The following selected historical financial data for each of the five years ended December 31, 1999 is derived from the audited consolidated financial statements of the Company. The selected data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying notes included elsewhere herein.
The Company is a provider of automobile, flood and other property and casualty insurance products. The Company is committed to providing quality customer service, building strong agent relationships, developing and capitalizing on territorial knowledge and fostering the creativity and innovation of its people.
The Company seeks to balance fee-based operations with selective risk underwriting to increase the Company's value for its shareholders, agents and employees by pursuing maximum growth with limited risk exposure.
Net (loss) income by business segment is as follows for 1999, 1998 and 1997:
The net losses experienced in 1999 are primarily related to the Company's automobile business. High loss and expense ratios in the Company's Nashville operation, coupled with an unsuccessful attempt to consolidate it with the Company's North Carolina operations, caused significant losses for both operations. Furthermore, extreme growth and high loss ratios typically associated with a new and growing book of business resulted in significant losses in the Company's South Carolina voluntary automobile business.
these claims, including adjusting expenses. However, the SC Facility does reimburse the Company in full for legal expenses associated with processing these claims.
In December 1997, the Company purchased Universal. SCIC had written business in North Carolina for many years. With the purchase of Universal, the Company combined its North Carolina operations. The use of two companies in the state, each rating in two tiers, is a great advantage to the nonstandard automobile operations.
Physical damage coverage is retained on voluntary business in North Carolina, as the NC Facility does not reinsure this coverage. Liability coverage, however, is reinsured 100% in the NC Facility. Companies ceding liability coverage to the NC Facility receive an expense allowance for processing the business and a claims allowance for adjusting the claims on that business. Every company that transacts business in North Carolina is a member of the NC Facility. SCIC is also a member of the Board of Governors of the NC Facility. Both Universal and SCIC write physical damage coverage and voluntary liability coverage in addition to the liability coverage ceded to the NC Facility.
In addition, the Company's flood product line now includes flood insurance, excess flood insurance, flood zone determinations, claims processing and compliance tracking as discussed. The Company's basic flood insurance products are underwritten by the NFIP, a federal government program that sets the policy rates, bears the risks and pays the claims. Seibels Bruce, working with independent agents throughout the United States, issues the policies and processes the claims. NFIP policies cover up to $250,000 in damage per home; however, this level of coverage is inadequate for many larger homes. Excess flood insurance provides coverage for larger, more expensive homes. The Company's excess flood products allow it to insure homes up to the full replacement value. For the Company's agents, this product allows them to expand their customer base to include more affluent individuals. Seibels Bruce, for its part, receives additional, non risk-bearing income since it acts as a broker of this product. It also improves the Company's agent relationships by offering a broader product portfolio.
To further leverage the Company's leadership position, in March 1998, it acquired AFS. Headquartered in Rancho Cordova, California, AFS provides flood zone determinations, flood insurance and flood compliance tracking. AFS's existing book of flood business concentrated on the West Coast is a counterbalance to Seibels Bruce's East Coast business. AFS's flood operations are primarily fee based, providing an additional balance to the Company's risk-based operations.
The Company's premium concentration in the catastrophe heavy Southeast led to the 1996 creation of a catastrophe adjusting business, INS, to manage the Company's internal claims volume. INS currently offers three services: catastrophe claims handling for hurricanes, tornadoes, hailstorms, earthquakes and
There were no credit life premiums earned for the year ended December 31, 1999 as this operation is nearing completion of its runoff.
Realized gains for the year ended December 31, 1999 consists of a gain on the sale of one of the Company's insurance subsidiaries, KIC, of $0.2 million and a gain on the sale of one of the Company's vacant buildings of $0.2 million. These gains were offset by losses of $0.1 million related to the write off of certain leasehold improvements of the Nashville operation associated with the renegotiation of its lease for office space.
Policy fees and other income for the year ended December 31, 1999 increased 2.9%, or $0.2 million, to $4.8 million from $4.6 million for the year ended December 31, 1998. This increase is due primarily to a full year of operations with Graward, which was acquired in May 1998, versus only seven months of operations during 1998.
Property and casualty losses and loss adjustment expenses for the year ending December 31, 1999 increased $20.7 million, or 81.8%, to $46.0 million from $25.3 million for the year ended December 31, 1998. This increase is due to the Company's higher than expected losses on the increased premiums earned in 1999.
Commission and service income for the year ended December 31, 1998 increased $5.2 million or 11.8% to $49.3 million from $44.1 million for the year ended December 31, 1997. Of this increase, $2.3 million relates to flood premium-based fees on a $6.9 million increase in flood written premiums while $0.7 million relates to flood claim-based fees and $1.3 million relates to flood zone determinations. Fees generated by acting as an MGA for another insurance company decreased $4.3 million as that contract was terminated in February 1998. However, this was more than offset by a $5.2 million increase in various state facility premium and claim-based fees.
Property and casualty premiums earned for the year ended December 31, 1998 increased $16.2 million, or 245.9% to $22.8 million from $6.6 million for the year ended December 31, 1997. This increase is due to a $14 million increase in nonstandard automobile premiums and a $2.2 million increase in commercial multi-peril premiums. The increase in nonstandard automobile earned premiums is a result of
re-entering the voluntary market in South Carolina, the purchase of Universal in December 1997 and the purchase of Graward in May 1998. The increase in commercial multi-peril earned premiums is a result of switching from a MGA status to a retained risk status in February 1998.
Net investment and other interest income for the year ended December 31, 1998 increased 19.5% or $0.8 million to $4.6 million from $3.9 million for the year ended December 31, 1997. This increase is due to a $12.5 million increase in 1998 in cash and investments. The average investment yield for the Company remained at 5.9% for the year.
The decrease in realized gains of $0.5 million is primarily attributable to a nonrecurring gain of sale of one of the Company's buildings of $0.3 million during 1997.
Policy fees and other income for the year ended December 31, 1998 increased 4,047.3% or $4.5 million to $4.6 million from $0.1 million for the year ended December 31, 1997. This increase is almost entirely due to policy fee income generated by Graward which was acquired in May 1998.
The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. While anticipated price increases due to inflation are considered, an increase in average severity of claims may be caused by a number of factors that vary with the individual type of policy written. Future average severity is projected based on historical trends as adjusted for changes in underwriting standards, policy provisions, and general economic trends.
The following table reflects the loss and LAE development for 1999 and 1998 on a GAAP basis:
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 Company's 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
Because only 44 claims remain open as of December 31,1999, 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.
Net cash used in operations totaled $1.0 million for 1999, compared to net cash provided of $8.0 million in 1998 and a net cash use of $2.4 million in 1997. Significant sources and uses of cash flows from operating activities included uses of $10.0 million due to a decrease in unearned premiums, of which $7.1 million related to retained business. The decrease was due to a quota share reinsurance contract entered into in the fourth quarter of 1999 whereby the Company ceded 75 percent of its unearned premium portfolio from its nonstandard automobile operations. Another significant use of funds was related to balances due other insurance companies, which decreased by $18.6 million in 1999. The decrease was due to the Company not reinsuring its automobile lines until late in the fourth quarter and running off the prior reinsurance contract, which expired in April 1999. A decrease in the unpaid loss and loss adjustment expenses used $6.1 million as a result of the Company's efforts to settle aged claims. Significant sources of funds resulted from a reduction in reinsurance recoverable on losses and LAE of $21.1 million due to the Company's running off old automobile reinsurance contracts and the SC Facility switching to monthly reimbursements due the Company for its premium processing and claims adjudication services. An additional $6.6 million and $1.2 million of cash was provided from collections of premiums and agents' balances receivable and premium notes receivable, respectively, due to the Company's increased collections efforts.
Investing activities in 1999 provided cash in the amount of $5.8 million. A major source of funds from investing activities came from the sale of one of the Company's insurance subsidiaries, KIC. KIC was sold in the fourth quarter for $3.1 million. The Company also sold a vacant building it owned in the third quarter for $433. Proceeds from investments sold or matured totaling $20.3 million were partially used to purchase new investments totaling $16.6 million. The Company purchased property and equipment totaling $1.5 million for the year.
dividends may only be paid out of positive earned surplus unless approved by the Commissioner. As of December 31, 1999, SCIC had negative earned surplus.
The North Carolina Insurance Holding Company System Regulatory Act provides that, without prior approval of the Commissioner of Insurance of the State of North Carolina, dividends within any 12-month period may not exceed the lessor of (i) 10% of a domestic insurer's surplus as regarding policyholders as of the preceding December 31 or (ii) the net income, not including realized capital gains, for the 12-month period ending the preceding December 31. For 2000, no dividends are available from Universal to the Company.
Payment of cash dividends by the Company is at the discretion of its Board of Directors and is based on its earnings, financial condition, capital requirements, and other relevant factors. If the ability of SCIC and the Company's other insurance subsidiaries to pay dividends or make other payments to the Company is materially restricted by regulatory requirements, it could affect the Company's ability to service its debt and/or pay dividends. In addition, no assurance can be given that North Carolina or South Carolina will not adopt statutory provisions more restrictive than those currently in effect.
The Company has determined, based on its recent earnings history, that a valuation allowance should be maintained against the deferred tax asset at December 31, 1999 and 1998.
Some of the statements discussed or incorporated by reference in this annual report on Form 10-K are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding management's current knowledge, expectations, estimates, beliefs and assumptions. All forward-looking statements included in this document or incorporated by reference are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. Results may differ materially because of both known and unknown risks and uncertainties which the Company faces. Factors which could cause results to differ materially from our forward-looking statements include, but are not limited to:
- the possibility that the Company will be unable to meet its cash flow requirements; the Company has suffered losses in recent years and the Company may continue to experience losses in the future;
In the first quarter of 1998, the Company purchased America's Flood Services, Inc. ("AFS") located in California. AFS offers fee-based flood zone determinations and compliance tracking services. In the second quarter of 1998, the Company acquired Graward General Companies, Inc. ("Graward") located in Tennessee. Graward acts as an MGA for the Company, offering nonstandard automobile insurance in the Southeast and Midwest. In the fourth quarter of 1998, the Company was awarded fifty percent of the business, as a servicing carrier, of the South Carolina Associated Auto Insurers Plan ("SCAAIP"), a joint underwriting association which was effective March 1, 1999. 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 can still cede renewals to the SC Facility until March 1, 2000, at which time final runoff of the SC Facility will commence. The SCAAIP will survive the SC Facility and offers the Company access to additional fee-based revenue with no underwriting risk.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") and include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Certain prior year balances have been reclassified to conform with the current year presentation.
To mitigate the losses experienced during 1999, the Company has taken several significant actions. The North Carolina operation has been moved back to Winston-Salem, North Carolina. The North Carolina operations incurred approximately $2 million in expenses related to the move to Nashville and the subsequent move back to Winston-Salem. After the move of the North Carolina operations back to North Carolina, the Nashville operation was left with excess capacity and staffing. In the third quarter of 1999, the Company began cutting its payroll and renegotiated its facilities lease to give up excess space. Other cost control measures and activities consolidations were also implemented to further reduce the Nashville operation's expense ratios. Concurrent with these measures, the Company began a critical profitability review of the Nashville operation's book of business that resulted in a reduction of authorized independent agents and more stringent underwriting guidelines. These measures were designed to improve
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) the profitability of a core book of business. While the actions were implemented in 1999, the full benefit of the changes and cost control measures will not be realized until the first quarter of 2000.
The losses experienced in the South Carolina operations source primarily from two factors. First, the Company wrote approximately $22 million in voluntary nonstandard automobile insurance during the ten months since the runoff of the SC Facility began on March 1, 1999. This rapid growth negatively affected earnings due to the front-end staffing and facilities growth required for a growing premium base. Secondly, the South Carolina book of business experienced higher than average loss ratios caused by the growing book's lower earned premium base and acceptance of higher insurance risks. The Company is currently in the process of reviewing this entire book of business and implementing cost containment measures designed to improve existing loss and general expense ratios.
While the Company does face considerable challenges in 2000, management is of the opinion that the actions taken to mitigate the losses experienced in 1999 will be effective and that it will be able to maintain compliance with existing capital and surplus, debt and operational requirements.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities", investments in debt and equity securities are classified
Debt is carried at its outstanding balance which approximates fair value as a result of its variable market rate of interest.
The Company offers premium financing arrangements which require a down payment and payment of the remaining balance in equal installments over the policy term.
In accordance with SFAS 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
Intangible assets consist primarily of goodwill and deferred loan costs. Goodwill is the excess of the amount paid to acquire a company over the fair value of its net assets, reduced by amortization and any subsequent valuation adjustments. The Company amortizes goodwill using the straight-line method over a period not to exceed 40 years. Deferred loan costs are the costs associated with issuing long term debt. The costs are amortized over the life of the debt. Intangible assets are continually evaluated to determine if a portion of the remaining balance may not be recoverable. If circumstances suggest that their value may be impaired and the write-down would be material, an assessment of recoverability is performed and any impairment is recorded through a valuation allowance with a corresponding charge recorded in the income statement.
Effective January 1, 1998, the Company adopted SFAS Statement No. 130, "Reporting Comprehensive Income". This statement establishes standards for reporting and display of comprehensive income and its components. Comprehensive income is a measure of all non-owner changes in equity of an entity and includes net income (loss) plus changes in certain assets and liabilities that are reported directly in equity.
Effective January 1, 1998, the Company adopted the provisions of SOP 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments", and recorded it as a cumulative effect of a change in accounting principle of $601. As a result, the Company's participation in the North Carolina Facility is no longer being treated as assumed reinsurance and all amounts assumed from the NC Facility have been eliminated. The NC Facility is now treated as an assessment organization. The effect of the change in accounting principle was a reduction of $.08 per share on both a basic and diluted basis. Below are the pro forma (loss) earnings per share for the twelve months ended December 31, 1998 and 1997, respectively, assuming the change in accounting principle was applied retroactively:
During the second quarter of 1998, the Company recorded a pre-tax restructuring charge of $546 related to the consolidation of its automobile and claims operations. The charges relate to employee severance and other termination benefits incurred in connection with moving the processing of the Company's automobile insurance business from Winston-Salem, North Carolina to Nashville, Tennessee and from the consolidation of claims management and staff positions in the Columbia, South Carolina office. All liabilities associated with the restructuring were paid in 1998.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statements establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. This statement could increase volatility in earnings and other comprehensive income. The effective date of this statement was amended by SFAS No. 137 and, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133 effective January 1, 2001. SFAS No. 133 is not expected to have a material impact on the Company's financial position or results of operations.
Investments in debt and equity securities are considered available-for-sale securities and are carried at market value at December 31, 1999 and 1998. Short-term investments are carried at cost, which approximates market value.
Proceeds from sales of debt and equity securities and the related realized gains and losses are as follows:
There were no non-income producing debt securities for the 12 months ended December 31, 1999, 1998 and 1997. Debt securities with an amortized cost of $23 million at December 31, 1999 and $25 million at December 31, 1998, were on deposit with regulatory authorities.
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, 1999, by contractual maturity, are as follows:
Effective March 31, 1998 the Company entered into a $15,000,000 credit facility (the "Facility") with a major lending institution for the purpose of financing its acquisitions activity and other general corporate purposes. Security for the Facility includes substantially all of the Company's assets. Principal payments are due quarterly beginning March 1999 with a final payment of all remaining principal and accrued interest due in June 2004. Accrued interest is payable monthly on the outstanding balance under the Credit Facility and is calculated, at the Company's discretion, using a pre-determined spread over LIBOR or the prime interest rate of the lending institution. The effective interest rate was 8.94% on December 31, 1999 and was 8.31% on December 31, 1998. The Credit Facility is secured by a lien on the assets of the Company.
The Credit Facility stipulates that the Company demonstrate compliance with a number of affirmative and negative covenants on a quarterly basis. Significant financial covenants include minimum statutory capital and surplus levels, ratios of debt to total capitalization and cash flow coverage. As of December 31, 1999, the Company was either in compliance with, or had obtained waivers of non-compliance for, all covenants.
NOTE 6 INCOME TAXES (CONTINUED) The Company uses the liability method in accounting for income taxes. A reconciliation of the income tax (benefit) provision to that computed by applying the statutory federal income tax rate to (loss) income before income taxes is as follows:
NOTE 6 INCOME TAXES (CONTINUED) The Company has determined, based on its recent earnings history, that a valuation allowance should be maintained against the deferred tax asset at December 31, 1999 and 1998.
A part of the Company's reserve for losses and loss adjusting expenses ("LAE") is set aside for environmental, pollution, and toxic tort claims. These claims relate to business written by the Company's 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 involved in the settled dispute pays, subsequent to the settlement date, a total of $20 million in losses and LAE. As of December 31, 1999 and 1998, $13.8 million and $8.7 million, respectively, of claims payments have been made by the other company since the settlement date.
