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 Innovative and Universal. That office contains approximately 18,000 square feet, and is leased through an arrangement with a term through 2005. Some additional premises are leased by the Company in locations in which they operate. Management believes that these facilities are adequate for the current level of operations. The company sold one of its auxiliary buildings during 1997. This sale created a gain of $311,000 for the company.
The Company is a servicing carrier for the NFIP. During 1996 and 1995, the Company recognized income for the policies it processes in the amount of 30.6% of gross premiums written. The Company's estimated rate for 1997 is 31.6% and would
During 1997, the Company received other income from its excess and surplus lines. The company acted as an MGA or broker for several non-affiliated insurance companies. The Company sold this business in December, 1997.
Beginning in early 1995, the Company replaced its Chief Executive Officer and Chief Financial Officer and began an intensive and ongoing effort to recruit additional management. New management has taken a number of actions to stabilize and improve the Company's financial condition through significant cost reductions, the raising of new equity capital, and a renewed emphasis on the proper mix of both risk and non-risk fee-based businesses. As a result of these actions and the relative stabilization of reserves, the Company was profitable in 1997, 1996 and 1995 and resumed limited underwriting activities in 1996.
Property and casualty premiums earned for the year ended December 31, 1997 decreased $0.6 million, or 11.8% 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 $0.3 million or 67.4% to $0.2 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 run-off the policies in existence at the sales date.
Policy acquisition costs for the year ended December 31, 1997 and 1996 were $1.4 and $1.8 million, respectively. The $0.4 million decrease is due to reduction in net premiums written in the property and casualty segments and a decrease in policy acquisition costs associated with the credit life segment.
Net credit life premiums earned for the year ended December 31, 1996 decreased $0.4 million, or 46%, to $0.5 million from $0.9 million for the year ended December 31, 1995
Other income for the years ended December 31, 1996 and 1995 was $0.2 million and $0.8 million, respectively. Other income in 1995 includes a gain from the settlement of litigation.
Property and casualty loss and loss adjustment expenses incurred decreased $5.8 million, or 32.9%, to $11.8 million from $17.6 million for the year ended December 31, 1995. This decrease largely corresponds to the decrease in property and casualty premiums earned and also reflects a smaller provision for prior year losses of $1.1 million in 1996 as compared to $3.4 million in 1995. See "Loss and Loss Adjustment Expense Reserves."
Interest expense was $0.2 million and $0.3 million for the years ended December 31, 1996, and 1995, respectively. The majority of the interest expense during both years related to interest paid on notes payable to one of the Company's principal shareholders. The Company repaid these notes in full on May 1, 1996.
Loss and loss adjustment expenses reserves are estimates at a given point in time of the amount of claims that the insurer expects to pay claimants plus investigation and litigation costs, based on facts and circumstances then known. It can be expected that the ultimate liability in each case will differ from such estimates. During the loss settlement period, additional facts regarding individual claims may become known and, consequently, it becomes necessary to refine and adjust the estimates of liability.
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.
These anticipated trends are monitored based on actual developments and are modified as necessary. The Company does not discount its loss and LAE reserves.
The above claims involve four Superfund sites, seven asbestos or toxic claims, four underground storage tanks and 32 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.
Net cash used in operations totaled $2.4 million for 1997, a substantial improvement over $12.9 million in 1996 and $21.7 million in 1995. As a result of its decision to suspend risk taking activities in 1995, the Company's stream of direct premium collections was eliminated for the first six months of 1996. However, the company continued to pay losses and loss adjustment expenses totaling $25.4 million in 1996, of which $16.3 million represented loss payments on prior year claims. Total losses paid in 1997 declined to $19.8 million, which included $10.9 million from prior years. The 1997 losses paid included Universal's loss experience for the month of December 1997. Direct Premium collections in 1997 prior to the acquisition of Universal were minimal.
Financing activities in 1997 provided $6.3 million in cash. The June 1997 public offering raised approximately $8.6 million, of which $2.9 million was used to repay notes associated with the Innovative acquisition.
