above listing is not intended to be a comprehensive list of all of the Company's accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States with no need for management's judgment in their application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. See Item 8 for the Company's audited consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by accounting principles generally accepted in the United States.
The Company conducts its business in two primary categories, fee-based property and casualty insurance operations and risk-bearing property and casualty insurance operations, and reports its operations through five distinct business segments. Following is a summary of the Company's reporting segments with indications of whether the supporting operating segments are risk-bearing or fee-based operations, whether the supporting operating segments are ongoing operations or in runoff, and the supporting operating segment's total revenues in 2002, 2001 and 2000:
(2) Includes SCIC's commercial operations in the state of Kentucky, which is currently in runoff. Direct premiums earned by SCIC in the state of Kentucky amounted to $2,471, $1,968 and $1,812 in 2002, 2001, and 2000, respectively.
(3) The Company is the beneficiary of several key man life insurance policies maintained on certain former directors or officers of the Company. During the three months ended June 30, 2002, the Company recorded a gain on the settlement of one of these policies of $294.
The Automobile segment includes UIC's retained risk nonstandard automobile and runoff premium finance operations, Catawba's retained risk nonowners automobile program, the runoff of the Company's retained risk Nashville and South Carolina automobile operations, and the fee-based NC Facility, SC Facility and SCAAIP operations.
through a number of unaffiliated premium finance companies. At December 31, 2002 the runoff of PBP was substantially complete.
Through its nonowners automobile program, Catawba provides supplemental automobile insurance coverage policies in South Carolina to employee drivers of company owned, operated and insured vehicles. The nonowners automobile market in South Carolina is a limited market with limited possibilities for significant increases in market share. While this business is somewhat price sensitive, customer service and agent relations are more crucial in maintaining market share.
During 2000, the Company discontinued its Nashville operations and placed all of this business into runoff, resulting in a special items charge to earnings of $16,365 for the year ended December 31, 2000. For the year ended December 31, 2002 there were no written premiums associated with this operation. Furthermore, as of December 31, 2002 only 149 claims with total net reserves for losses and LAE of $1,586 remained on this book of business.
Through SCIC and Catawba, the Company participated in the NFIP, a flood insurance program administered by the federal government. In this capacity, SCIC and Catawba received commissions and service income from the NFIP for writing and administering the premiums and servicing the related claims, but retained no underwriting risk because all of the premiums and losses were fully ceded to the NFIP. These commissions amount to approximately 32% (during 2002) and 31% (during 2001) of direct premiums written for policy administration and 3.3% of direct incurred losses for claims administration.
During 2002 and 2001, the Company's NFIP written premium increased at a rate that surpassed that of the total NFIP, due primarily to obtaining several large books of flood business from independent insurance agents across the United States. This was facilitated by geographic expansion and the introduction of new technology to its agency force, including internet-based policy rating and flood zone determination services. As a result of its premium growth and the retention of its NFIP book of business, the Company received marketing bonuses from the NFIP of $615 and $553 in March 2002 and 2001, respectively.
On September 12, 2002, the Company announced that it had received notice from FEMA that FEMA did not intend to offer SCIC and Catawba a Financial Assistance/Subsidy Arrangement with the Federal Insurance and Mitigation Administration for the fiscal year beginning October 1, 2002, effectively terminating their participation in the NFIP. FEMA's decision was the result of the Order Imposing Administrative Supervision and Appointing Supervisor. The Company made numerous attempts to change FEMA's decision, but FEMA would not reconsider the decision as a result of an unsatisfactory underwriting operation review of the Company's NFIP policies. Though the Company's numerous efforts to change FEMA's decision were unsuccessful, it obtained an extension of the existing arrangement for renewal business only through December 31, 2002, at which time the inforce policies were to be transitioned to the NFIP, or to another carrier in the NFIP, and the Company's servicing carrier status would be terminated. On November 15, 2002, the Company received approval from both FEMA and the SCDOI and then announced that it had completed a transaction with The Hartford under which The Hartford acquired the right to renew or assume all of SCIC and Catawba's in-force NFIP business. The purchase price of the renewal rights was $3,800 in cash at closing, plus up to $1,000 to be paid on November 15, 2003, if certain retention thresholds on the book of business are achieved. Provisions of the underlying sales agreement, as approved by FEMA, provide that The Hartford administer and report the Company's business to the NFIP over the transition period that ends September 30, 2003. As a result of the Company's continuing involvement with the book of business during the transition period, the gain on the transaction of $3,499 (purchase price of $3,800 less expenses of sale of $301) has been deferred and will be recognized evenly over the transition period. It is uncertain whether the Company will meet the retention thresholds to qualify for the additional $1,000. Any such additional amounts will only be reflected in revenue if and when the retention thresholds and related requirements are achieved.
The Company's subsidiary, AFS offers flood zone determinations and flood zone mapping services to customers located throughout the United States. These services are provided primarily to real estate lenders to determine whether or not homes are located in flood zones and, therefore, require flood insurance for loan closing. As a complementary product, AFS also offers flood insurance as an agent through servicing carriers of the NFIP. As a result, AFS' revenues can be affected by increasing or decreasing general market interest rates due to the impact these fluctuations have on the number of new real estate loans. In recognition of this fact, AFS has been actively working to expand its agency operations in an effort to balance the cyclical nature of its flood zone determination and flood mapping services. Commissions and fees from AFS' flood zone determinations and flood zone mapping services
One of AFS' product offerings is a "life of loan" flood zone determination whereby AFS agrees to update the zoning status of the subject property throughout the life of the original underlying loan. Therefore, AFS defers a portion of the revenues associated with this product and amortizes it into income over the estimated life of the original underlying loan. As of and for the year ended December 31, 2002, AFS has deferred approximately $500 of revenues associated with its "life of loan" product offering.
The Commercial segment includes the runoff retained risk commercial operations of SCIC, the retained risk commercial operations of Catawba and UIC, and the fee-based commercial automobile activity for the NC Facility and SC Facility.