The policies corresponding to these claims were written on a direct basis. The Company has excess of loss reinsurance with company retention through 1980 of $100 and $500 after that date. The claims are reserved as follows as of December 31, 1999 and 1998:
Effective October 14, 1999, the Company sold Kentucky Insurance Company, one of its insurance company subsidiaries to an unrelated party for a gain of $243,000 calculated as follows:
The operations of Kentucky Insurance Company generated income of $113, $4 and $171 during 1999, 1998 and 1997, respectively.
Effective May 1, 1998, the Company acquired all of the issued and outstanding shares of common stock of Graward. Consideration in the transaction included cash of $7.5 million and Subordinated Convertible Notes ("Notes") with a principal amount of $2.7 million (See Note 5). The Company accounted for the transaction as a purchase. The excess purchase price over the fair value of the assets was $16.2 million. The Company has delivered to the sellers of Graward, a final balance sheet as required under the purchase agreement (See Note 15(e)). The final balance sheet identifies purchase price adjustments totaling approximately $6 million which the Company believes are valid reductions in the resolution of the purchase price and expects an eventual reduction in the purchase price and a resulting reduction in the goodwill recorded above. Interest accruals and payments on the notes were suspended after the delivery of the final balance sheet.
Effective March 31, 1998, the Company acquired all of the issued and outstanding shares of common stock of AFS. Consideration in the transaction included cash of $2.1 million and 50,000 shares of $0.625 Cumulative, Convertible, Redeemable, Nonvoting Special Preferred Stock (See Note 9) of the Company. The Company accounted for the transaction as a purchase. The excess purchase price over the fair value of the assets was $2.3 million.
On March 31, 1998, the Company issued 50,000 shares of $0.625 Cumulative, Convertible, Redeemable, Nonvoting Special Preferred Stock ("$0.625 Special Stock") in connection with its acquisition of AFS. The Company determined the value of the $0.625 Special Stock at the issuance date to be $500. The $0.625 Special Stock pays quarterly dividends at an annual rate of $0.625 per share. The Company paid $31 and $23 in special stock dividends in 1999 and 1998, respectively. On or after August 15, 2000, but prior to August 15, 2002, the Company, at its option, may redeem in whole or in part the $0.625 Special Stock at a price of $15.00 per share. On August 15, 2002, the Company must redeem any remaining shares at a rate of $10.00 per share. On or after August 15, 2000, but prior to August 15, 2002, holders of the shares have the right to convert each share of the $0.625 Special Stock into 1.25 shares, or a total of 62,500 shares, of the Company's common stock.
NOTE 9 SPECIAL STOCK AND DIVIDEND RESTRICTIONS (CONTINUED) 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 pays quarterly dividends at an annual rate of $0.62 per share. The Company paid $137 in Special Stock dividends in 1999 and 1998. On or after August 15, 2000, but prior to August 15, 2002, the Company, at its option, 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 1.25 shares, or a total of 275,000 shares, of the Company's common stock.
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 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).
NOTE 11 STATUTORY REPORTING (CONTINUED) A reconciliation between GAAP net (loss) income and statutory net (loss) income of the property and casualty insurance subsidiaries is as follows for the year ended December 31:
The 1996 Stock Option Plan for Employees (the "Employees Plan") became effective on November 1, 1995. The Employees Plan has reserved 2,500,000 shares of the Company's common stock for issuance under the plan as options and incentive stock to employees and consultants of the Company. Activity in the Employee Plan is summarized as follows:
NOTE 12 BENEFIT AND STOCK OPTION PLANS (CONTINUED) All grants made under the Employees Plan have exercise prices no lower than the market price at the date of grant. At December 31, 1999, 1,006,567 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, 1999.
The Company has adopted the disclosure-only provisions of SFAS 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 1999, 1998, and 1997 consistent with the provisions of SFAS No. 123,
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, 1999, the amount of assets available in the Plan, based on information currently available, was $12,936.
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 contributions to the Plan on behalf of the participating employees was $271, $68 and $72 in 1999, 1998 and 1997, respectively.
The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was 6% for 1999, 7% for 1998 and 8% for 1997 and is assumed to decrease to a 5% ultimate trend (5% in 1998 and 1997) with a duration to ultimate trend of 2 years (three years in 1998 and four years in 1997). 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, 1999 by $4.
NOTE 13 SEGMENT REPORTING (CONTINUED) The reportable segments were determined based on management's internal reporting approach, which is focused on product line and complementary coverages. The reportable segments are comprised of Automobile, Flood, Commercial and All Other. The Automobile segment includes all personal lines components of retained risk nonstandard automobile, NC Facility and SC Facility operations. The Flood segment contains all flood operations including NFIP, flood zone determinations, excess flood and flood compliance tracking, as well as the complementary homeowners product line and the Company's insurance adjusting business. The Commercial segment includes all commercial operations, as well as the commercial automobile activity for the NC Facility and SC Facility. The All Other segment includes the runoff operations of the Company. The results of the reportable segments are included as follows:
The Company's property and casualty insurance operations include a retained risk component and a servicing carrier component. A significant percentage of the risk business is ceded through several reinsurance programs including pro-rata and excess of loss. In its servicing carrier operation, premiums are ceded entirely to the applicable state's reinsurance facility or to the NFIP. 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, 1999 is as follows:
The Company believes that the balances due from the SC Facility, the NC Facility and the NFIP are fully collectable due to the governmental agency's ability to assess policyholders and member companies for deficiencies. The remaining recoverables due from nonaffiliated reinsurance companies have also been deemed fully collectable by the Company.
(a) The Company and its subsidiaries lease office space, computer equipment and automobiles under several operating leases that expire at various times. Lease expense amounted to $1,584, 1,543 and $425 in 1999, 1998 and 1997 respectively. Approximate minimum future lease payments under these operating leases at December 31, 1999 are as follows:
During the fiscal year ended December 31, 1999, 1998 and 1997, the Company paid a total of $350, $522 and $483 to SADISCO Corporation ("SADISCO") respectively. Of which, in 1999, 1998, and 1997, $73, $54 and $96 respectively was for salvage and disposal services provided to the Company in the ordinary course of business and $277, $468 and $387 respectively was for reimbursement of expenses advanced by SADISCO on behalf of the Company in connection with such services. Charles H. Powers, chairman of the Company's Board of Directors and member of the Board of Director's Compensation Committee, is the owner and operator of SADISCO.
The following is a summary of unaudited quarterly information for the years ended December 31, 1999 and 1998:
During the first and second quarters of 1999, commission and service income continued a decline that began in the fourth quarter of 1998 due to further decreases in written premium for 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 can still cede renewals to the SC Facility until March 1, 2000, at which time final runoff of the SC Facility will commence. Commission and service income showed significant increases in the third and fourth quarters of 1999 over the second quarter of 1999 due to a significant increase in hurricane-related claims for the SC Facility, the NC Facility and the NFIP.
Premiums earned continued the upward trend experienced throughout 1998 for the first three quarters of 1999 due to the Company's planned growth of its nonstandard automobile and commercial lines programs. Largely contributing to this premium growth is a full nine months of operations with its affiliated Managing General Agent (Graward) in 1999 versus a partial year of operations in 1998. Premiums earned decreased during the fourth quarter of 1999 due to the Company's shift of focus from overall premium growth to strengthening the quality of its existing of business. The net losses experienced in the fourth quarter of 1999 are primarily related to the Company's automobile business. High loss and expense ratios in the Company's Nashville operations, coupled with an unsuccessful attempt to consolidate two of the automobile operations, caused significant losses in both the Nashville and North Carolina operations. Furthermore, extreme growth and high loss ratios typically associated with a new book of business caused significant losses in the Company's South Carolina voluntary automobile business. Several initiatives were undertaken during the fourth quarter of 1999, all of which were designed to improve existing loss and underwriting expense ratios. These initiatives include an agent profitability review, more stringent underwriting guidelines, and implementation of underwriting expense cost control measures.
During the first quarter of 1998, the Company purchased AFS for $2.6 million, consisting of $2.1 million in cash and $0.5 million in cumulative, convertible, redeemable, nonvoting, special preferred stock (see Notes 5, 8 and 9). During the second quarter of 1998, the Company acquired Graward for a tentative purchase price of $10.3 million, consisting of $7.5 million in cash and $2.7 million in subordinated convertible notes (see Notes 5, 8 and 9).