- - In June, 1997, the Company lead a public equity offering. A total of 2,853,089 shares were offered at $7.00 per share. 1,853,089 of the 2,853,089 shares were offered by a former shareholder, and 1,000,000 shares were offered by the Company. Subsequent to the offering, the Underwriters exercised an over-allotment option to purchase 427,963 additional shares at $7.00 per share. Proceeds from the offering totaled $9,996,000 and net proceeds to the Company were $9,296,000 after the underwriters 7% commission and after all related issuance costs. Approximately half of the proceeds were used in items related to the Universal acquisition, another $1.8 million was used for the Sunshine investment and the remainder was used for working capital.
- - In the fourth quarter of 1997, subsidiaries of the Company acquired notes payable to a financial institution in the amounts of $825,000 and $2,750,000 in connection with the acquisition of Innovative by the Company. The $825,000 is a long term loan, the proceeds of which were used for permanent working capital. The $2,750,000 loan is a short term revolving line of credit used to finance the accounts of a subsidiary premium finance company, Premium Budget Plan. As of December 31, 1997, $1,909,000 was outstanding on this line of credit.
- - In the fourth quarter, 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.
The Company is a legal entity separate and distinct from its subsidiaries. As a holding company, the primary sources of cash needed to meet its obligations, including principal and interest payments with respect to any indebtedness, are dividends and other permitted payments from its subsidiaries and affiliates.
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 lesser of (i) 10% of 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.
The South Carolina Insurance Holding 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 SCIC's surplus as regarding policyholders as shown in the insurer's most recent annual statement or (ii) SCIC's net income, not including realized capital gains or losses as shown in the insurer's most recent annual statement.
The Company has unused tax operating loss carryforwards and capital loss carryforwards of approximately $92.9 million for income tax purposes. However, due to a "change in ownership" event that occurred in January, 1995, the Company's use of the carryforwards are subject to limitations in future years of approximately $2 million per year. Net operating loss carryforwards available for use in 1998 is approximately $7.2 million, due to tax losses incurred in 1995 subsequent to the change in ownership event and the carryover of previous years' unused limitations.
Based on its recent earning history, the Company has established a valuation allowance of $12.6 million against the net deferred tax asset as December 31, 1997.
The Company, and its subsidiaries began evaluating the Year 2000 compliance issue in early 1997 and developed a plan that had the Company 40% compliant by December 31, 1997. The Company expects that it will be 95% compliant by December 31, 1998 and, 100% compliant by June 30, 1999. As of December 31, 1997, the Company has spent approximately $25,000 on the Year 2000 compliance issue and expects total costs to be approximately $300,000, which the Company will fund out of current operating funds primarily in 1998.
We have audited the accompanying consolidated balance sheets of The Seibels Bruce Group, Inc. (a South Carolina corporation) (the Parent Company) and subsidiaries (collectively the "Company"), as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
In our opinion, the financial statement 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, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Year Ended December 31, (Dollars shown in thousands)
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended December 31, (in thousands)
For purposes of the 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 Statement 115, investments in debt and equity securities are classified as either held-to-maturity, available for sale or trading. The Company currently holds these 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 shareholders' equity. The fair values of cash and short-term investments approximate carrying value because of the short maturity of those instruments.
Premium and agents' balances are carried at their historical costs which approximate fair value as a result of timely collections and evaluations of recoverability with a provision for uncollectable amounts.
Property and casualty premiums are reflected in income when earned as computed on a monthly pro-rata method. Written premiums and earned premiums have been reduced by reinsurance placed with other companies, including substantial amounts related to business produced as a servicing carrier.
Credit life premiums are reflected in income when earned as computed on a monthly pro-rata method for level term premiums and on a sum-of-the-digits method for decreasing term premiums.
Policy acquisition costs attributable to property and casualty operations represent that portion of the cost of writing business that varies with and is primarily related to the production of business. Such costs are deferred and charged against income as the premiums are earned. The deferral of policy acquisition costs is subject to the application of recoverability tests to each primary line or source of business based on past and anticipated underwriting results. The deferred policy acquisition costs that are not recoverable from future policy revenues, if any, are expensed. The Company considers anticipated investment income in determining whether premium deficiencies exist.
Basic per share data is based on the weighted average number of shares outstanding of 7,001,552 in 1997 (4,918,346 in 1996 and 4,181,000 in 1995). Diluted per share data is based on the weighted average number of shares outstanding of 7,273,971 in 1997 (5,491,553 in 1996 and 4,239,556 in 1995). Stock options and/or convertible preferred stock had a dilutive effect on income per share in 1997, 1996 and 1995.