On August 21, 2002, the SCDOI issued an Order Imposing Administrative Supervision and Appointing Supervisor that placed SCIC, Catawba and CAIC under administrative supervision for at least six months as a result of the disputes associated with the HDC Program of SCIC and CAIC. Provisions of the Order provided for SCIC, Catawba and CAIC to immediately cease writing risk-bearing business and for SCIC and CAIC to immediately cease renewal of existing risk-bearing business. On August 23, 2002, SCIC and Catawba submitted to the SCDOI a request to permit Catawba (1) to continue to write its existing risk-bearing business (the nonowners automobile program) and (2) to renew, in all states in which Catawba is also licensed, the risk-bearing commercial lines business previously written through SCIC. On September 4, 2002, the SCDOI notified Catawba that this request had been approved. The Approval permits Catawba to continue to write new and renewal premiums in its risk-bearing automobile business and allows it to renew the risk-bearing commercial lines business previously written through SCIC in the states of South Carolina, Georgia and Tennessee. A subsequent request of, and approval from, the SCDOI and the Georgia Department of Insurance permits Catawba to also write new commercial lines business in South Carolina and Georgia. On September 12, 2002, SCIC and UIC submitted to the NCDOI a request to permit UIC to renew the risk-bearing commercial lines business previously written through SCIC in the state of North Carolina. This request was granted on November 25, 2002 and UIC subsequently began renewing the North Carolina commercial lines business of SCIC. The only other state in which SCIC wrote risk-bearing commercial lines business is Kentucky. Catawba's application to the Kentucky Department of Insurance to write this business was withdrawn and this business is being runoff. The Order had a negative impact
INS also generates a substantial portion of its income from the loss adjusting services provided in connection with the SC Facility. The SC Facility began its planned runoff effective March 1, 1999, at which time no new business was accepted into the SC Facility. Effective October 1, 1999, voluntary renewals were no longer accepted by the SC Facility. However, servicing carriers were able to cede renewals to the SC Facility until March 1, 2002, at which time final runoff of the SC Facility commenced. INS' fees earned from the loss adjusting services provided in connection with the SC Facility amounted to 6%, 10% and 20% of its total revenues for the years ended December 31, 2002, 2001 and 2000, respectively.
The Company continues to maintain reserves and pay significant claims with respect to these runoff operations, which have resulted in substantial losses to the Company over the past 15 years. During 2002, the Company experienced significant development related to these reserves amounting to approximately $1,272. The development resulted from a sharp increase in the trend of new claims associated with this business alleging that the Company was liable for damages. Though the Company was found not to be liable in all cases, the LAE incurred in connection with defending the Company, as well as the strengthening of LAE reserves as a result of the change in trends, resulted in substantial adverse development during 2002. Approximately 68% and 66% of the Company's total net reserves for losses and LAE at December 31, 2002 and 2001, respectively, relate to these long tail runoff operations.
December 31, 2002, and has ordered HDC to deposit funds in an equivalent amount in a Court-restricted commercial checking account to serve as the funds from which losses of the HDC Program are to be paid. The actuary retained by HDC has issued a report estimating HDC's liability for the deductibles to be $4,300 as of December 31, 2002 and HDC has deposited funds totaling $4,300 into a Court-restricted commercial checking account to serve as the funds from which losses are to be paid. Pursuant to the court order, the Company has retained an actuary to review the work of the actuary retained by HDC. The actuary retained by the Company has raised questions regarding aspects of the methodology used by the actuary retained by HDC and has not received a response to those questions. The Company, in consultation with its consulting actuary, has estimated that HDC's liability for the deductibles may be as much as $9,800 as of December 31, 2002. Whether the actuaries will be able to agree on an amount representing HDC's estimated liability for the deductibles at December 31, 2002 cannot be determined at this time.
HDC reported that it collected $20,054 in premium equivalents and that it paid losses amounting to $1,292 under its 2002 program. All reserve and accrual amounts are management's best estimates of ultimate liability at this time and these estimates are subject to change as more information becomes available. Estimated reserves for losses and LAE for claims arising under the HDC Program have been established by the Company net of the deductible that HDC is required to pay under order of the Court. The Company has a potential off-balance sheet credit risk associated with such deductibles if the Company were required to fund the deductibles in the event that HDC cannot pay the deductible.
- UIC plans to submit a request to the NCDOI in the second quarter of 2003 to allow it to begin writing new commercial lines risk-bearing business in the state of North Carolina.
Commission and service income decreased $2,419 or 6.7%, to $33,853 for the year ended December 31, 2002 from $36,272 for the year ended December 31, 2001. The automobile segment accounted for a decrease of $3,235, reporting commission and service income of $6,854 for the year ended December 31, 2002, versus $10,089 for the same period of 2001. The decrease is substantially the result of the continuing runoff of the SC Facility, which has been in runoff since March 1, 1999 but began its final stage of runoff effective March 1, 2002. Commission and service income generated through the SC Facility and the related SCAAIP amounted to $1,075 for the year ended December 31, 2002 and $3,146 for the year ended December 31, 2001, a decrease of $2,071. The operations of the Company's North Carolina domiciled subsidiary, UIC, accounted for another $1,164 decrease in
commission and service income, resulting entirely from business ceded to the NC Facility. The decrease is primarily the result of pricing and other competitive initiatives effected by certain of UIC's competitors in an effort to increase premium volume, the effects of which were intensified as a result of the SCDOI's order placing UIC's affiliates, SCIC, Catawba and CAIC, under administrative supervision. UIC generally does not engage in pricing competitions with its competitors. Rather, UIC relies on its superior customer service, long standing agency relationships and proven commitment to the North Carolina marketplace to maintain or grow its premium volume.
Commission and service income for the adjusting services segment was $7,233 for the year ended December 31, 2002, versus $8,435 for the same period of 2001, a decrease of $1,202. The SC Facility began its planned runoff effective March 1, 1999 and entered its final state of runoff effective March 1, 2002. Commission and service income generated from the SC Facility amounted to $454 and $1,065 for the years ended December 31, 2002 and 2001, respectively, a decrease of $611. Another $614 of the overall net decrease related to decreased commissions associated with the continuing runoff of claims associated with the Company's Nashville and South Carolina automobile programs, which began runoff in the second and third quarters of 2000. Another $405 of the overall net decrease resulted from INS' catastrophe claims operation, primarily as a result of a less active catastrophe season across the nation during 2002 as compared to 2001. In addition, that operation experienced some turnover in key management early in the third quarter of 2002, resulting in the loss of certain customers. Partially offsetting these decreases in commission and service income was an increase of $693 related to INS' Claims Administration Services agreement with QualSure. Under this agreement, INS administers the claims of QualSure for a fee based upon subject earned premium. QualSure's premium volume has been increasing throughout 2002 as compared to 2001. The remaining net decrease of $265 came from all other activities of the adjusting services segment and is reflective of the Company's profitability and viability analysis of each of INS' service lines. As a result, INS has begun a process of discontinuing certain of its service lines and eliminating the related expenses. INS' continuing operations are centered on its Claims Administration Services Agreement with QualSure and complemented by its network glass claims handling, all-lines claims administration and catastrophe claims administration services.
The commercial segment accounted for a further decrease of $222, reporting commission and service income of $467 for the year ended December 31, 2002, versus $689 for the same period of 2001. The decrease is substantially attributable to the continuing runoff of the SC Facility. No commission and service income was earned through the SC Facility for the year ended December 31, 2002 as compared to the $318 that was earned for the same period of 2001. Partially offsetting this decrease was a $96 increase in commission and service income earned through the NC Facility as a result of increased premiums ceded to the NC Facility for the year ended December 31, 2002 as compared to the same period of 2001. In accordance with a mandate from the NCDOI, the Company ceased writing new risk-bearing commercial business in the state of North Carolina at the beginning of the third quarter of 2000. Though the Company was allowed to renew existing risk-bearing commercial business at its discretion, the only new commercial business permitted was that which would be ceded to the NC Facility. The mandate was issued as a result of the deteriorated financial condition of SCIC that resulted from the discontinuation of the Company's Nashville operations in the second quarter of 2000. Until the SCDOI Order issued in August 2002, SCIC had been recovering portions of its NC Facility book lost during 2001 and the last six months of 2000.
Net premiums earned increased $1,228, or 8.5%, to $15,661 for the year ended December 31, 2002 from $14,433 for the year ended December 31, 2001. Premiums earned by the commercial segment amounted to $9,290 for the year ended December 31, 2002 as compared to the 7,379 earned for the same period of 2001, an increase of $1,911. As a result of the issuance of the SCDOI Order, the Company lost portions of its commercial lines book of business in the states of South Carolina, North Carolina, Georgia and Tennessee and is running off its complete commercial lines book of business in the state of Kentucky. Direct premiums written for the years ended December 31, 2002 and 2001 amounted to $11,870 and $12,578, respectively, a decrease of 5.6%. As a result of a decreasing premium volume, the unearned premium reserve is amortizing into income more rapidly than it is being increased by new and renewal writings. Further contributing to the commercial segment's increase in premiums earned, though to a much lesser extent, was the positive effect of retaining a larger portion of its commercial operations during the first quarter of 2002 as compared to the same period of 2001. From April 1, 2000 through March 31, 2001, the Company's commercial lines were reinsured primarily through a 70% quota share reinsurance agreement. Effective April 1, 2001, the agreement was cancelled at the Company's request to capitalize upon the favorable underwriting results of the commercial book of business.
Premiums earned reported by the all other segment was $606 and $49 for the years ended December 31, 2002 and 2001, respectively, an increase of $557. Approximately $580 the overall increase resulted from the premiums earned under the HDC Program that was effective January 1, 2002. Direct premiums written and earned under the HDC Program amounted to $1,544 and ceded premiums written and earned amounted to $964 for the year ended December 31, 2002. This program ended December 31, 2002 and will not be a recurring source of revenue for the Company. The remaining $23 decrease in premiums earned reported by the all other segment came from all of the segment's other runoff operations.
The automobile segment accounted for a decrease of $1,240, reporting premiums earned of $5,764 for the year ended December 31, 2002 as compared to $7,004 for the same period of 2001. The overall decrease primarily resulted from three factors. First, in the second and third quarters of 2000, respectively, the Company announced the discontinuation of its Nashville operations and its withdrawal from the voluntary nonstandard automobile market in South Carolina. Premiums earned from these operations for the year ended December 31, 2002 amounted to $8, a decrease of $1,665 over the $1,673 earned for the same period of 2001. Second, premiums earned through the nonstandard automobile risk-bearing operations of Catawba amounted to $774 and $1,049 for the years ended December 31, 2002 and 2001, respectively, a decrease of $275 that resulted from business lost as a result of the SCDOI's Order placing Catawba under administrative supervision. Third, premiums earned by UIC amounted to $4,929 for the year ended December 31, 2002 versus $4,393 for the same period of 2001, an increase of $536. As previously discussed, UIC experienced a marked decrease in premium volume for the year ended December 31, 2002 as compared to the same period of 2001 primarily as a result of pricing and other competitive initiatives effected by certain of UIC's competitors. However, since approximately 57% of UIC's automobile premium volume for the year was ceded to the NC Facility the decreasing premium volume did not have as dramatic an impact on premiums earned. More than offsetting the decrease in premiums earned resulting from a decrease in premium volume was the effect of a change in UIC's reinsurance program. From December 31, 1999 until July 1, 2002, UIC's retained-risk automobile business had been subject to a 75% quota share reinsurance agreement. Effective July 1, 2002, the existing 75% quota share reinsurance agreement was canceled in favor of a 60% quota share reinsurance agreement. Retaining more premium under the new quota share reinsurance agreement had a favorable impact on UIC's premiums earned for the year ended December 31, 2002. The remaining $164 increase in premiums earned by the automobile segment came from business the Company is required to assume from the SC Facility and mostly was assumed in the first and second quarters of 2002.
Net investment income decreased $317, or 12.7%, to $2,183 for the year ended December 31, 2002 from $2,500 for the year ended December 31, 2001. The principal cause of the decrease was the continually decreasing general level of market interest rates. For the year ended December 31, 2002, the Company's investment portfolio yielded an average return of 4.6%, a deterioration over the 5.2% averaged for the same period of 2001. Though the Company's cash and invested asset base increased substantially between December 31, 2001 and December 31, 2002, the majority of the increase occurred in the fourth quarter of 2002 and has been retained in lower yielding commercial paper investments until quality long-term investments could be located.
Net realized losses amounted to $211 for the year ended December 31, 2001 due to $301 of losses realized on the sale of automobiles no longer required for operations and the disposal of obsolete data processing equipment and software, partially offset by $90 in gains realized on the liquidation of a portion of the Company's bond portfolio to fund its operations.
Further contributing to the overall decrease in other income was a decrease of $766 associated with a division of the adjusting services segment. The division posted other income of $891 for the year
December 31, 2002 versus $1,657 for the same period of 2001. The decrease is attributable to a general decrease in business volumes within the division's primary market of South Carolina resulting from the runoff of the SC Facility and the withdrawal of key customers' automobile programs in the state. In addition, in December 2002 the division refunded approximately $150 of fees charged to and paid by UIC in excess of fees approved by the NCDOI.
On November 15, 2002, the Company received approval from both FEMA and the SCDOI and then announced that it had sold the right to renew or assume all of SCIC and Catawba's in-force NFIP business to The Hartford for $3,800 in cash at closing, plus up to $1,000 to be paid on November 15, 2003, if certain retention thresholds on the book of business are achieved. Provisions of the underlying sales agreement, as approved by FEMA, provide that The Hartford administer and report the Company's business to the NFIP over the transition period that ends September 30, 2003. As a result of the Company's continuing involvement with the book of business during the transition period, the gain on the transaction of $3,499 (purchase price of $3,800 less expenses of sale of $301) has been deferred and will be recognized evenly over the transition period. Included in other income for the year ended December 31, 2002 is $350 of amortized gain.
Losses and LAE increased $1,694 or 21.9%, to $9,434 for the year ended December 31, 2002 from $7,740 for the year ended December 31, 2001. Included in the losses and LAE incurred is $970 and $23 incurred for the years ended December 31, 2002 and 2001, respectively, related to the change in estimated unpaid losses and LAE of prior years ("development"), an increase of $947. The largest components of the unfavorable development are the Company's runoff environmental and general liability operations and its continuing commercial operations, which are partially offset by the net favorable development reported by the various components of its automobile operations. Certain components of the overall unfavorable development reported for the year ended December 31, 2002 are discussed in the following paragraphs.
Approximately $580 of the increase is attributable to the net losses and LAE incurred under the HDC Program. Incurred losses and LAE of the HDC Program are recorded on the Company's books as direct insurance activity and ceded as applicable to reinsurers. As a large deductible workers' compensation program, HDC is responsible for all losses and LAE of the HDC Program up to a deductible of $1,000 per occurrence, at which point coverage is provided by the Company subject to its reinsurance that amounts to $15,000 in excess of $5,000 per occurrence.
Furthering the overall increase in losses and LAE was the $1,576 increase reported by the commercial segment. During the year ended December 31, 2002, the Company experienced unfavorable development related to its loss and LAE reserves of prior accident years amounting to $870 as a result of a reserve reconciliation project initiated by the Company's recently hired commercial lines claims manager. Furthermore, the Company incurred a significant commercial lines loss in the second quarter of 2002 that crossed into its excess of loss reinsurance agreement. The Company's retention for this claim was $250. Finally, from April 1, 2000 through March 31, 2001, the Company's commercial lines were reinsured primarily through a 70% quota share reinsurance agreement. Effective April 1, 2001, the agreement was cancelled at the Company's request to capitalize upon the favorable underwriting
results of the commercial book of business. Retaining a larger portion of its commercial book of business had a negative impact on the Company's losses and LAE for the year ended December 31, 2002 over the same period of 2001.
Other operating costs and expenses decreased $2,813, or 13.1%, to $18,625 for the year ended December 31, 2002 from $21,438 for the year ended December 31, 2001. In addition to the wide array of general expense reductions that would normally be associated with a decreasing revenue base there were certain other noteworthy fluctuations:
At the time PBP was placed into runoff, management established substantial additional reserves for uncollectable premium notes receivable based upon its historical experience with PBP's operations, its business environment and the fact that the business was moving into runoff. However, as a result of significant receivables monitoring and collections efforts by both the Company's internal collections department and the unaffiliated management company, PBP's actual and final bad debt exposure was substantially less than historically experienced or expected. Therefore, for the year ended December 31, 2002, PBP's allowance for uncollectable premium notes receivable was reduced by approximately $300 through a credit to earnings.
- In September 2001, the Compensation Committee of the Company's Board of Directors recommended, and the Board of Directors approved, the adoption of an incentive compensation program covering certain members of management. The program was terminated by the Company's Board of Directors on October 31, 2002. Expenses under the program for the years ended December 31, 2002 and 2001 were $0 and $852, respectively.
- On December 21, 2000, the Company sold its corporate headquarters to its majority shareholder, Chairman of the Board of Directors and Chief Executive Officer. Concurrent with this transaction, the Company leased the property back for a fixed period of three years without an option for renewal. Monthly lease expense is calculated annually at a predetermined spread over the Prime Lending Rate. Lease expense for the year ended December 31, 2002 was $290, a decrease of $168 over the expense incurred for the same period of 2001.
- Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires an entity to separate its goodwill, intangible assets with definite useful lives and intangible assets with indefinite useful lives. Goodwill and intangible assets with indefinite useful lives are no longer subject to periodic amortization. Rather they are subject to impairment tests that are required to be performed on at least an annual basis. As a result of adopting SFAS No. 142, other operating costs and expenses for the year ended December 31, 2002 did not include goodwill amortization of $125.
During the quarter ended June 30, 2000, the Company recorded a special items charge in the amount of $16,421 associated with the discontinuation of its Nashville operations and the impairment
The commercial segment accounted for a further increase of $35, posting commission and service income of $689 for the year ended December 31, 2001, versus $654 for the same period of 2000. The overall increase is substantially attributable to the net effect of two factors. First, in accordance with a mandate from the NCDOI, the Company ceased writing new risk-bearing commercial business in the state of North Carolina at the beginning of the third quarter of 2000. Though the Company may, however, continue renewing existing risk-bearing commercial business at its discretion, any new commercial business generated is ceded to the NC Facility. The mandate was issued as a result of the deteriorated financial condition of SCIC that resulted from the discontinuation of the Company's Nashville operations in the second quarter of 2000. Commission and service income generated through the NC Facility amounted to $371 and $298 for the years ended December 31, 2001 and 2000, respectively, an increase of $73. Second, commission and service income generated through the SC Facility amounted to $318 and $356 for the years ended December 31, 2001 and 2000, respectively, a decrease of $38. The SC Facility has been in runoff since March 1, 1999 and entered the final stage of runoff effective March 1, 2002.
Commission and service income for the automobile segment was $10,089 for the year ended December 31, 2001, versus $11,194 for the same period of 2000, a decrease of $1,105. The decrease is substantially the result of the continuing runoff of the SC Facility, a residual market for automobile insurance in the state of South Carolina. Effective March 1, 1999, no new policies could be ceded to the SC Facility, and no voluntary renewals could be ceded to the SC Facility after September 1999. Designated agents, such as the Company, are able to renew business in the SC Facility through March 1, 2002. Commission and service income generated through the SC Facility and the SCAAIP amounted to $3,146 for the year ended December 31, 2001 and $4,019 for the year ended December 31, 2000, a decrease of $873. The operations of the Company's North Carolina domiciled subsidiary, UIC, accounted for another $220 decrease in commission and service income, resulting entirely from business ceded to the NC Facility. Though the Company experienced an increase in premium writings within the NC Facility during the year ended December 31, 2001 versus the same period of 2000, claims commissions earned from the NC Facility actually decreased. This is attributable to a reduction in losses ceded to the NC Facility resulting from much lower weather-related claims
over the same period of 2000. In accordance with a mandate from the NCDOI, the Company ceased writing new risk-bearing commercial business in the state of North Carolina at the beginning of the third quarter of 2000. The Company may, however, continue renewing existing risk-bearing commercial business at its discretion. The mandate was issued as a result of the deteriorated financial condition of SCIC that resulted from the discontinuation of the Company's Nashville operations in the second quarter of 2000.
losses on the sale of investments amounted to $236 and resulted from the liquidation of a portion of the Company's investment portfolio to fund its operations and investment in QualSure Holding.
Also contributing to the overall decrease in other income was the Company's net $615 decrease in equity in earnings of its unconsolidated subsidiaries, Sunshine State and QualSure Holding from income of $129 for the year ended December 31, 2000 to a loss of $486 for the same period in 2001. The Company invested $854 and $4,900 in Sunshine State and QualSure Holding, respectively, for ownership interests of 21.49% and 30.625%, respectively. As each of these investments exceeds 20% of the equity of each respective company, the Company's equity in the undistributed earnings of the unconsolidated affiliates, using a computed equity method, are included in current earnings.
The remaining net increase in other income of $76 came from all other operations.
During the quarter ended June 30, 2000, the Company recorded a special items charge in the amount of $16,421 associated with the discontinuation of its Nashville operations and the impairment of long-lived assets associated with those operations. As of December 31, 2001, the restructuring plan associated with the restructuring charge has been completed, resulting in a final revision of the initial estimate of $156 that was taken into income in September 2001.
Loss and LAE 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 existing estimates of liability. Management, in conjunction with the Company's consulting actuary, performs a complete review of the Company's recorded reserves for unpaid losses and LAE to evaluate the adequacy of such reserves. Management believes the reserves, which approximate the amount determined by independent actuarial reviews, are adequate. However, establishing reserves is an estimation process and the ultimate liability may be in excess of or less than the amount recorded. Changes in estimated loss reserves are recorded in the year so determined.
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 reporting 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.
* In 1993 the Company adopted Statement of Financial Accounting Standards No. 113, "Accounting and Reporting of Short-Duration and Long-Duration Contracts". In accordance with the provisions of the statement, the Company began presenting its liability for unpaid losses and LAE on a gross basis.
The final section of the above table presents the re-estimated direct liability for unpaid losses and LAE, with separate disclosure of the re-estimated reinsurance recoverables thereon.
In evaluating the above information, it should be noted that 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 have 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.
Of the remaining environmental, pollution and toxic tort claims, the following activity took place during 2002 and 2001:
The claims involve four Superfund sites, nine asbestos or toxic claims, seven underground storage tanks and ten 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.
Because only thirty claims remain open as of December 31, 2002, the exposure to significant additional development is less than when the claims were less mature. In addition, the likelihood of
new claims being asserted for construction liability is lessened by the expiration of statutes of limitations since the last policy expired over ten years ago.
The Company's principal sources of liquidity during 2003 include the collection of commission and service fees, including substantial amounts received from the NC Facility and QualSure; premium collections on insurance policies issued; the collection of policy fees and interest income on insurance policies financed; collections of balances due from its reinsurers; and the collection of net investment income and proceeds received from the sale or maturity of investments. The Company's cash outflows can vary greatly because of the uncertainties regarding settlement dates for liabilities for unpaid losses and LAE 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.
Other significant sources of cash from operations include the net collection of reinsurance recoverable on paid and unpaid losses and LAE of $13,003 and the $6,324 reduction in reinsurance premiums prepaid to the Company's reinsurers. The reduction is attributable to continued runoff of the Company's Nashville and South Carolina automobile operations, the continued runoff of the SC Facility, and the curtailment of its commercial operations in the third and fourth quarters of 2002 as a result of the SCDOI Order. Further, the Company sold the renewal rights to its NFIP business to The Hartford in November 2002, thus beginning the runoff of that operation. As a result of these factors, collections on reinsurance recoverable on paid and unpaid losses and LAE outstanding at December 31, 2001 surpassed new recoverables being generated through continuing operations. Finally, effective July 1, 2002, the existing 75% quota share reinsurance agreement on UIC's retained-risk nonstandard automobile program was canceled in favor of a 60% quota share reinsurance agreement. Retaining more risk on the program resulted in fewer premiums being prepaid to reinsurers and fewer ceded losses and LAE to recover from reinsurers.
Another significant source of cash was the $4,378 in collections on PBP's premium notes receivable. A substantial portion of UIC's written premium has traditionally been financed through PBP. In December 2001, UIC introduced an installment billing program to its insureds and PBP was placed into runoff. At the time PBP was placed into runoff, management established substantial additional reserves for uncollectable premium notes receivable based upon its historical experience with PBP's operations, its business environment and the fact that the business was moving into runoff. However, as a result of significant receivables monitoring and collections efforts by both the Company's internal collections department and the unaffiliated management company, PBP's actual and final bad debt exposure was substantially less than historically experienced or expected. Therefore, during the year ended December 31, 2002, PBP's allowance for uncollectable premium notes receivable was reduced by approximately $300 through credits to earnings.
Another significant use of cash was the $888 net increase in premiums and agents' balances receivable. The majority of UIC's written premium has traditionally been financed through PBP. In December 2001, UIC introduced an installment billing program to its insureds and PBP was placed into runoff. As such, premiums historically paid in full by PBP to UIC are now being billed and collected by UIC.
Adjustable Rate Cumulative Nonvoting Preferred Special Stock is nonconvertible and nonredeemable and pays quarterly dividends at an annual adjustable rate of 3.5% plus LIBOR (amounting to 4.9% at December 31, 2002). On August 15, 2002, the Company redeemed its Special Stock and AFS Special Stock at a price of $10.00 per share, using cash in the amount of $2,590. Dividends paid on the Company's Special Stock, AFS Special Stock and Adjustable Rate Cumulative Nonvoting Preferred Special Stock amounted to $430 for the year ended December 31, 2002.
Under the HDC Program, estimated reserves for losses and LAE for claims arising under the HDC Program have been established by the Company net of the deductible that HDC is required to pay under order of the Court. The Company has a potential off-balance sheet credit risk associated with such deductibles if the Company were required to fund the deductibles in the event that HDC cannot pay the deductible.
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, 2002 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedules I, II, III, IV, V and VI listed in Part IV, Item 15 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements for the year ended December 31, 2002, and in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
THIS IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND IT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
The accompanying consolidated financial statements include the accounts of The Seibels Bruce Group, Inc. and its wholly-owned subsidiaries (collectively, the "Company") and have been prepared in conformity with accounting principles generally accepted in the United States ("GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company conducts business in two primary categories: fee-based property and casualty insurance operations and risk-bearing property and casualty insurance operations. Its fee-based property and casualty insurance operations include the following:
On November 15, 2002, the Company received approval from both FEMA and the SCDOI and then announced that it had completed a transaction with The Hartford Financial Services Group, Inc. ("The Hartford") under which The Hartford acquired the right to renew or assume all of SCIC and Catawba's in-force NFIP business (see TRANSACTION WITH THE HARTFORD).
The NC Facility is a state-sponsored plan for assuring the availability of motor vehicle liability insurance to all North Carolina drivers outside of the voluntary market. Two of the Company's subsidiaries, SCIC and Universal Insurance Company ("UIC"), cede business to the NC Facility.
Effective July 1, 2002, one of the Company's subsidiaries, Seibels, Bruce & Company ("SBC"), entered into an agreement with a Florida domiciled insurance company to serve as managing general agent for that company's low-value dwelling homeowners' insurance program in the state
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) of Florida until such time as that program is runoff. Runoff began January 1, 2003; therefore, SBC will not earn significant revenue related to the agreement after December 31, 2002. In its capacity as managing general agent, SBC is responsible for policy issuance and administration, customer service and claims administration. SBC's claims administration responsibilities are fulfilled through a Claims Administration Services Agreement with INS. SBC earned commission and service income amounting to 5.7% of total commission and service income for the year ended December 31, 2002 through this managing general agency agreement.
SCIC and Consolidated American Insurance Company ("CAIC") have issued workers' compensation insurance master policies to a professional employment organization headquartered in Mesa, Arizona to provide workers' compensation insurance for that organization's client companies located in California (SCIC) and Arizona (CAIC), providing coverage for the period January 1, 2002 through December 31, 2002 (see HDC WORKERS' COMPENSATION PROGRAM and Note 14).
The fair values of debt securities are disclosed in Note 2 and were determined from nationally quoted market rates if available and, alternatively, from Bloomberg or Hub Market Data quotations.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The fair values of cash and short-term investments approximate carrying values (cost) due to the short-term nature of those instruments.
Realized gains and losses on investments included in the results of operations are determined using the identified cost method.
The Company routinely evaluates the collectability of receivables and has established an allowance for uncollectable accounts for agents' balances and direct billed balances receivable and premium notes receivable in the amount of approximately $2,681 and $3,763 at December 31, 2002 and 2001, respectively. For the years ended December 31, 2002, 2001 and 2000, bad debt expense, net of recoveries was $5, $1,839 and $1,773. Included in 2002 bad debt expense is a credit (reduction in bad debt expense) of approximately $300 related to a change in estimated uncollectible amounts related to notes receivable of PBP which was placed in runoff in December 2001. PBP's actual bad debt exposure in runoff was less than historically experienced or expected.
Effective January 1, 2002, the Company adopted the provisions of Statement on Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 establishes accounting and reporting standards for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." It requires an entity to separate its goodwill, intangible assets with definite useful lives and intangible assets with indefinite useful lives. Goodwill and intangible assets with indefinite useful lives are no longer subject to periodic amortization. Rather
Management, in conjunction with the Company's consulting actuary, performs a complete review of the Company's recorded reserves for unpaid losses and LAE to evaluate the adequacy of such reserves. Management believes the reserves, which approximate the amount determined by independent actuarial reviews, are adequate. However, establishing reserves is an estimation process and the ultimate liability may be in excess of or less than the amount recorded. Changes in estimated loss reserves are recorded in the year so determined.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.
The Company received or is to receive commissions equal to 4% of total premium equivalents collected by HDC from participants in the HDC Program as well as full reimbursement for actual boards, bureaus, assessments and premium taxes incurred by the Company under the HDC Program. For the year ended December 31, 2002, the Company recorded commission and service income amounting to $802 under the HDC Program.
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
In accordance with SFAS No. 128, "Earnings Per Share", the Company measures earnings per share at two levels: basic earnings per share and diluted earnings per share. Basic per share data is calculated by dividing income (loss) allocable to common stockholders by the weighted average number of shares outstanding during the year. Diluted per share data is calculated by dividing income (loss) allocable to common stockholders by the weighted average number of shares outstanding during the year, as adjusted for the potentially dilutive effects of stock options, warrants and/or convertible preferred stock, unless common equivalent shares are antidilutive.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections." This statement will require gains
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) and losses on extinguishments of debt for fiscal years beginning after May 15, 2002 to be classified as income or loss from continuing operations rather than as extraordinary items as previously required. The Company does not believe this statement will have a material impact on its consolidated financial position and results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company is in the process of evaluating the impact that the adoption of SFAS No. 146 will have on its consolidated financial position and results of operations.
The amortized cost and estimated fair values of investments in debt securities were as follows:
There were no non-income producing debt securities for the 12 months ended December 31, 2002, 2001 and 2000. Debt securities with an amortized cost of $17,112 at December 31, 2002 and $16,648 at December 31, 2001 were on deposit with regulatory authorities.
At December 31, 2001, the Company owned 32,676 shares of common stock of Insurance Services Offices, Inc. ("ISO") which it had received in 1997 as a result of ISO converting from a mutual organization to a stock company. Since the equity security received in connection with the conversion was not marketable, the Company had historically valued the investment at cost ($0). In February 2002, ISO offered, and the Company accepted, to repurchase the Company's shares for a price of $64.80 per share, resulting in a realized investment gain of $2,117.
Accretion of bond discount, net of amortization of bond premium, increased the Company's net investment income by $44, $55 and $50 for the years ended December 31, 2002, 2001 and 2000.
Depreciation expense charged to operations was $442 in 2002, $390 in 2001, and $1,451 in 2000.
In connection with the sale of the renewal rights to its NFIP business to The Hartford, the Company determined that certain data processing equipment and software used in that operation had been impaired resulting in a realized loss of $27. Such assets are no longer in use by the Company and are not readily marketable.
A reconciliation of direct to net premiums, on both a written and an earned basis is as follows:
A summary of the Company's reinsurance recoverable on paid and unpaid losses and LAE, as well as its prepaid reinsurance premiums at December 31, 2002 is as follows:
The Company believes that the balances due from the NC Facility, the SC Facility and the NFIP are fully collectable due to the applicable governmental agency's backing and/or ability to assess policyholders and member companies for deficiencies. The remaining recoverables due from nonaffiliated reinsurance companies are also considered fully collectable by the Company.
Incurred losses for the years ended December 31, 2002, 2001 and 2000, include changes in estimates of unpaid losses and LAE for claims occurring in prior years of $970, $23 and $2,355. The Company's runoff environmental and general liability business (see discussion to follow) is the primary source of the unfavorable development of reserves from prior accident years. During 2000, the development resulted from general reserve strengthening in response to unexpectedly high loss and LAE payments during the year. While there was no significant development of these reserves during
On March 31, 1998, the Company entered into a $15,000 Credit Facility with a major lending institution for the purpose of financing its acquisition activity and other general corporate purposes. Quarterly principal payments began in March 1999 and the final payment of all remaining principal and accrued interest was to be in June 2004. Accrued interest was payable monthly on the outstanding balance under the Credit Facility and was calculated using a pre-determined spread over LIBOR. On March 28, 2002, the outstanding balance of the Credit Facility was repaid in full with the proceeds from the issuance of Adjustable Rate Cumulative Nonvoting Preferred Special Stock to the Company's majority shareholder, Chairman of the Board of Directors and Chief Executive Officer (see Note 9).
The Company and its subsidiaries file a consolidated federal income tax return. A formal tax-sharing agreement has been established by the Company with its subsidiaries. A reconciliation of the income tax provision to that computed by applying the statutory federal income tax rate to the income (loss) before provision for income taxes is as follows:
The Company has unused tax operating loss carryforwards and capital loss carryforwards of $92,198 for income tax purposes. However, due to "change in ownership" events that occurred in June 1998, January 1997, and January 1995, the Company's use of the net operating loss carryforwards are subject to maximum limitations in future years of approximately $2,205 per year. Net operating loss carryforwards available for use in 2003 are approximately $6,428 due to losses incurred after the June 1998 change in ownership event occurred and the carryover of previous years' unused limitations.
NOTE 8 INCOME TAXES (CONTINUED) The years of expiration of the tax carryforwards are as follows:
On December 1, 1997, the Company issued 220,000 shares of Cumulative, Convertible, Redeemable, Nonvoting Special Preferred Stock ("Special Stock") in connection with an acquisition. The Company determined the value of the Special Stock at the issuance date to be $2,200. The Special Stock paid quarterly dividends at an annual rate of $0.62 per share. In January 2001, the holders of the Special Stock surrendered, and the Company cancelled, 11,000 shares of the Special Stock to settle a dispute between the Company and the holders. The Company paid $81, $130 and $137 in special stock dividends for the years ended December 31, 2002, 2001, and 2000, respectively. On August 15, 2002, the Company redeemed the Special Stock at a price of $10.00 per share.
On March 28, 2002, the Company issued 800,000 shares of Adjustable Rate Cumulative Nonvoting Preferred Special Stock to its majority shareholder, Chairman of the Board of Directors and Chief Executive Officer for an aggregate purchase price of $8,000. The proceeds from the transaction were used to repay the outstanding balance of the Company's Credit Facility and for general corporate purposes. The Adjustable Rate Cumulative Nonvoting Preferred Special Stock is nonconvertible and nonredeemable and pays quarterly dividends at an annual adjustable rate of 3.5% plus LIBOR (4.9% at December 31, 2002). The Company paid $329 in preferred special stock dividends for the year ended December 31, 2002.
The Seibels Bruce Group, Inc. 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 the lease payments on its corporate headquarters and the dividend payments associated with the Adjustable Rate Cumulative Nonvoting Preferred Special Stock held by its majority shareholder, Chairman of the Board
NOTE 11 DIVIDEND RESTRICTIONS AND STATUTORY REPORTING (CONTINUED) of Directors and Chief Executive Officer, are dividends and other permitted payments, including management fees, from its subsidiaries and affiliates.
Since before the Company's acquisition of UIC in 1997, UIC has operated, and continues to operate, under the Regulatory Action Division ("RAD") of the NCDOI. Under the requirements of
The Company currently has three plans under which stock options and incentive stock may be granted to employees, non-employee directors, consultants and active independent agents of the Company. Under the 1996 Stock Option Plan for Employees ("Employee Plan") and the 1995 Stock Option Plan for Independent Agents ("Agents Plan"), stock options expire five (5) years from the date of grant. Under the 1995 Stock Option Plan for Non-Employee Directors ("Directors Plan"), the options expire ten (10) years from the date of grant. Each plan is administered by a committee appointed by the Board of Directors.
NOTE 12 BENEFIT AND STOCK OPTION PLANS (CONTINUED) The Agents Plan became effective on June 15, 1996. The Agents Plan has reserved 125,000 shares of the Company's common stock for issuance under the plan as options to independent insurance agents of the Company. Activity in the Agents Plan is summarized as follows:
Options vest at the discretion of the 1995 Stock Option Plan for Independent Agents Committee. All grants made under the Agents Plan have exercise prices no lower than the market price at the date of grant. Options granted during 2001 and 2000 were granted at exercise prices of $2.01 and $1.83, respectively. At December 31, 2002, 95,581 shares of the Company's common stock have been reserved for future grants. Following is a summary of options outstanding and exercisable by price range as of December 31, 2002:
The Directors Plan became effective on June 15, 1995, with 250,000 shares of the Company's common stock reserved for issuance under the plan. Activity in the Directors Plan is summarized as follows:
The Company sponsors the South Carolina Insurance Company Employees' Profit-Sharing and Savings Plan (the "Plan"), which provides both a profit-sharing and a 401(k) element for the employees of the Company, its subsidiaries and affiliates. As of December 31, 2002, the amount of assets available in the Plan was $9,516. The profit-sharing element of the Plan covers all full-time employees who have met minimum eligibility requirements. There were no contributions to this part of the Plan in 2002, 2001 or 2000. 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 Company matches 50% of the first 6% of the employee's contribution to the Plan. The Company's contribution to the Plan on behalf of the participating employees was $268, $244, and $310 in 2002, 2001, and 2000 respectively.
The Company currently provides certain health care and life insurance benefits for certain retired employees. The projected future cost of providing post-retirement benefits is reflected as an expense as employees render services instead of when the benefits are paid. The net transition obligation is being recorded as a charge against income on a prospective basis as part of the future annual benefit cost. Post-retirement benefit expense was approximately $59 in 2002, $70 in 2001, and $110 in 2000.
Reportable segments are determined based on management's internal reporting approach, which is based on product line and complementary coverages. The reportable segments are comprised of Automobile, Flood, Commercial, Adjusting Services and All Other. Following is a summary of the Company's reporting segments with indications of whether the supporting operating segments are risk-bearing or fee-based operations and whether the supporting operating segments are ongoing operations or in runoff:
NOTE 13 SEGMENT REPORTING (CONTINUED) (see Note 2). Shared expenses comprised approximately 4%, 2% and 2% of "all other expenses" in fiscal 2002, 2001 and 2000, respectively. These shared amounts were allocated on a basis proportionate with each reportable segment's total net loss and LAE and unearned premium reserves. The results of the reportable segments are included in the following tables:
(a) In December 2000, the Company sold its corporate headquarters to its majority shareholder, Chairman of the Board of Directors and Chief Executive Officer. Concurrent with this transaction, the Company leased the property back for a fixed period of three years without an option for renewal. Lease expense incurred under this related party lease amounted to $290 and $458 in 2002 and 2001, respectively. Approximate minimum future lease payments are $259 in 2003.
The Company and its subsidiaries lease various other office space, computer equipment and automobiles under several operating leases that expire at various times. Lease expense amounted to
NOTE 14 COMMITMENTS AND CONTINGENCIES (CONTINUED) $822, $1,027, and $1,320 in 2002, 2001, and 2000 respectively. Approximate minimum future lease payments under these operating leases at December 31, 2002 are as follows:
The Court has ordered HDC to retain an independent actuary to estimate the unpaid losses and LAE of the HDC Program, subject to the deductible, as of December 31, 2002, and has ordered HDC to deposit funds in an equivalent amount in a Court-restricted commercial checking account to serve as the funds from which losses of the HDC Program are to be paid. The actuary retained by HDC has issued a report estimating HDC's liability for the deductibles to be $4,300 as of December 31, 2002 and HDC has deposited funds totaling $4,300 into a Court-restricted commercial checking account ($3,000 on January 29, 2003, and $1,300 on February 21, 2003) to serve as the funds from which losses are to be paid. Pursuant to the court order, the Company has retained an actuary to review the work of the actuary retained by HDC. The actuary retained by the Company has raised questions regarding aspects of the methodology used by the actuary retained by HDC and has not received a response to those questions. The Company, in consultation with its consulting actuary, has estimated that HDC's liability for the deductibles may be as much as $9,800 as of December 31, 2002. Whether the actuaries will be able to agree on an amount representing HDC's estimated liability for the deductibles at December 31, 2002 cannot be determined at this time.
(e) In February 2002, litigation was initiated in the District Court of Shelby County, Texas, in a lawsuit styled Mary Masterson, individually and on behalf of all others similarly situated, vs. America's Flood Service, Inc., et al. The litigation involves both the Company and its wholly-owned subsidiary, AFS, and is in its very earliest stages. The pleadings allege that a putative class of persons in Texas
(f) Litigation was initiated in the Maricopa County Superior Court, State of Arizona on March 25, 2002 by Du Pre Insurance Services, Inc., a California corporation, Infinet Holdings, Inc., an Arizona corporation, Human Dynamics Corporation, a California corporation and HDC Financial Services Corporation, an Arizona corporation. The litigation names as defendants the Company, SCIC and CAIC. Effective January 1, 2002, the Company, through SCIC and CAIC, issued two workers' compensation insurance master policies to the HDC Group. SCIC and CAIC did not obtain the approval of the SCDOI prior to issuing the master policies and, therefore, subsequently canceled them. Litigation was initiated in the Superior Court of the State of Arizona on March 25, 2002 by the HDC Group against the Company, alleging that the Company wrongfully terminated workers compensation coverage, breached its implied duty of good faith and fair dealing by unilaterally rescinding HDC's workers compensation coverage and that the Company breached its contract with the HDC Group to provide workers compensation coverage. HDC claims its entitlement to punitive damages in an unspecified amount. On July 9, 2002, an Arizona Superior Court Judge ruled that the policies are in effect from January 1, 2002 through December 31, 2002. The Company intends to appeal the decision.
In September 2002, the Company and the HDC Group mediated several outstanding issues which resulted in an Interim Agreement between the parties that was approved by the Court in October 2002. In accordance with the court-approved Interim Agreement, the HDC Group is responsible for funding all losses of the HDC 2002 workers' compensation program. Reinsurance coverage for the HDC Program was obtained on October 21, 2002 effective for losses incurred between January 1, 2002 and December 31, 2002 and amounting to $15,000 in excess of $5,000 per occurrence. The Company, upon receiving approval from the SCDOI, elected to retain the risk for losses amounting to $4,000 in excess of $1,000 per occurrence for premiums prescribed in the court-approved Interim Agreement. In addition, the Company received or is to receive fees equal to 4% of collected premium equivalents under the HDC Program as well as reimbursement for actual boards, bureaus, assessments and premium taxes incurred for the insurance policies. All premiums not remitted to the reinsurers or to the Company were retained by the HDC Group.
INS recorded commission and service income of $4,608, $3,915 and $3,458, respectively, in connection with its Claims Administration Services Agreement with QualSure. Effective October 3, 2002, the Company's ownership interest in QualSure Holding was redeemed by QualSure Holding. Under the terms of the underlying redemption agreement, INS continues to provide claim administration services to QualSure under an amended contract at a reduced rate for terms that expire from October 4, 2005 through January 21, 2010.
The Company's majority shareholder, Chairman of the Board of Directors and Chief Executive Officer is an owner and operator of SADISCO Corporation ("SADISCO"), a provider of salvage and disposal services for the Company. During the fiscal years ended December 31, 2002, 2001 and 2000, the Company paid a total of $116, $242 and $225, respectively, to SADISCO.
On March 28, 2002, the Company issued 800,000 shares of $10 par value Adjustable Rate Cumulative Nonvoting Preferred Special Stock to its majority shareholder, Chairman of the Board of Directors and Chief Executive Officer for an aggregate purchase price of $8,000. The proceeds from the transaction were used to repay the outstanding balance of the Credit Facility. The Adjustable Rate Cumulative Nonvoting Preferred Special Stock pays quarterly dividends at an annual adjustable rate of 3.5% plus LIBOR (4.9% at December 31, 2002).
Premiums earned exhibited significant fluctuations between the second, third and fourth quarters of 2002, primarily as a result of the accounting and reporting for the HDC Program. The program was originally intended to be a fronted program, administered by HDC with minimal underwriting risk to SCIC and CAIC due to the anticipated placement of multiple layers of reinsurance coverage. SCIC and CAIC did not obtain the approval of the SCDOI prior to issuing the master policies and subsequently canceled them during the first quarter of 2002. The cancellation of these policies is the ongoing subject of litigation and mediation. On July 9, 2002, an Arizona Superior Court Judge ruled that the policies are in effect from January 1, 2002 through December 31, 2002. The Company did not receive sufficient information to enable the recording of estimated premiums earned under this fronting program until the third quarter of 2002, at which time it recorded premiums earned of $10,046 representing estimated premiums earned from January 1 through September 30, 2002. In subsequent Court proceedings it was
The net realized gain reported in the fourth quarter of 2002 is due to the net effect of two transactions. First, effective October 3, 2002, the Company's combined ownership interest in QualSure Holding was redeemed by QualSure Holding for $4,775 resulting in a realized gain of $632. Second, in connection with the sale of the renewal rights to its NFIP business to The Hartford, the Company impaired certain data processing equipment and software used in that operation, resulting in a realized loss of $27.
The equity in (loss) earnings of unconsolidated subsidiary result from the Company's equity ownership interests in Sunshine State and QualSure. As each of these investments exceeds 20% of the equity of each respective company, the Company's equity in the undistributed earnings of the unconsolidated affiliates, using the equity method, are included in current earnings. Effective October 3, 2002, the Company's ownership interest in QualSure was redeemed by QualSure.
company, the Company's equity in the undistributed earnings of the affiliates, using a computed equity method, are recorded as other income. Other income recorded by the Company in 2001 was a loss of $486 as compared to income in 2000 of $129. Finally, partially offsetting these decreases in other income was the amortization of the deferred gain on sale of the Company's corporate headquarters. In December 2000, the Company sold its corporate headquarters to its majority shareholder, Chairman of the Board of Directors and Chief Executive Officer, resulting in a gain of $1,892. Concurrent with this transaction, the Company leased the property back for a fixed period of three years without an option for renewal. The entire gain resulting from this transaction was deferred and is being amortized into income evenly over the term of the leaseback.