Property, equipment and software are stated at cost and, for financial reporting purposes, depreciated on a straight-line basis over the estimated useful lives of the assets. For income tax purposes, accelerated depreciation methods are used for certain equipment. Software development cost as well as purchased software is capitalized when it is expected to have a useful life of at least three years and is considered a major enhancement or a new project.
FASB Statement No.131 "Disclosures about Segments of an Enterprise and Related Information" has been issued and becomes effective in 1998. This statement requires public enterprises to report financial and descriptive information about its reportable operating segments, formatting those segments in a manner that coincides with the way in which management regularly reviews the business and formulates decisions. The Company has not elected early adoption of this statement and does not believe that adoption will result in a significant impact to the financial statements.
Realized gains (losses) on investments are summarized as follows (in thousands):
Unrealized gains and losses reflected in equity are as follows (in thousands):
The amortized cost and estimated market values of investments in debt and equity securities were as follows (in thousands):
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, 1997 by contractual maturity, are as follows (in thousands):
The Company uses the liability method in accounting for income taxes. Deferred taxes are determined based on the estimated future tax effects of difference between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. A reconciliation of the difference between income taxes (benefit) on income from operations computed at the federal statutory income tax rate is as follows (in thousands):
Deferred tax liabilities and assets at December 31, 1997 and 1996, are comprised of the following (in thousands):
The Company has unused tax operating loss carryforwards and capital loss carryforwards of $92.9 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 1998 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.
A part of the Company's reserve for losses and LAE is set aside for environmental, pollution, and toxic tort claims. These claims relate to business written by the previously owned West Coast operation prior to 1986. On June 7,1994, the Company settled a dispute relative to approximately 400 of these claims. Any future liability on these claims is limited to 50% of the direct loss and LAE paid. The Company's obligation does not begin until the other company pays out subsequent to June 7,1994, a total of $ 20 million in losses and LAE paid, net of reinsurance. As of December 31, 1997 and 1996, $7.5 and $4.2 million respectively of claims payments have been made (gross of reinsurance) since June 7, 1994. A portion of the reinsurance on this business was placed with a reinsurer currently operating under the supervision of its state regulator. Estimates of any obligations of the Company take into account potential recoverable amounts.
Of the remaining environmental, pollution and toxic tort claims, the following activity took place during 1997 and 1996:
In estimating the liability for reported and estimated losses and adjustment expenses related to environmental and construction defect claims, management considers facts currently known along with current state of the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, management can reasonably estimate its liability. Usually there are several different insurers participating in the defense and settlement with ultimate costs pro-rated by either time on the risk or policy limits. In exposures on both known and unasserted claims, estimates of the liabilities are reviewed and updated continually. The potential development of losses is restricted by policy limits.
The following table summarizes net property and casualty losses and LAE incurred (in thousands):
Innovative's subsidiary, Universal, writes property and casualty insurance primarily in North Carolina, where the company is domiciled. It finances a portion of its business through PBP, Inc., its premium financing subsidiary. Universal's primary line is nonstandard automobile insurance. The results of operations for the month of December are included in the consolidated financial statements of the Company.
The following unaudited proforma consolidated results of operations for 1997 and 1996 give effect to the acquisition as though it had occurred at the beginning of each year presented. The dividend on the preferred stock has been considered.
The ability of the Company to declare and pay cash dividends, as well as to service any debt, is dependent to some degree upon the ability of South Carolina Insurance Company (SCIC) and Universal to declare and pay dividends to the Company.
The South Carolina Insurance Holding Company Regulatory Act provides that, without the 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 SCIC's surplus as regarding policyholders as shown in the insurer's most recent annual statement or (ii) SCIC's net income, not including realized capital gains or losses as shown in the insurer's most recent annual statement.
The Company's insurance subsidiaries' assets, liabilities and results of operations have been reported on the basis of GAAP, which varies from statutory accounting practices ("SAP") prescribed or permitted by insurance regulatory authorities. Prescribed statutory accounting practices are found in a variety of publications of the National Association of Insurance Commissioners ("NAIC"), state laws and regulations, as well as through general practices. The NAIC is currently involved in a project that would codify statutory accounting principles, which will then constitute the only source of "prescribed" statutory practices. When complete, that project will most likely alter the definition of prescribed versus permitted statutory accounting practices and may result in changes to the accounting policies that insurance companies use to prepare their statutory financial statements. The principal differences between SAP and GAAP, are that under SAP: (1) certain assets that are not admitted assets are eliminated from the balance sheet, (2) acquisition costs for policies are expensed as incurred, while they may be deferred and amortized over the estimated life of the policies under GAAP, (3) no provision is made for deferred income taxes and (4) valuation allowances are established against investments. Each of the Company's insurance subsidiaries must file with applicable state insurance regulatory authorities an "Annual Statement" which reports, among other items, net income (loss) and shareholders' equity (called "surplus as regards policyholders" in property and casualty reporting).
A reconciliation between GAAP shareholders' equity and statutory capital and surplus, at December 31, is as follows (in thousands):
The Company currently has three plans under which stock options, incentive stock and restricted stock may be granted to employees, non-employee directors, consultants and active independent agents of the Company. Under the plan for employees and independent agents, stock options expire five (5) years after the date of grant. Under the plan for non-employee directors, the options expire ten (10) years from the date of grant. Each plan is administered by a committee appointed by the Board of Directors.
All grants made under the Plan have exercise prices no lower than the market price at the date of grant. At December 31, 1997, 410,980 shares of the Company's common stock have been reserved for future grants. The following table summarizes options outstanding and exercisable by price range as of December 31, 1997.
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, 1995 and 1996, 8,750 shares were granted at an exercise price of $3.50 and $10.50, respectively. In addition, on June 15, 1997, 12,500 shares were granted at an exercise price of $7.19.
During 1996 and 1995, a total of 57,125 options were granted at an average exercise price of $8.40 and $6.00, respectively. In 1997, 5,526 options were granted at an average exercise price of $6.37. At December 31, 1997, 84,235 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 1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro-forma amounts indicated below (in thousands except per share amounts):
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 $77,000 in 1997 and $75,000 in 1996. The following table presents the reconciliation of the obligation at December 31, 1997 and 1996 (in thousands):
Net periodic post-retirement benefit cost includes the following components for 1997, 1996 and 1995 (in thousands):
The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was 8% for 1997 and 9% for 1996 and 1995 is assumed to decrease to a 5.5% ultimate trend (5.5% in 1996 and 1995) with a duration to ultimate trend of six years (six years in 1996 and 1995). The health care cost trend rate assumption has an effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point each year would increase the post-retirement benefit obligation as of December 31, 1997 by $9,000.
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, 1997, the amount of assets available for the plan benefits, based on information currently available, was $10,900,596.
The profit-sharing element of the plan covers all full-time employees who have met minimum eligibility requirements. There have been no contributions to this part of the plan since 1988.
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 (in thousands):
Five reinsurers comprise a significant portion of the Company's reinsurance recoverable on paid and unpaid losses and loss adjustment expense, as well as prepaid reinsurance at December 31, 1997. The reinsurers and related balances are as follows (in thousands):
(a) The Company's and its subsidiaries lease office space, computer equipment and automobiles under several operating leases that expire at various times. Approximate minimum future lease payments under these operating leases at December 31, 1997 are as follows (in thousands):
(b) A contingent liability exists with respect to reinsurance placed with other companies. (see Note 13)
(c) Due to the nature of their business, certain subsidiaries are parties to various other legal proceedings, which are considered routine litigation incidental to the insurance business.
(d) The Company was served with a complaint dated November 7, 1997 by the Municipal Association of South Carolina which claimed it has potential deficiency of approximately $1.75 million with respect to certain South Carolina municipality taxes. Management and legal counsel believe that the Company has basis for nonpayment of such amounts and the Company believes that it has adequately reserved in its financial statements with respect to this claim.
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 in 1996 and $1.8 million in 1995.
and flood compliance tracking. Graward is a general agent that writes non standard automobile insurance. The combined purchase price for the transactions is estimated at $12.9 million and will be funded through a bank loan of $9.7 million and convertible debt and preferred stock for a total of $3.2 million.
SUPPLEMENTARY DATA QUARTERLY FINANCIAL INFORMATION (unaudited) (in thousands, except per share amounts)
The following is a summary of unaudited quarterly information for the years ended December 31, 1997 and 1996: