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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31,1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO
______________
COMMISSION FILE NUMBER 0-8804
THE SEIBELS BRUCE GROUP, INC.
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0672136
State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
1501 LADY STREET (P.O. BOX 1) 29201(2)
COLUMBIA, S.C. (Zip code)
(Address of principal executive offices)
(803) 748-2000
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $1.00 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of March 24, 1999: $22,363,783.
The number of shares outstanding of the registrant's common stock as of March
24, 1999: 7,778,707.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual proxy statement in connection with the annual meeting to
be held May 19, 1999 are incorporated by reference into Part III.
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TABLE OF CONTENTS
Table of Contents....................................................................... i
Abbreviations........................................................................... ii
PART I
Item 1. Business...................................................................... 1
Item 2. Properties.................................................................... 10
Item 3. Legal Proceedings............................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders........................... 10
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters....................................................................... 11
Item 6. Selected Financial Data....................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 12
Item 8. Financial Statements and Supplementary Data................................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................... 61
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons of the
Registrant.................................................................... 62
Item 11. Executive Compensation........................................................ 64
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 64
Item 13. Certain Relationships and Related Transactions................................ 64
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K............. 64
Signatures............................................................................... 67
i
ABBREVIATIONS
The following abbreviations used in the text have the meaning set forth
below unless the context requires otherwise:
AFS..................... America's Flood Services, Inc.
FASB.................... Financial Accounting Standards Board
FEMA.................... Federal Emergency Management Administration
GAAP.................... Generally Accepted Accounting Principles
Graward................. Graward General Companies, Inc.
IBNR.................... Incurred-But-Not-Reported
INS..................... Insurance Network Services
Innovative.............. The Innovative Company
JUA..................... Joint Underwriting Association
KIC..................... Kentucky Insurance Company
LAE..................... Loss Adjustment Expenses
MGA..................... Managing General Agent
NAIC.................... National Association of Insurance Commissioners
NCCI.................... National Council on Compensation Insurance
NC Facility............. North Carolina Reinsurance Facility
NFIP.................... National Flood Insurance Plan
PBP..................... Premium Budget Plan
RBC..................... Risk Based Capital
SAP..................... Statutory Accounting Principles
The Seibels Bruce Group, Inc. (also the "Company" or "Seibels
SBIG.................... Bruce")
SBC..................... Seibels Bruce & Company
SCAAIP.................. South Carolina Associated Auto Insurers Plan
SCIC.................... South Carolina Insurance Company
SC Facility............. South Carolina Reinsurance Facility
Universal............... Universal Insurance Company
WYO..................... Write-Your-Own
ii
PART I
ITEM 1. BUSINESS
CORPORATE PROFILE AND DEVELOPMENT OF BUSINESS
(dollars in thousands except per share data)
Tracing its roots to 1869, The Seibels Bruce Group, Inc. ("Seibels Bruce" or
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.
One of Seibels Bruce's core businesses, nonstandard automobile insurance,
boasts operations spanning 11 states. In South Carolina, home of the Company's
corporate headquarters, Seibels Bruce is the only insurance provider with a
presence in all three components of the nonstandard automobile market-- the
South Carolina Reinsurance Facility ("SC Facility"), the South Carolina
Associated Auto Insurers Plan ("SCAAIP") and the voluntary market.
Seibels Bruce's other core business, flood operations, now extends well
beyond simply writing flood insurance for the National Flood Insurance Program
("NFIP") in 46 states. The Company also offers flood zone determinations, excess
flood insurance, flood compliance tracking services and claims supervision and
adjusting. Commercial lines and homeowners further complement Seibels Bruce's
product offerings.
Seibels Bruce 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.
In the fall, a planning group was formed to address the direction of the
Company; establish its mission; and set strategies and objectives toward its
accomplishment. This process examined the external environment including
competition, as well as political and regulatory issues, on a product and state
basis and, where appropriate, a national level. In each state, management then
looked at the critical success factors of product development and delivery, and
assessed these success factors against corporate strengths and weaknesses. This
process identified where the Company excelled and where improvements were
needed. Given all the above, a mission statement was established as follows:
OUR COMMITMENT
Building on a heritage of providing insurance and related products through
the independent agency system since 1869, Seibels Bruce will increase
shareholder value by:
- focusing on quality customer service;
- enhancing customer relationships and loyalty;
- capitalizing on territorial knowledge;
- fostering creativity and innovation; and
- valuing each other;
- while adhering to the highest standards of integrity.
OUR VISION
We will achieve consistent earnings through consistent performance by
focusing on growth in our core markets and by providing the complementary
products that will enhance our position in the agency plant.
1
This vision concentrates on the Company's core competencies of automobile
and flood and then surrounds them with complementary products and services to
enhance the Company's position in the agency plant. Seibels Bruce leverages its
customer and claims service, territorial knowledge and flexibility to retain and
enhance its agency and insured relationships.
Nineteen-hundred and ninety-eight was a transitional year, not only in
regards to the board and senior management, but also in the results of the
organization. For fiscal 1998, Seibels Bruce posted a net loss of $2.9 million
or ($0.39) per share, compared with net income of $4.0 million or $0.57 per
share in 1997.
By business segment, the following are 1998 results before change in
accounting principle (in thousands):
NET (LOSS) INCOME
-----------------
Automobile................................................................. $ (814)
Flood...................................................................... 24
Commercial................................................................. (2,090)
All other.................................................................. 587
-------
Total...................................................................... $ (2,293)
The above results include over $3.0 million in charges relating to events or
actions, taken in 1998, that management does not expect to re-occur, which as
detailed later in this document, emphasizes the transitional nature of 1998.
Nineteen-hundred and ninety-eight was a year in which Seibels Bruce made
significant investments in each of its business operations to position itself
for improved future financial performance and to provide for enhanced
infrastructure. In its nonstandard automobile operations, Seibels Bruce
substantially strengthened its South Carolina business and made a major
acquisition to expand the Company's geographic reach. In its flood business,
Seibels Bruce expanded its book of business and acquired a West Coast operation
that enhanced its product and service lines. In its commercial lines operations,
Seibels Bruce completed the transition from acting as a managing general agent
to writing retained risk policies. In addition, Seibels Bruce is preparing for
1999 to network with a strategic partner in commercial lines and other
complementary products to minimize its risk through reinsurance and enhanced
underwriting.
The following table sets forth the sources of the Company's revenue for the
year ended December 31, 1998 (in thousands):
AUTO FLOOD COMMERCIAL ALL OTHER TOTALS
---------- --------- ----------- ----------- ----------
Direct Written Premium................................ $ 132,788 $ 32,754 $ 15,585 $ 447 $ 181,574
Net Written Premium................................... $ 22,554 $ (19) $ 9,251 $ 440 $ 32,226
Sources of premium result from contractual processing with the SC Facility,
South Carolina voluntary business, Universal Insurance Company ("Universal") in
North Carolina, Graward General Companies, Inc. ("Graward") in Tennessee, flood
business, commercial business and runoff book premiums.
NONSTANDARD AUTOMOBILE
Entering 1998, the Company set several strategic objectives: to win the
contract to be a servicing carrier for the SCAAIP, the joint underwriting
association structure that will survive the SC Facility; to grow its business in
the voluntary market; and to seek out acquisition candidates to expand the
Company's operations into other geographic areas.
2
GRAWARD OPERATIONS
In May 1998, Seibels Bruce announced the acquisition of privately held
Graward. The company, located in Nashville, Tennessee, brought access to more
than 2,000 agents throughout Arkansas, Georgia, Indiana, Kentucky, Mississippi,
North Carolina, Ohio, Tennessee and Virginia.
Since the acquisition, Seibels Bruce has been consolidating its operations
and is working to instill the customer and agent service focus that Seibels
Bruce is known for, throughout the new, larger organization. Additionally,
Seibels Bruce is capitalizing on its territorial knowledge and agent
relationships.
UNIVERSAL OPERATIONS
In December 1997, Seibels Bruce purchased Universal, located in
Winston-Salem, North Carolina. South Carolina Insurance Company ("SCIC"), a
wholly owned subsidiary of Seibels Bruce, had written business in North Carolina
for many years. With the purchase of Universal, Seibels Bruce 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.
Graward complemented the Company's acquisition of Universal, which
underwrites nonstandard automobile insurance primarily in North Carolina. The
Graward and Universal acquisitions provided Seibels Bruce with a premium base of
approximately $71 million outside of South Carolina.
SOUTH CAROLINA OPERATIONS
The Company's strength in the South Carolina nonstandard automobile market
is based on the Company's history as a servicing carrier for the SC Facility
since its creation in 1974. Seibels Bruce continues to build its voluntary
nonstandard automobile business, a program that was launched in 1997. In
October, Seibels Bruce announced that it had been selected as one of two
insurance servicing carriers that will make up the nonstandard automobile
SCAAIP. As the SC Facility is phased out, SCAAIP will provide insurance to
drivers unable to obtain coverage in the voluntary market. This selection
distinguishes Seibels Bruce as the only insurance company to participate in all
three segments of the South Carolina nonstandard automobile insurance market.
Seibels Bruce's role as a member of all three segments, its knowledge of the
South Carolina market and the strong relationships it has established with
agents over the years gives the Company a strong competitive advantage in the
South Carolina market. Seibels Bruce is actively working to capitalize on that
advantage and has designed programs to assist agents and their driver customers
in making the transition from the SC Facility to the voluntary market. In
addition, the Company is networking with agents to provide them with tools to
enhance risk selection and underwriting of voluntary nonstandard policies.
FLOOD
Seibels Bruce's other core product line, flood operations, experienced
substantial growth in 1998. The Company's written premiums for flood increased
at a rate nearly doubling that of the NFIP. Seibels Bruce added to its
experienced flood sales force and was able to acquire several large books of
flood business from independent agents throughout the nation. This was achieved
by expanding the Company's product lines and services for the independent agent.
The Company's flood product line now includes flood insurance, excess flood
insurance, flood zone determinations, claims processing and compliance tracking.
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
3
replacement value. For the Company's agents, this product allows them to expand
their customer base to include more affluent individuals. Seibels Bruce receives
additional, non risk-bearing income since it acts as a broker of this product,
and allows the Company to improve its agent relationships by offering a broader
product portfolio.
To further leverage the Company's leadership position, in March 1998, it
acquired America's Flood Services, Inc. ("AFS"). Headquartered in Gold River,
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.
Flood zone determinations and flood zone mapping are services provided
primarily to mortgage originators, for determining whether homes are located in
flood zones and require flood insurance. These capabilities, through AFS, allow
the Company to offer more complete services to agents and institutions, provide
it with an even stronger presence in the flood market and expand the channels of
distribution for the Company's products.
Claims processing has been a major revenue and earnings component for
Seibels Bruce over the past several years and is a weather dependent piece of
the Company's flood operations. Whereas most property and casualty insurance
companies suffer risk-based losses during hurricanes and floods, Seibels Bruce
benefits strongly as a fee-based processor of claims for the NFIP. The addition
of AFS gives the Company a presence for flood claims processing on both coasts,
an important element of diversification and scale for weather dependent
operations.
In 1998, Seibels Bruce launched bundled homeowners' and flood product in
South Carolina. This complementary product boosted flood sales and gave the
Company a competitive edge in the South Carolina coastal market. The Company is
currently examining expanding this program to other states, including North
Carolina in 1999, where Seibels Bruce offers flood insurance. In certain
markets, the Company's flood products are sold together with commercial
insurance, its third major product line. As with the Company's other
complementary products, its underwriting strategy for commercial is conservative
from both a risk selection and a geographic dispersion standpoint, while
providing adequate reinsurance protection from catastrophes to protect
shareholder interest.
COMMERCIAL LINES
In 1998 Seibels Bruce accomplished its major strategic initiative in
commercial lines--converting from a managing general agent ("MGA") role to
retaining risk for commercial policies. The transition was a success, and
Seibels Bruce retained more than 75 percent of the policies it had originally
underwritten. This is largely attributable to the long-standing relationships
Seibels Bruce has with the commercial lines agents who sell its products.
Commercial lines represents an important diversification for Seibels Bruce,
further rounding out its product lines and enabling the agents to bundle Seibels
Bruce's products for a more complete insurance portfolio. This diversification
makes Seibels Bruce more attractive to agents, makes it easier for them to work
with the Company and enables them to better serve their customers.
Even though the transition was successful, Hurricane Bonnie resulted in a
high level of losses and claims activity that significantly affected the
Company's financial results and commercial lines performance. It should be noted
that the methodology of earning premiums associated with a transition to
retaining risk tends to negatively impact results in the short term due to the
matching of earned premium to underwriting expenses. Because Seibels Bruce
understands the importance of a complete product line and the benefits the
Company receives from having commercial operations beyond simply premium volume,
Seibels Bruce remains committed to its commercial lines of business. As
mentioned earlier, for further protection Seibels Bruce is examining ways to
reduce its catastrophe risk exposure through a
4
long-term strategic alliance with a quality reinsurance organization. Seibels
Bruce has a letter of commitment with an A++ rated carrier to reinsure its
commercial lines with a 90% quota share agreement affective March 31, 1999. The
Company believes this arrangement should provide approximately $1.9 million in
surplus relief in the first quarter.
CLAIMS OPERATIONS
The Company's premium concentration in the catastrophe heavy Southeast led
it to create, in 1996, a catastrophe adjusting business, Insurance Network
Services ("INS"), to manage the Company's internal claims volume. INS currently
offers three services: catastrophe claims adjusting for hurricanes, tornadoes,
hailstorms, earthquakes and floods; catastrophe claims supervision; and ordinary
claims adjusting. These services expand the Company's business by complementing
its core flood operations and by allowing it to adjust claims for other
insurance companies. INS's capabilities assisted the Company in adjusting claims
from Hurricanes Bonnie and Georges and the 1998 winter storms. The Company's
experience in processing flood claims led to the award of two statewide
windstorm contracts, a strong indication of the Company's growing presence in
the catastrophe claims adjusting market. The Company's flood products are
supported by other lines of insurance in several markets.
REINSURANCE
The Company currently reinsures 50% of its nonstandard automobile business
in South Carolina and 20% of its business in North Carolina and West Virginia
under separate pro-rata reinsurance agreements with groups of reinsurers. The
remaining nonstandard automobile is reinsured under a 75% pro-rata reinsurance
agreement with groups of reinsurers. This type of reinsurance is designed to
increase the capacity of the Company to write new and renewal business. The
Company cedes a portion of the premiums to the reinsurers net of a ceding
commission, and collects the same portion of claims payments from the
reinsurers. The lead reinsurer for the South Carolina business is Hartford
Insurance Company, while the reinsurers in North Carolina and West Virginia are
Gerling Global Reinsurance Corporation and TIG Reinsurance Company and in the
remaining states the lead reinsurer is Kemper Reinsurance Corporation.
Effective February, 1998, the Company reinsured its commercial lines
business on a per risk excess of loss basis. The Company retains $100,000 per
risk, and cedes the excess to American Re Insurance Company. Effective in April
1998, the Company purchased catastrophe coverage for its commercial and personal
lines of business.
Prior to suspending underwriting operations in the first half of 1995, the
Company reinsured a portion of its risks. Business was ceded principally to
reduce the Company's exposure on large individual risks and to provide
protection against large catastrophic occurrences. The Company's principal
reinsurer under the prior agreements, in terms of the amount of reinsurance
recoverable on incurred losses, is Swiss Reinsurance American Corporation.
Reinsurance does not legally discharge an insurer from its primary liability
on the policies it issues, but an assuming reinsurer is liable to the insurer to
the extent of reinsurance ceded. Therefore, the Company is subject to credit
risk with respect to the obligations of its reinsurers. The Company evaluates
the financial condition of each prospective reinsurer before it cedes business
to the carrier. Reserves for uncollectable reinsurance are provided if deemed
necessary.
In its capacity as a servicing carrier, the Company issues policies for
automobile and flood insurance then reinsures 100% of these risks with the SC
Facility and the NFIP. While the amount of reinsurance recoverable under these
arrangements is significant, the Company believes these balances from the SC
Facility and the NFIP are fully collectable.
5
INVESTMENT AND INVESTMENT RESULTS
The Company's cash and investments were distributed as follows at December
31, 1998 and 1997 (in thousands):
1998 1997
---------------------- ----------------------
ASSET ASSET
VALUES % VALUES %
----------- --------- ----------- ---------
U. S. Government and government agencies and authorities.............. $ 34,786 54.1 $ 38,624 74.6
States, municipalities and political subdivisions..................... 635 1.0 2,289 4.4
Corporate bonds....................................................... 4,274 6.7 1,021 2.0
----------- --------- ----------- ---------
Total debt securities............................................... 39,695 61.8 41,934 81.0
Cash & short term investments......................................... 23,141 36.0 8,922 17.2
Equity securities..................................................... 1,306 2.0 915 1.8
Other long term investments........................................... 108 0.2 22 --
----------- --------- ----------- ---------
Total cash and investments.......................................... $ 64,250 100.0% $ 51,793 100.0%
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Asset values represent market values at December 31, 1998 and 1997,
respectively. During the fourth quarter of 1997, the Company invested $1.4
million into Sunshine State Holding Company. This investment was a combination
of $0.8 million in equity and $0.6 million in loans. The equity investment is
greater than 20% of the equity of Sunshine State Holding Company, therefore the
Company's equity in the undistributed earnings of the affiliate are reported in
earnings.
The following table sets forth the consolidated investment results for the
three years ended December 31 (in thousands):
1998 1997 1996
--------- --------- ---------
Total investments (1)........................................ $ 55,515 $ 53,078 $ 47,614
Net investment income........................................ $ 3,271 $ 3,121 3,006
Average yield................................................ 5.9% 5.9% 6.3%
Net realized investments gains (losses)...................... $ 55 $ 529 $ (14)
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(1) Average of the aggregate invested amounts (market values) at the beginning
of the year, as of June 30 and as of the end of the year.
REGULATION
STATE REGULATION. Insurance companies are subject to supervision and
regulation in the jurisdictions in which they transact business, and such
supervision and regulation relate to numerous aspects of an insurance company's
business and financial condition. The primary purpose of such supervision and
regulation is the protection of policyholders. The extent of such regulation
varies but generally derives from state statutes which delegate regulatory,
supervisory and administrative authority to state insurance departments.
Accordingly, the state insurance departments have the authority to establish
standards of solvency which must be met and maintained by insurers, license
insurers and agents; and to approve policy forms. State insurance departments
also conduct periodic examinations of the affairs of insurance companies and
require the filing of annual and other reports relating to the financial
condition of insurance companies.
Most states have enacted legislation which regulates insurance holding
company systems, including acquisitions, dividends, the terms of surplus notes,
the terms of affiliate transactions and other related matters. Four of the
Company's insurance subsidiaries are domiciled in the state of South Carolina
and are principally regulated by the South Carolina Department of Insurance.
Universal is domiciled in North Carolina and is principally regulated by the
North Carolina Department of Insurance. Kentucky Insurance
6
Company ("KIC"), a subsidiary of Catawba Insurance Company ("CIC"), is domiciled
in Kentucky and is principally regulated by the Kentucky Department of
Insurance.
Insurance companies are required to file detailed annual statements with the
state insurance regulators in each of the states in which they do business, and
their business and accounts are subject to examination by such regulators at any
time. In addition, these insurance regulators periodically examine the insurer's
financial condition, adherence to statutory accounting principles, and
compliance with insurance department rules and regulations. South Carolina,
North Carolina and Kentucky insurance laws, rather than federal bankruptcy laws,
would apply to the liquidation or reorganization of any of the Company's
insurance companies. An examination of SCIC, and its subsidiary companies,
Consolidated American Insurance Company, Catawba Insurance Company, KIC and
Investors National Life Insurance Company of South Carolina as of December 31,
1998, is in process. An examination of Universal has been completed as of
December 31, 1997, with analysis of certain operations of the Company being
conducted through December 18, 1998.
NAIC GUIDELINES. The National Association of Insurance Commisioners
("NAIC") has adopted Risk-Based Capital ("RBC") requirements for property and
casualty insurance companies to evaluate the adequacy of statutory capital and
surplus in relation to investment and insurance risks such as asset quality,
asset and liability matching, loss reserve adequacy, and other business factors.
The RBC formula is used by state insurance regulators as an early warning tool
to identify, for the purpose of initiating regulatory action against, insurance
companies that are potentially inadequately capitalized. Compliance is
determined by the ratio of the Company's regulatory total adjusted capital to
its company action level RBC (as defined by the NAIC). Companies which fall
below the company action level RBC are required to disclose plans to remedy the
situation. As of December 31, 1998, all of the insurance subsidiaries have
ratios that are in excess of the level which would prompt regulatory action.
REGULATION OF DIVIDENDS AND OTHER PAYMENTS FROM INSURANCE SUBSIDIARIES
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
indebtedness, are dividends and other permitted payments from its subsidiaries
and affiliates.
North Carolina and South Carolina insurance laws and regulations require a
domestic insurer to report any action authorizing distributions to shareholders
and material payments from subsidiaries and affiliates at least 30 days prior to
distribution or payment except in limited circumstances. Additionally, those
laws and regulations provide the Department of Insurance with the right to
disapprove and prohibit distributions meeting the definition of an
"Extraordinary Dividend" under the statutes and regulations.
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.
The South Carolina Insurance Holding Company Regulatory Act provides that,
without prior approval of the Director of Insurance of the State of South
Carolina, dividends within any 12-month period may not exceed the greater of (i)
10% of a domestic insurer's surplus as regarding policyholders as shown in the
insurer's most recent annual statement or (ii) a domestic insurer's net income,
not including realized capital gains or losses as shown in the insurer's most
recent annual statement. Furthermore, dividends may only be paid out of positive
earned surplus unless approved by the Commissioner as of December 31, 1998, SCIC
had negative earned surplus.
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
7
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.
REQUIRED PARTICIPATION
STATE RESIDUAL MARKET PLAN. Most states in which the Company's property and
casualty insurance group writes business have collective pools, underwriting
associations, reinsurance facilities assigned risk plans and or other types of
residual market plans, the largest being the SC Facility and the North Carolina
Reinsurance Facility ("NC Facility"), pursuant to which coverages not normally
available in the voluntary market are shared by all companies writing that type
of business in that state. Participation is usually based on the ratio of the
Company's share of the voluntary market in a given state.
SOUTH CAROLINA AUTOMOBILE. The SC Facility is an unincorporated, non-profit
administrative state sponsored plan. The SC Facility provides a mechanism for
the insurance companies doing business in the state of South Carolina to cede
mandated, high risk coverages, under automobile policies and to share the cost
of those coverages ceded. Every insurer authorized to write automobile liability
insurance in South Carolina is required to participate in the SC Facility. When
policyholders whose premiums have been ceded through the SC Facility incur a
loss, the member company which issued the policy adjusts the loss and
subsequently is reimbursed for the loss and expenses by the SC Facility. The SC
Facility has also created a pool of "Designated Agents", which are agencies
usually comprised of a single independent agent who lost his or her access to
the voluntary automobile market. Designated Agents are assigned to one of the SC
Facility's servicing carriers. Prior to October 1, 1996, the cession of
retention of physical damage was dictated by whether or not the risk was
"pointed" or "clean". Only clean risk physical damage could be ceded to the SC
Facility prior to October 1, 1996. Effective October 1, 1996, however, physical
damage was removed from the mandate, and the SC Facility agreed to accept any
physical damage, pointed or clean, provided the SC Facility-filed rates were
used.
In 1997, the South Carolina State General Assembly passed legislation which
transforms the SC Facility into the SCAAIP, a Joint Underwriting Association
("JUA"), effective March 1, 1999. As of March 1, 1999, insurance companies may
no longer cede new business to the SC Facility. Non-servicing Carriers may
continue to cede renewals to the SC Facility until October 1, 1999 and Servicing
Carriers may continue to cede renewals to the SC Facility until March 1, 2002.
All renewals ceded after March 1, 1999 must be ceded at the rate level approved
for the SC Facility. The new JUA began accepting business on March 1, 1999. The
initial rate level for the JUA is approximately 150% of the current SC Facility
rate. The legislation allowed the current Designated Agents to receive voluntary
contracts without jeopardizing their Designated Agent Status.
NATIONAL FLOOD INSURANCE PROGRAM. FEMA's Federal Insurance Administration
manages the NFIP. The NFIP regulations established the "Financial
Assistance/Subsidy Arrangement" pursuant to which the NFIP Administrator and the
private sector insurers participate in the WYO Program. Under the WYO Program,
insurers which are parties to a Financial Assistance/Subsidy Arrangement may
issue, in the NFIP name, a Standard Flood Insurance Policy, the form and
substance of which is approved by the NFIP Administrator. Insurers are
responsible for all aspects of service, including policy issuance, endorsements
and renewals of policies and adjustments of claims brought under the policies,
and the NFIP Administrator monitors the performance levels of all insurers
participating in the WYO Program.
The Company is required to furnish to FEMA such summaries and analyses of
information, including claims information, as may be necessary to carry out the
purposes of the National Flood Insurance Act of 1968, as amended.
8
COMPETITION AND OTHER FACTORS
The Company operates in highly competitive industry markets. Many of its
competitors have greater financial resources and higher ratings from A. M. Best
than the Company. In general, the Company competes with both large national
writers and smaller regional companies in each state in which it operates. These
competitors include other companies that, like the Company, serve the agency
market, as well as companies that sell insurance directly to policyholders.
Direct writers may have certain competitive advantages over agency writers,
including increased name recognition, increased loyalty of their customer base,
and, potentially, reduced acquisition costs.
NONSTANDARD AUTOMOBILE INSURANCE BUSINESS. The Company is one of three
servicing carriers for the SC Facility. The Company competes with the major
carriers for nonstandard voluntary automobile business. The nonstandard
automobile insurance business is price sensitive and certain competitors of the
Company have, from time to time, decreased their prices in an apparent attempt
to gain market share. Although the Company's pricing is inevitably influenced to
some degree by that of its competitors, management of the Company believes that
it is generally not in its best interest to match such price decreases; choosing
instead to compete on the basis of underwriting criteria and superior service to
its agents and insureds.
The South Carolina Legislature has instituted reform legislation which will
reorganize the SC Facility over a three-year transition period into a JUA. The
Company believes that one result of the proposed reorganization will be that the
SC Facility rates will increase to a level that will trigger a voluntary exit
from the SC Facility by customers able to obtain more attractive rates in the
voluntary market. In this event, the Company feels there will be an opportunity
to attract those customers to its nonstandard automobile insurance products,
and, eventually, into standard and preferred automobile products. In particular,
the Company believes its Designated Agent relationships, its underwriting data
and experience with the SC Facility and knowledge of the South Carolina
automobile insurance market will allow it to obtain additional business.
Competition in the North Carolina market is driven not only by price, but
also by premium financing. The North Carolina market is sensitive to the down
payment required on a nonstandard automobile policy. The Company, through PBP,
plans to offer down payments which are similar to its competitors.
FLOOD PROGRAM. Factors influencing the choice of a competitor over the
Company include a competitor's ability to offer homeowners or other property
products to agents, and a competitor's ability to increase commission rates and
on-line policy issuance capability. The Company has been impacted by not having
a homeowners product to compliment its flood insurance especially in Florida;
thus, the Company signed a joint marketing agreement with Sunshine State
Insurance Company, which gives the Company's agents access to a homeowners
product.
COMMERCIAL LINES. As the Company resumed writing risk-bearing commercial
business in 1998, new competitive factors arose. The Company continued to, and
will continue, to focus on small businesses in developing its "Main Street" book
of business, but competition in this market is intense. The Company will be
competing with the large national and regional carriers, many with higher A.M.
Best ratings than the Company's, which influences the decisions of many
commercial insurance customers. In addition, companies offering workers'
compensation coverage may reap some competitive advantage. The Company is
reinsuring its book of business with A+ rated carriers to try to lessen the
effects of not having a rating. The Company is also investigating certain niche
markets in which it believes the competition will be less, and a lack of a
rating will have little impact.
EMPLOYEES
At December 31, 1998, the Company and its subsidiaries employed a total of
544 employees.
9
ITEM 2. PROPERTIES
The Columbia, South Carolina headquarters, containing approximately 141,000
square feet of occupied space, is owned by the Company, and used primarily by
its property and casualty insurance operations. The Winston-Salem, North
Carolina office houses Universal. That office contains approximately 18,000
square feet and is leased through an arrangement with a term through 2005.
Graward is located in Nashville, Tennessee. That office consists of
approximately 20,000 square feet and is leased through 2002. AFS is located in
Rancho Cordova, California. AFS leases 4,000 square feet on a month to month
basis. Some additional premises are leased by the Company in locations in which
it operates. Management believes that these facilities are adequate for the
current level of operations.
ITEM 3. LEGAL PROCEEDINGS
The Company was served with a complaint dated November 19, 1997 by Norwest
Financial Resources, Inc. ("Norwest") that claimed indemnification against the
Company pursuant to the Asset Purchase Agreement dated as of July 2, 1993 by and
among Premium Service Corporation of Columbia ("Premium"), the Company and
Norwest. The indemnification claim relates to certain loans which were recorded
on the books of Premium but which later were discovered to be incorrectly
recorded as realizable assets. This complaint was filed in the state of South
Carolina in the Richland County, Court of Common Pleas. Management believes the
Company has no liability in the case.
Catawba Insurance Company ("Catawba") 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 Catawba
has basis for non-payment of such amounts. This complaint was filed in the State
of South Carolina in the Richland County, Court of Common Pleas, Fifth Judicial
Circuit.
On May 1, 1998, the Company completed its acquisition of Graward. In
completing the Final Balance Sheet in accordance with the stock purchase
agreement for the Graward acquisition, the Company identified certain purchase
price adjustments which it believes were known to certain of the sellers, but
were not disclosed to the Company during its due diligence process. The stock
purchase agreement with Graward provides methods for resolving the differences
as to the appropriate adjustments to the Final Balance Sheet. On December 7,
1998, the sellers notified the Company that they intended to submit to
arbitration two matters currently in dispute between the parties. Management
believes that the purchase price will be adjusted appropriately under the
purchase agreement.
The Company and its subsidiaries are parties to various other lawsuits
generally arising in the normal course of its 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year covered by this report.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
(a) Market Information
The Company's common stock is quoted and traded on The NASDAQ Stock Market
under the symbol "SBIG." The following table sets forth the range of high and
low closing sales prices as reported on The NASDAQ Stock Market. The table
reflects a 1-for-4 reverse stock split of the common stock that occurred on
April 10, 1997. On March 24, 1999, the last reported sales price of the common
stock on The NASDAQ Stock Market was $2.875 per share.
1999 HIGH LOW
- -------------------------------------------------------------------------------- --------- ---------
First quarter (through March 24, 1999).......................................... 3.88 2.88
1998 HIGH LOW
- -------------------------------------------------------------------------------- --------- ---------
First quarter................................................................... 8.38 7.00
Second quarter.................................................................. 8.38 6.88
Third quarter................................................................... 7.31 3.88
Fourth quarter.................................................................. 4.88 3.19
1997 HIGH LOW
- -------------------------------------------------------------------------------- --------- ---------
First quarter................................................................... 9.50 7.25
Second quarter.................................................................. 8.25 6.13
Third quarter................................................................... 8.75 7.75
Fourth quarter.................................................................. 8.38 7.38
(b) Holders
There were approximately 2,749 shareholders of record as of March 24, 1999.
This number does not include beneficial owners holding shares through nominee or
"street" names.
(c) Dividends
There have been no dividends declared by the Company on its common stock
during the past 5 years, and the Board of Directors does not presently intend to
pay any cash dividends on common stock in the foreseeable future. The ability of
the Company to declare and pay cash dividends, as well as to pay any debt
service, is dependent upon the ability of SCIC, Graward, AFS and Universal to
declare and pay dividends to the Company; however, the Company does collect
management fees from certain subsidiaries. SCIC and Universal are regulated as
to their payment of dividends by their respective state of domicile's insurance
laws. The Company's payment of cash dividends is at the discretion of the Board
of Directors and is based on its earnings, financial condition, capital
requirements, and other relevant factors. See Note 9 of Notes to Financial
Statements.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended
December 31, 1998 is derived from the audited consolidated financial statements
of the Company. The selected data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and accompanying notes
included elsewhere herein.
11
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FINANCIAL CONDITION
Total cash & investments........................... $ 64,250 $ 51,793 $ 42,944 $ 50,641 $ 61,686
Total assets....................................... 295,563 234,618 220,472 224,005 255,935
Total debt......................................... 16,250 3,036 0 2,476 439
Special stock...................................... 2,700 2,200 0 0 0
Shareholders' equity............................... 35,588 37,544 23,791 10,187 650
Per share........................................ 4.58 4.86 3.86 2.44 0.16
RESULTS OF OPERATIONS
Revenues
Insurance:
Commission & service income...................... $ 49,298 $ 44,105 $ 46,419 $ 49,572 $ 60,669
Property & casualty premiums..................... 22,762 6,580 7,186 10,384 14,718
Credit life premiums............................. 13 156 478 890 1,801
Net investment & other interest.................... 4,645 3,887 3,807 4,330 6,226
Realized gains (losses) on investments............. 55 529 (14) 164 (6,327)
Other.............................................. 4,644 112 151 843 2,673
---------- ---------- ---------- ---------- ----------
Total revenues..................................... $ 81,417 $ 55,369 $ 58,027 $ 66,183 $ 79,760
---------- ---------- ---------- ---------- ----------
(Loss) income before effect of change in accounting
principle.......................................... $ (2,293) $ 4,003 $ 5,176 $ 1,152 $ (19,074)
Effect of change in accounting principle............. (601) -- -- -- --
Net (loss) income.................................... $ (2,894) $ 4,003 $ 5,176 $ 1,152 $ (19,074)
Basic earnings per share before change in accounting
principle.......................................... (0.31) 0.57 1.05 0.28 (6.89)
Basic earnings per share effect of change in
accounting principle............................... (0.08) -- -- -- --
Basic earnings per share after change in accounting
principle.......................................... (0.39) 0.57 1.05 0.28 (6.89)
Diluted earnings per share before change in
accounting principle............................... (0.31) 0.55 0.94 0.27 (6.89)
Diluted earnings per share effect of change in
accounting principle............................... (0.08) -- -- -- --
Diluted earnings per share after change in accounting
principle.......................................... (0.39) 0.55 0.94 0.27 (6.89)
(See Item 7 and Notes to Financial Statements included under Item 8).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
OVERVIEW
The Company provides automobile, flood, commercial, homeowners and other
property and casualty insurance services and products. As stated in the
Development of Business segment, the Company maintains core products of
nonstandard automobile and flood. It offers complementary products of commercial
and homeowners in support of the Company's core businesses.
12
The following table shows the results of the segments of automobile, flood,
commercial and all other for 1998.
Net (loss)/income (before effective change in accounting principle):
Automobile......................................................... $ (814)
Flood.............................................................. 24
Commercial......................................................... (2,090)
All other.......................................................... 587
---------
Total.............................................................. $ (2,293)
NONSTANDARD AUTOMOBILE
Entering 1998, Seibels Bruce set several strategic objectives: to win the
contract to be a servicing carrier for the SCAAIP, a joint underwriting
association structure that will survive the SC Facility; to grow the Company's
business in the voluntary market; and to seek out acquisition candidates to
expand the Company's operations into other geographic areas. Currently, Seibels
Bruce is the only company in South Carolina with servicing contracts in the SC
Facility, the SCAAIP contract awarded in September 1998 and active in the
voluntary auto market.
SOUTH CAROLINA OPERATIONS
Under the Company's contract with the SC Facility premium-based fees under
the contract are 21.0% of gross premiums written. The Company is responsible for
paying all costs of processing the policies, including a mandated 12.0%
commission on gross premiums earned to the agent. The Company also receives
income on the claims it pays for the SC Facility in the amount of 11.0% of the
gross paid claims (compared with a 15.0% rate under its prior contract). The
Company is responsible for paying all costs to process these claims, including
adjusting expenses. However, the SC Facility does reimburse the Company in full
for legal expenses associated with processing these claims.
In 1997, the South Carolina Legislature passed Act 154 which went into
effect on March 1, 1999 and limits the facility for renewals only for 36 months
until February 28, 2002. Therefore, the Company will receive processing fees on
renewals during this period and claims fee for runoff of the current business,
renewals until February 28, 2002 and complete runoff thereafter.
Act 154 provides to South Carolina drivers the most significant changes in
automobile insurance in twenty-five (25) years. Act 154 capped recoupment at 10%
of the liability premium, offers greater flexibility to insurance companies to
match the rate they charge to the risk drivers present and, created the South
Carolina Associated Auto Insurers Plan to provide insurance to drivers who find
it difficult to obtain coverage in the private market.
The SC Facility will be replaced with SCAAIP, which is designed to provide
the highest risk insureds at self-sustaining rates. The Company also writes
voluntary nonstandard auto in a number of companies for those drivers who do not
renew in the facility or who are referred to SCAAIP.
NORTH CAROLINA NONSTANDARD AUTOMOBILE OPERATIONS
In December 1997, Seibels Bruce purchased Universal. SCIC had written
business in North Carolina for many years. With the purchase of Universal,
Seibels Bruce 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 physical damage coverage. Only
liability coverage is written in the NC Facility. Liability
13
coverage is reinsured 100% in the NC Facility and companies 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 which is
ceded to the NC Facility.
NASHVILLE OPERATIONS
In May, Seibels Bruce announced the acquisition of privately held Graward in
Nashville, Tennessee. The company brought access to more than 2,000 agents
throughout Arkansas, Georgia, Indiana, Kentucky, Mississippi, North Carolina,
Ohio, Tennessee and Virginia. As with any acquisition, Seibels Bruce is
diligently reviewing operations, competition, pricing and market strategies. On
an annualized basis, the Nashville operation provides the Company a premium of
approximately $41 million as it begins in 1999.
OVERALL AUTOMOBILE OPERATIONS
Overall, in the automobile operations, during 1998 Seibels Bruce made
significant investments in each of its business operations to position itself
for improved future financial performance and to provide for enhanced
infrastructure. Seibels Bruce actively works to capitalize on advantages and
strengths it has in all markets and has designed programs to assist agents and
their driver customers. This is especially true in South Carolina where Seibels
Bruce assists agents in the transition from the SC Facility to the voluntary
market. In addition, the Company networks with these same agents to provide them
with tools to enhance risk selection and underwriting of voluntary nonstandard
policies. In 1999, Seibels Bruce is embarking on similar plans with its
Universal agents in North Carolina and agents who write business in all states
associated with the Nashville operations.
FLOOD
The Company's other core product line, flood operations, experienced
substantial growth in 1998. The Company's written premiums for flood increased
at a rate nearly doubling that of the NFIP. Seibels Bruce added to its
experienced flood sales force and was able to acquire several large books of
flood business from independent agents throughout the nation. This was achieved
by expanding the Company's product lines and services for the independent agent.
As a servicing carrier for the NFIP, the Company recognizes income for the
policies it processes in the amount of 31.6% of gross premiums written. The
Company is responsible for paying all costs associated with processing the
policies, including a commission to the independent agent. The Company also
receives a fee on the claims that it pays on these policies in the amount of
3.3% of incurred claims. The Company is reimbursed for the allocated loss
adjustment expenses associated with these claims according to a standard fee
schedule.
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.
14
To further leverage the Company's leadership position, in March 1998, it
acquired AFS. Headquartered in Gold River, 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.
Flood zone determinations and flood zone mapping are services provided
primarily to mortgage originators, for determining whether homes are located in
flood zones and require flood insurance. These capabilities, through AFS, allow
the Company to offer more complete services to agents and institutions, provide
it with an even stronger presence in the flood market and expand the channels of
distribution for the Company's products.
COMMERCIAL LINES
Prior to February 1998, the Company derived revenues from its role as a
commercial lines MGA for an unaffiliated insurance company. While the Company
performed all services and paid all costs (including the independent agents'
commissions) related to administering and processing policies and claims, the
policies were written on behalf of an unaffiliated insurance company. The
Company's financial statements reflect commission income as a percentage of
premiums written but do not reflect the premiums written or associated claims
incurred in 1997. Beginning in February 1998, as the commercial policies
renewed, the Company began to retain the risk.
In 1998, Seibels Bruce did accomplish its major strategic initiative in
commercial lines--converting from a MGA role to retaining risk for commercial
policies. The transition was a success, and Seibels Bruce retained more than 75
percent of the policies it had originally underwritten. This is largely
attributable to the long-standing relationships Seibels Bruce has with the
commercial lines agents who sell its products.
Commercial lines represents an important diversification for Seibels Bruce,
further rounding out its product lines and enabling the Company's agents to
bundle products for a more complete insurance portfolio. This makes Seibels
Bruce more attractive to agents, makes it easier for them to work with the
Company and enables them to better serve their customers.
Even though the transition was successful, Hurricane Bonnie resulted in a
high level of losses and claims activity that significantly affected the
Company's financial results and commercial lines performance. It should be noted
that the methodology of earning premiums associated with a transition to
retaining risk tends to negatively impact results in the short term due to the
timing of earned premium versus underwriting expenses. In addition, Seibels
Bruce was heavily reinsured for large catastrophes, which absorbed a great deal
of the Company's premium base. At April 1, 1999 Seibels Bruce is looking to take
advantage of a more efficient reinsurance market to provide similar coverage.
Because Seibels Bruce understands the importance of a complete product line and
the benefits it receives from having commercial operations beyond simply premium
volume, the Company remains committed to its commercial lines of business. As
mentioned earlier, Seibels Bruce is examining ways to reduce its catastrophe
risk exposure more efficiently through a long-term strategic alliance with a
quality reinsurance organization. The Company expects to realize the benefit of
this agreement in first quarter 1999.
INSURANCE ADJUSTING
The Company's premium concentration in the catastrophe heavy Southeast led
it to create, in 1996, a catastrophe adjusting business, INS, to manage the
Company's internal claims volume. INS currently offers three services:
catastrophe claims handling for hurricanes, tornadoes, hailstorms, earthquakes
and floods; catastrophe claims supervision; and ordinary claims adjusting. These
services expand the Company's business by complementing its core flood
operations and by allowing it to adjust claims for other insurance companies.
INS's capabilities assisted the Company in adjusting claims from Hurricanes
Bonnie and Georges and the 1998 winter storms. The Company's experience in
processing flood claims led to the
15
award of two statewide windstorm contracts, a strong indication of Seibels
Bruce's growing presence in the catastrophe claims adjusting market. The
Company's flood products are supported by other lines of insurance in several
markets.
RUNOFF
The Company continues to maintain reserves and pay significant claims with
respect to its runoff operations. These runoff operations consist primarily of
general liability policies that include contractors' liability and environmental
coverages primarily in California and commercial (including workers'
compensation) and personal lines policies in the Southeast. The runoff of claims
on these policies created substantial losses to the Company during the past 10
years. In addition, the Company's runoff segment contains the management of
runoff reserves from prior business in the 1980's and runoff from a nonstandard
homeowners MGA book in Kentucky and Tennessee entered into in early 1997.
Seibels Bruce discontinued writing new business in this MGA in October of 1998
and will complete this runoff in one year.
1998 RESULTS EFFECT ON BUSINESS SEGMENTS
As discussed, the Company had a net loss before effect of change in
accounting principle of $2,293 for 1998. This included $3,056 million in
one-time unusual items. The following schedule itemizes the one-time unusual
items Seibels Bruce experienced in this transition year:
DECEMBER 31, 1998
-----------------------------------------------------------
AUTOMOBILE FLOOD COMMERCIAL ALL OTHER TOTALS
----------- --------- ----------- ----------- ---------
Income (loss) as reported................................. $ (814) $ 24 $ (2,090) $ 587 $ (2,293)
Restructuring charge...................................... 503 30 11 1 545
Arbitration and legal expenses............................ 549 549
Severance payments........................................ 162 49 32 243
Y2K remediation expense................................... 520 520
Hurricane Bonnie losses................................... 99 412 511
Accounting system reengineering........................... 103 31 182 (165) 151
Operational items......................................... 337 200 537
----------- --------- ----------- ----------- ---------
Total unusual items....................................... $ 1,724 $ 110 $ 637 $ 585 $ 3,056
----------- --------- ----------- ----------- ---------
Income (loss) before unusual items........................ $ 910 $ 134 $ (1,453) $ 1,172 $ 763
----------- --------- ----------- ----------- ---------
----------- --------- ----------- ----------- ---------
The schedule shows the detail of the unusual items and its effect on
business segments. Nonstandard automobile was effected by
$1,724 in adjustments from severance payouts from certain downsizing; year
2000 remediation expenses for systems acquired in the Graward and Universal
acquisitions; Universal losses from Hurricane Bonnie; and the reengineering of
the Company's accounting systems and new general ledger installation. This
illustrates that the nonstandard automobile segment, without special charges,
would have produced $910 of income.
The flood segment produced income of $24 and experienced some severance and
accounting reengineering costs totaling $108. Without these adjustments, the
flood segment would have had income of $134.
The commercial segment showed a start-up loss in 1998 of $(2,090). Total
special charges of $637 came from severance payments, from Hurricane Bonnie
costs of $412; and accounting reengineering costs of $182. The loss without
unusual items would have been $(1,453) and, as discussed, Seibels Bruce is
addressing the alliance of a reinsurance partner for this book in 1999.
16
The "All Other" category contains management of runoff reserves from prior
business in the 1980's and runoff from a nonstandard homeowners managing general
agency book in Kentucky and Tennessee entered into in early 1997. Income of $587
was due mainly to investments of reserves. With out the unusual items net income
would have been $1,172. Some of the unusual items include a $200 write-off from
an uncollectable receivable, arbitration and legal expenses of $549 and a
benefit from accounting reengineering of $165. Also impacting this segment, but
not listed, include losses from runoff of the homeowners mentioned above of
$934. The Company discontinued writing new business with this MGA in October
1998 and will complete runoff in one year. The Company also strengthened
workers' compensation reserves on second injury fund by $401 and $336 on loss
adjustment and administrative expenses that support the Company's runoff
liabilities.
17
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
COMMISSION AND SERVICE INCOME
Commission and service income for the year ended December 31, 1998 increased
$5.2 million or 11.8% to $49.2 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 $4.2 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
Property and casualty premiums earned for the year ended December 31, 1998
increased $16.2 million, or 245.9% to $22.8 million from the year ended December
31, 1997. This increase is due to a $14 million increase in nonstandard
automobile premiums and $2.2 in commercial multi-peril premiums. The increase in
nonstandard automobile earned premiums is a result of re-entering the voluntary
market in South Carolina, the purchase of Universal in December 1997 and the
purchase of Graward in May 1998. The increase in Commercial multi-peril earned
premiums is a result of switching from a MGA status to a retained risk status in
February 1998.
CREDIT LIFE PREMIUMS EARNED
Net credit life premiums earned decreased $0.1 million in 1998 compared to
1997 as the Company continues to runoff its life company operations.
NET INVESTMENT AND INTEREST INCOME
Net investment and other interest income for the year ended December 31,
1998 increased 19.5% or $0.8 million to $4.6 million from $3.9 million as of
December 31, 1997. This increase is due to a $12.5 million increase in 1998 in
cash and investments. The average investment yield for the Company remained at
5.9% for the year.
REALIZED GAINS ON INVESTMENTS
Realized gains on investments totaled $55,000 for the year ended December
31, 1998, a $0.5 million decrease from the previous year.
LOSS AND LOSS ADJUSTMENT EXPENSES
Property and casualty loss and loss adjustment expenses for the year ending
December 31, 1998 increased $16.4 million, or 185.8% to $25.2 million from $8.8
million for the year ended December 31, 1997. This increase is due to the
Company's re-entry into the retained risk business. Of this amount, $0.5 million
relates to hurricane related losses.
POLICY ACQUISITION COSTS
Policy acquisition costs increased $9.0 million for the year ended December
31, 1998 compared to 1997, or 748.1%. The Company attributes this increase to
the costs associated with the underwriting activities necessary to generate
earned premium.
18
OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expense for the year ended December 31, 1998
increased $5.7 million, or 13.8% to $46.8 million from $41.1 million for the
year ended December 31, 1997. This increase is due to the operating costs
associated with the new acquisitions, AFS and Graward. In addition, the Company
has experienced $0.5 million in Year 2000 remediation expenses, $0.5 million in
legal expenses related to an arbitration case and approximately $2.0 million
related to other one-time charges.
YEARS ENDED DECEMBER 31, 1997 AND 1996
COMMISSION & SERVICE INCOME
Commission and service income for the year ended December 31, 1997 decreased
$2.3 million or 5% to $44.1 million from $46.4 million for the year ended
December 31, 1996. This decrease is due to a $1.7 million decrease in
premium-based fee revenue from the Company's MGA relationship in commercial
lines. Also, flood claim-based revenues decreased $2.1 million due to reduced
claims activity during the year ended December 31, 1997. Revenues from SC
Facility premium-based and claim-based fees increased $1.2 million and $0.6
million, respectively, for the year ended December 31, 1997. Flood premium-based
fees also increased $0.6 million for the same period.
PROPERTY AND CASUALTY PREMIUMS EARNED
Property and casualty premiums earned for the year ended December 31, 1997
decreased $0.6 million, or 8.4% to $6.6 million from the year ended December 31,
1996. This decrease is due to a $0.9 million decrease in premiums assumed from
pools and associations.
CREDIT LIFE PREMIUMS EARNED
Net credit life premiums earned for the year ended December 31, 1997
decreased $0.4 million or 65.5% to $0.1 million from $0.5 million for the year
ended December 31, 1996. The Company sold the related subsidiary in September
1993. Under the sale agreement, the Company retained the responsibility and
continues to runoff the policies in existence at the sales date.
NET INVESTMENT AND INTEREST INCOME
Net investment and other interest income for the year ended December 31,
1997 increased 2.1% or $80,000 from $3.8 million as of December 31, 1996 to $3.9
million. The Company's cash and investment position increased $8.8 million from
December 31, 1996 to December 31, 1997. Approximately one-half of the increase
is due to the addition of Universal's $4.2 million portfolio on December 1,
1997. Investment income only includes results for one month of the Universal
portfolio. Average yield for the portfolio was down slightly from 6.3% in 1996
to 5.9% in 1997 which is reflective of the lower interest rate environment
experienced in 1997.
REALIZED GAINS ON INVESTMENTS
Realized gains on investments totaled $0.5 million for the year ended
December 31, 1997, a $0.5 million increase over the previous year. Of this
total, $0.2 million was realized on the sale of stock in an industry trade
group, Insurance Services Office. In addition, the Company sold surplus real
estate, which resulted in a gain of $0.3 million.
LOSS AND LOSS ADJUSTMENT EXPENSES
Property and casualty loss and loss adjustment expense for the year ending
December 31, 1997 decreased $3.0 million, or 25.2% to $8.8 million from $11.8
million for the year ended December 31, 1996.
19
The decrease is due to a reduction in losses and loss adjustment expenses
related to the Company's runoff business.
POLICY ACQUISITION COSTS
Policy acquisition costs for the year ended December 31, 1997 and 1996 were
$1.2 and $1.8 million, respectively. The $0.6 million decrease is due to a
reduction in net premiums written in the property and casualty segments and a
decrease in policy acquisition costs associated with the credit life segment.
OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses for the year ended December 31, 1997
increased $2.1 million, or 5.3% to $41.1 million from $39.0 million for the year
ended December 31, 1996. This increase is mainly due to the Company hiring
individuals in 1997 for its voluntary automobile program and associated start up
costs for that program.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Loss and loss adjustment expense 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.
The liability for losses on direct business is determined using case-basis
evaluations and statistical projections. The liabilities determined under these
procedures are reduced, for GAAP purposes, by an estimated amount to be received
through salvage and subrogation. The resulting liabilities represent the
Company's estimate of the net cost of all unpaid losses and LAE incurred through
December 31 of each year. These estimates may be affected by the frequency
and/or severity of future claims. These estimates are continually reviewed and
as experience develops and new information becomes known, the liability is
adjusted as necessary.
The anticipated effect of inflation is implicitly considered when estimating
liabilities for losses and LAE. While anticipated price increases due to
inflation are considered, an increase in average severity of claims may be
caused by a number of factors that vary with the individual type of policy
written. Future average severity is projected based on historical trends
adjusting for changes in underwriting standards, policy provisions, and general
economic trends.
These anticipated trends are monitored based on actual developments and are
modified as necessary. The Company does not discount its loss and LAE reserves.
20
The following table presents, on a GAAP basis, a three-year analysis of
losses and LAE, net of ceded reinsurance recoverable, with the net liability
reconciled to the gross liability as reported in the Company's financial
statements (in thousands):
1998 1997 1996
---------- ---------- ----------
Liability for losses and LAE at the beginning of the
year:
Gross liability per balance sheet...................... $ 114,770 $ 132,152 $ 145,523
Ceded reinsurance recoverable, classified as an
asset................................................ (75,616) (84,725) (84,492)
---------- ---------- ----------
Net liability.......................................... 39,154 47,427 61,031
---------- ---------- ----------
Reserves acquired in purchase of Universal............... -- 2,655 --
---------- ---------- ----------
Provision for losses and LAE for claims occurring in the
current year........................................... 24,450 12,202 10,697
Increase (decrease) in estimated losses and LAE for
claims occurring in prior years........................ 819 (3,362) 1,117
---------- ---------- ----------
25,269 8,840 11,814
---------- ---------- ----------
Losses and LAE payments for claims occurring during
Current year........................................... 18,398 8,845 9,151
Prior years............................................ 9,703 10,923 16,267
---------- ---------- ----------
28,101 19,768 25,418
---------- ---------- ----------
Liability for losses and LAE at the end of the year:
Net liability.......................................... 36,322 39,154 47,427
Ceded reinsurance recoverable, classified as an
asset................................................ 83,654 75,616 84,725
---------- ---------- ----------
Gross liability per balance sheet...................... $ 119,976 $ 114,770 $ 132,152
---------- ---------- ----------
The ceded reinsurance recoverable, classified as an asset, includes $94.4
million at the end of 1998 ($97.6 million at the end of 1997 and $102.2 million
at the end of 1996) of balances recoverable from various facilities (such as the
SC Facility, NC Facility and NFIP). See Note 13 of Notes to Financial
Statements.
The difference between the year-end net liability for losses and LAE
reported in the accompanying consolidated financial statements in accordance
with GAAP and that in accordance with SAP was as follows for the years ended
December 31 (in thousands):
1998 1997
---------- ----------
Net liability on a SAP basis as filed in annual statement............. $ 36,954 $ 39,540
Established salvage and subrogation recoveries recorded on a cash
basis for SAP and on an accrual basis for GAAP...................... (632) (386)
---------- ----------
Net liability on a GAAP basis, at year end............................ 36,322 39,154
Ceded reinsurance recoverable, classified as an asset................. 83,654 75,616
---------- ----------
Gross liability on a GAAP basis, at year end.......................... $ 119,976 $ 114,770
---------- ----------
---------- ----------
21
The following table reflects the loss and LAE development for 1998 and 1997
on a GAAP basis (in thousands):
RE-ESTIMATED AS
UNPAID LOSSES OF ONE YEAR CUMULATIVE
AND LAE LATER DEFICIENCY
------------- --------------- -----------
1998: Gross liability......................... $ 119,976
Less reinsurance recoverable............ 83,654
-------------
Net liability........................... $ 36,332
-------------
-------------
1997: Gross liability......................... $ 114,770 $ 117,171 $ (2,401)
Less reinsurance recoverable............ 75,616 77,198 $ (1,582)
------------- --------------- -----------
Net liability........................... $ 39,154 $ 39,973 $ (819)
------------- --------------- -----------
------------- --------------- -----------
The following analysis reflects loss and LAE development on a SAP basis, net
of ceded reinsurance recoverable, for a ten year period for retained business
only for year ended December 31 (in millions):
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Liability for unpaid losses and LAE (SAP).............. 129 122 114 112 118 120 80 62 48 39 37
Cumulative liability paid through:
One year later......................................... 104 78 77 63 30 65 26 16 9 11
Two years later........................................ 141 121 116 50 84 86 42 29 17
Three years later...................................... 166 145 93 91 102 99 52 35
Four years later....................................... 183 115 125 104 112 108 58
Five years later....................................... 151 139 135 111 120 114
Six years later........................................ 170 147 140 117 125
Seven years later...................................... 176 151 146 122
Eight years later...................................... 179 156 151
Nine years later....................................... 183 160
Ten years later........................................ 187
Liability re-estimated as of:
One year later......................................... 174 135 136 119 129 138 85 63 45 40
Two years later........................................ 177 150 147 124 139 144 87 62 46
Three years later...................................... 188 156 151 134 151 143 85 64
Four years later....................................... 185 159 161 145 149 141 87
Five years later....................................... 185 168 172 143 150 143
Six years later........................................ 195 180 171 145 152
Seven years later...................................... 206 178 173 148
Eight years later...................................... 204 181 176
Nine years later....................................... 207 183
Ten years later........................................ 208
Cumulative (deficiency) redundancy..................... (79) (61) (62) (36) (34) (23) (7) (2) 2 (1)
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
The preceding table presents the development of balance sheet liabilities on
a SAP basis for 1988 through 1998. The top line of the preceding table shows the
initial estimated liability on a SAP basis. This liability represents the
estimated amount of losses and LAE for claims arising in years that are unpaid
at the balance sheet date, including losses that have been incurred but not yet
reported. The next portion of the table reflects the cumulative payments made
for each of the indicated years as they have developed through time. This table
has been adjusted for a modification made to 1994 paid losses on a GAAP basis,
not recorded for statutory net losses incurred. On a statutory basis, the
modification is a reclassification only and has no effect on income.
22
In evaluating this information, it should be noted 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.
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 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. As of December 31,
1998, $8.7 million of claims payments have been made since June 7, 1994.
Of the remaining environmental, pollution and toxic tort claims, the
following activity took place during 1998 and 1997:
1998 1997
----- -----
Pending, January 1.............................................................. 47 71
New claims advised.............................................................. 10 11
Claims settled.................................................................. 14 35
-- --
Pending, December 31............................................................ 43 47
-- --
-- --
The policies corresponding to these claims were written on a direct basis.
The Company has excess of loss reinsurance with company retention through 1980
of $100,000 and $500,000 after that date. The claims are reserved as follows as
of December 31, 1998 and 1997 (in thousands):
1998 1997
--------- ---------
Case reserves.............................................................. $ 2,625 $ 2,960
IBNR....................................................................... 4,310 4,641
LAE reserves............................................................... 1,900 1,820
--------- ---------
Total.................................................................... $ 8,835 $ 9,421
--------- ---------
--------- ---------
The above claims involve four Superfund sites, seven asbestos or toxic
claims, two underground storage tanks and 30 miscellaneous clean-up sites. For
this direct business there are usually several different insurers participating
in the defense and settlement of claims made against the insured. Costs and
settlements are pro-rated by either time on the risk or policy limits.
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. 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.
Because only 43 claims remain open as of December 31,1998, 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.
23
LIQUIDITY AND CAPITAL RESOURCES
Liquidity relates to the Company's ability to produce sufficient cash to
fulfill contractual obligations, primarily to policyholders. Sources of
liquidity include service fee income, premium collections, investment income and
sales and maturities of investments. The principal uses of cash are payments of
claims, interest and operating expenses. Cash outflows can be variable because
of the uncertainties regarding settlement dates for liabilities for unpaid
losses and because of the potential for large losses. Accordingly, the Company
maintains investment and reinsurance programs generally intended to avoid the
forced sale of investments to meet claims obligations.
Net cash provided by operations totaled $9.4 million for 1998, a substantial
improvement over the use of cash of $2.6 million in 1997 and $12.9 million in
1996. Individual sources of cash flows from operating activities included
changes of $9,180 in unearned premiums on retained business, a $5,838 decrease
in premium and agents' balances receivable and $1,964 in balances due other
insurance companies, which are related in part to the Company's continued
re-entry into the retained risk business. It should be noted that a large
portion of the changes in balances due other insurance companies and in premium
and agents' balances receivable occurred as a result of the Graward acquisition
and had very little effect on cash flow. Individual uses of cash included a
reduction in reported and estimated losses and claims and loss adjustment
expense on retained business due primarily to the settlement of runoff claims,
reinsurance recoverable on losses and LAE and prepaid reinsurance premiums on
ceded business.
Investing activities in 1998 used cash in the amount of $5.3 million as
premium notes receivable grew from Universal business, the Company purchased
additional software and data processing equipment and paid for its acquisition
of Graward in part with cash. Investments sold or matured totaled $31.5 million
and proceeds were used to purchase new investments totaling $28.5 million. Net
cash flow provided in 1997 by investing activities made up for the deficit in
operating cash flow for the same period, as total funds provided by investing
activities equaled $2.3 million.
In its investment strategy, the Company attempts to match the average
duration of the investment portfolio and the approximate duration of its
liabilities. Total cash and investments at December 31, 1998, 1997 and 1996 were
$64.3 million, $51.8 million and $42.9 million, respectively. All debt
securities are considered available for sale and are carried at market value as
of December 31, 1998 and 1997. The weighted-average maturity of the fixed income
investments as of December 31, 1998 was approximately 2.4 years. Average net
investment yields on the Company's cash and investments were 5.9% in 1998 and
1997.
Financing activities in 1998 provided $10.1 million in cash. These cash
flows were primarily attributed to the purchase and related debt financing of
AFS and Graward. Financing activities since January 1, 1997 are summarized as
follows:
- In June 1997, the Company had 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
24
December 31, 1997, $1,909,000 was outstanding on this line of credit. At
December 31, 1998 there was an outstanding balance of zero.
- Also in the fourth quarter of 1997, the Company issued 220,000 shares of
Cumulative, Convertible, Redeemable, Nonvoting Special Preferred Stock
("Special Stock") to the previous shareholders of Innovative as
consideration for the purchase of Innovative. The Special Stock pays
quarterly dividends at an annual rate of $0.62 per share. On or after
August 15, 2000, but prior to August 15, 2002, the Company at its option
only, may redeem in whole or in part the Special Stock at a price of
$15.00 per share. On August 15, 2002, the Company must redeem any
remaining shares at a rate of $10.00 per share. On or after August 15,
2000, but prior to August 15, 2002, holders of the shares have the right
to convert each share of the Special Stock into 1.23 shares of Common
Stock.
- In March 1998, the Company closed a $15 million Credit Facility (the
"Facility") with a major lending institution to facilitate the purchase of
AFS and Graward. Proceeds were also used to repay in full the notes
payable acquired in the forth quarter of 1997. Principal payments are due
quarterly beginning March 1999 with a final payment of all remaining
principal and accrued interest due in June 2004. Accrued interest is
payable monthly on the outstanding balance under the Facility. As of
December 31, 1998, the outstanding balance under the Facility was
$13,550,000.
- Also in March 1998, the Company issued 50,000 shares, with a value of
$500,000, of $0.625 Cumulative, Convertible, Redeemable, Nonvoting Special
Preferred Stock ("$0.625 Special Stock") to the former owners of AFS as
partial consideration in conjunction with the acquisition of AFS. The
$0.625 Special Stock pays quarterly dividends at an annual rate of $0.625
per share. On or after August 15, 2000, but prior to August 15, 2002, the
company may redeem, in whole or in part, the $0.625 Special Stock at a
price of $15.00 per share and the holders of the $0.625 Special Stock have
the right to convert each share of $0.625 Special stock into 1.25 shares
of common stock, par value $1.00, of the company. On August 15, 2002, the
Company must redeem any remaining shares of $0.625 Special Stock at a rate
of $10.00 per share.
- In May 1998, the Company acquired Graward in part with $2,700,000 in
Subordinated Convertible Notes. The entire principal amount is due in full
on December 31, 2004. Interest payments, which are due quarterly, are
being withheld pending the outcome of certain proceedings described in
Part II under Item 1.
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.
North Carolina and South Carolina insurance laws and regulations require a
domestic insurer to report any action authorizing distributions to shareholders
and material payments from subsidiaries and affiliates at least 30 days prior to
distribution or payment except in limited circumstances. Additionally, those
laws and regulations provide the Department of Insurance with the right to
disapprove and prohibit distributions meeting the definition of an
"Extraordinary Dividend" under the statutes and regulations.
The North Carolina Insurance Holding Company System Regulatory Act provides
that, without prior approval of the Commissioner of Insurance of the State of
North Carolina, dividends within any 12-month period may not exceed the lessor
of (i) 10% of a domestic insurer's surplus as regarding policyholders as of the
preceding December 31 or (ii) the net income, not including realized capital
gains, for the 12-month period ending the preceding December 31. For 1999, no
dividends are available from Universal to the Company.
The South Carolina Insurance Holding Company Regulatory Act provides that,
without prior approval of the Director of Insurance of the State of South
Carolina, dividends within any 12-month period may not exceed the greater of (i)
10% of a domestic insurer's surplus as regarding policyholders as
25
shown in the insurer's most recent annual statement or (ii) a domestic insurer's
net income, not including realized capital gains or losses as shown in the
insurer's most recent annual statement. Furthermore, dividends may only be paid
out of positive earned surplus unless approved by the Director. As of December
31, 1998, SCIC had negative earned surplus.
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 or Universal
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 volume of premiums that the property and casualty insurance subsidiaries
may prudently write is based in part on the amount of statutory net worth as
determined in accordance with applicable insurance regulations. NAIC has adopted
RBC requirements for property and casualty insurance companies to evaluate the
adequacy of statutory capital and surplus in relation to investments and
insurance risks such as asset quality, asset and liability matching, loss
reserve adequacy, and other business factors. The RBC formula is used by state
insurance regulators as an early warning tool to identify, for the purpose of
initiating regulatory action, insurance companies that are potentially
inadequately capitalized. Compliance is determined by the ratio of the
companies' regulatory total adjusted capital to its authorized control level RBC
(as defined by NAIC). All six of the property and casualty insurance
subsidiaries of the Company have December 31, 1998 ratios of total adjusted
capital to RBC that are in excess of the level which would prompt regulatory
action.
UTILIZATION OF NET OPERATING LOSS CARRYFORWARDS
The Company has unused tax operating loss carryforwards and capital loss
carryforwards of approximately $99.8 million for income tax purposes. However,
due to a "change in ownership" event that occurred in January, 1995, the
Company's use of the carryforwards are subject to limitations in future years of
approximately $2 million per year. Net operating loss carryforwards available
for use in 1999 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 determined that a
valuation allowance should be maintained against the net deferred tax asset as
December 31, 1998.
YEAR 2000 COMPLIANCE
In 1997, Seibels Bruce initiated a company-wide program (the "Compliance
Program") to identify and address issues associated with the ability of its
date-sensitive information, policy and claims processing systems and other
equipment to properly recognize the Year 2000 in order that the Company will not
suffer any business interruptions as a result of the century change on January
1, 2000. As well as reviewing internal compliance issues, a program is actively
in place to review all arrangements with third party vendors as well as
non-information technology providers with which the Company does business.
THE COMPANY FACES THE FOLLOWING MAJOR RISKS RELATED TO THE YEAR 2000 COMPLIANCE
ISSUE:
The Company's internal transaction systems that process and issue policies
and changes to those policies, verify policyholder's coverage and process and
make claim payments must be Year 2000 compliant. Without compliance, system
recognition for appropriate renewal, expiration, coverage verification and all
other processing would be impaired.
Vendor systems that process policies and claims outside the Company's
internal system present the same exposure as above and an identical impairment.
26
The Company's telecommunication systems, if not compliant, would impair the
ability to adequately communicate with policyholders and related constituency at
current service levels.
THE STATUS OF THE ABOVE BUSINESS RISKS IS AS FOLLOWS:
In regard to internal systems, the Compliance Program calls for full
conformity to meet all internal policy expiration dates. Work on the Compliance
Program began in 1997 since the Company issues three-year commercial policies.
All other internal systems processing policies with expiration dates of shorter
terms of one year and of six months are currently on target for completion to
process all policy contract obligations. Remediation has been completed on the
Company's Nashville, Tennessee system and it has been issuing policies with
expiration dates beyond the year 2000 since November 30, 1998. The Company
believes that its Columbia, South Carolina processing system has been fully
compliant since mid December 1998 and the Company has been issuing policies with
expiration dates beyond the year 2000 on that system since that time. The
processing system in Winston-Salem, North Carolina is currently being remediated
and is expected to be completed by April 1, 1999. The Company has until May 15,
1999 to complete the process before it would have an impact on its operations.
With regard to the third party vendor, which processes the Company's flood
policies, processing systems; the Company has reviewed the compliance status of
this company. The vendor has been processing three-year policy contracts
beginning in 1997 on a Year 2000 compliant basis and is currently on target to
process policies of shorter terms. This company's compliance plan calls for full
remediation of their system by the end of the first quarter of 1999. The
Company's overall Year 2000 plan includes procedures for assessing all third
party vendors. While not processing policies on their systems, the Company must
submit statistical data to several reporting bureaus, which, if not Year 2000
compliant, could impede the Company's ability to collect funds owed to it by the
agencies for which these bureaus collect data. The largest of these bureaus
believes that it has been compliant since June, 1998 and the other government
agency bureau is not issuing any statements as to its readiness. The Company has
no plans to conduct independent testing of these bureaus. The Company is also in
the process of surveying all of its major reinsurers to evaluate their Year 2000
compliance.
In accordance with the Compliance Program, the Company expects to complete
an upgrade of its phone system by June 1, 1999, and any other equipment that is
not Year 2000 compliant by October 1, 1999. An inventory has been taken of all
software, equipment and facilities related items that may be date sensitive,
such as elevators, alarm systems and heating and cooling systems, and a log is
kept showing the Year 2000 compliance status. The Company anticipates successful
remediation in accordance with the Compliance Plan.
The Company expects to spend between $750,000 and $1,000,000 on Year 2000
compliance covering both external and internal costs through out the remediation
process, of which a significant portion, approximately $650,000, was allocated
as an expense in 1998. Of the 1998 portion of such expenses, approximately
$520,000 was paid to outside providers. The Company also spent approximately
$25,000 in 1997. All charges in 1998 were to modify software; all 1997 charges
were paid to consultants to identify Year 2000 issues.
Even though the Company has had much success with the remediation process to
date, it has developed a contingency plan should the Winston-Salem, North
Carolina processing system not be compliant in time. The Company has the
capability and capacity to use its Columbia processing system, which has already
been remediated, to process those policies currently processed on the
Winston-Salem system. The Company also believes that the completed and planned
modifications of its internal systems and equipment will allow it to be Year
2000 compliant in a timely manner. However, there can be no assurance that the
Company's internal systems or equipment, or those of third parties on which the
Company relies, will be Year 2000 compliant in a timely manner or that
contingency plans of any third parties will mitigate the effects of
noncompliance. The failure of systems or equipment of the Company or
27
third parties could have a material adverse effect on the Company's business and
consolidated financial statements.
The Audit Committee of the Company's Board of Directors is updated monthly
as to the status of the Company's readiness. In addition, the Company's Vice
President of Audit and Planning monitors the status of all Year 2000 projects
and has direct access to all Information Services personnel and the Audit
Committee of the Board of Directors.
FORWARD-LOOKING STATEMENTS
The preceding Year 2000 compliance statement contains various
forward-looking statements which represent the Company's beliefs or expectations
regarding future events. When used in the Year 2000 compliance discussion the
words "believes" "anticipates" and "expects" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements
include, without limitation, the Company's expectations as to when it will
complete the remediation and testing phases of its Year 2000 program and those
of its third party vendors; its estimated cost of achieving Year 2000
compliance; and the Company's belief that its internal systems and equipment
will be Year 2000 compliant in a timely manner. All forward-looking statements
involve a number of risks and uncertainties that could cause actual results to
differ materially from the projected results. Factors that may cause these
differences include, but are not limited to, the availability of qualified
personnel and other information technology resources; the ability to identify
and remediate all the date sensitive lines of computer code or to replace
embedded computer chips in affected systems of equipment; and the actions of
third parties with respect to Year 2000 compliance.
28
Item 8. Financial Statements and Supplementary data (continued on following
page).
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
The Seibels Bruce Group, Inc.:
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, 1998 and 1997, 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, 1998. 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Seibels
Bruce Group, Inc. and subsidiaries, as of December 31, 1998 and 1997 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
As explained in Note 1 to the financial statements, effective January 1,
1998, the Company adopted the provisions of SOP 97-3, "Accounting by Insurance
and Other Enterprises for Insurance Related Assessments", and changed its method
of accounting for the Company's participation in the North Carolina Reinsurance
Facility.
Our audits were 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 14 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 audit of the basic financial statements, 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.
ARTHUR ANDERSEN LLP
Columbia, South Carolina
March 19, 1999
30
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FOR THE YEAR ENDED DECEMBER 31,
(DOLLARS SHOWN IN THOUSANDS)
1998 1997
--------- ---------
ASSETS
Investments:
Debt securities, available-for-sale, at market (cost of $38,788 at 1998 and $41,845 at
1997).................................................................................... $ 39,695 $ 41,934
Equity securities, at market (cost of $1,306 at 1998 and $906 at 1997)..................... 1,306 915
Cash and short-term investments............................................................ 23,141 8,922
Other long-term investments................................................................ 108 22
--------- ---------
Total cash and investments............................................................... 64,250 51,793
Accrued investment income.................................................................... 880 785
Premiums and agents' balances receivable, net................................................ 14,728 5,674
Premium notes receivable..................................................................... 4,606 3,233
Reinsurance recoverable on paid losses and loss adjustment expenses.......................... 29,972 30,244
Reinsurance recoverable on unpaid losses and loss adjustment expenses........................ 83,654 75,616
Property and equipment, net.................................................................. 6,028 5,462
Prepaid reinsurance premiums--ceded business................................................. 59,619 50,602
Deferred policy acquisition costs............................................................ 2,472 1,580
Goodwill..................................................................................... 20,892 2,557
Other assets................................................................................. 8,462 7,072
--------- ---------
Total assets............................................................................. $ 295,563 $ 234,618
--------- ---------
--------- ---------
LIABILITIES
Losses and loss adjustment expenses
Reported and estimated losses and claims--retained business................................ $ 28,950 $ 30,847
--ceded business....................................... 74,746 66,262
Adjustment expenses--retained business..................................................... 7,372 8,307
--ceded business......................................................... 8,908 9,354
Unearned premiums:
Property and casualty--retained business................................................... 12,919 3,739
--ceded business......................................................... 59,619 50,602
Credit life................................................................................ 22 41
Balances due other insurance companies....................................................... 39,024 15,489
Debt......................................................................................... 16,250 3,036
Current income taxes payable................................................................. -- 41
Other liabilities and deferred items......................................................... 9,465 7,156
--------- ---------
Total liabilities........................................................................ 257,275 194,874
--------- ---------
--------- ---------
COMMITMENTS AND CONTINGENCIES
Issued and outstanding 220,000 shares of cumulative $0.62, convertible, redeemable, nonvoting
special preferred stock, redemption value $2,200........................................... 2,200 2,200
Issued and outstanding 50,000 shares of cumulative $0.625, convertible, redeemable, nonvoting
special preferred stock, redemption value $500............................................. 500 --
--------- ---------
Total special stock...................................................................... 2,700 2,200
--------- ---------
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, $1 par value, authorized 17,500,000 shares in 1998 and 12,500,000 shares in
1997, issued and outstanding 7,773,075 and 7,730,725 shares in 1998 and 1997,
respectively............................................................................... 7,773 7,731
Additional paid-in-capital................................................................... 61,861 61,665
Accumulated other comprehensive income....................................................... 907 47
Accumulated deficit.......................................................................... (34,953) (31,899)
--------- ---------
Total shareholders' equity................................................................. 35,588 37,544
--------- ---------
Total liabilities and shareholders' equity................................................. $ 295,563 $ 234,618
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
31
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
(DOLLARS AND WEIGHTED AVERAGE SHARES OUTSTANDING SHOWN IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
1998 1997 1996
--------- --------- ---------
Commission & service income...................................................... $ 49,298 $ 44,105 $ 46,419
Premiums earned:
Property & casualty............................................................ 22,762 6,580 7,186
Credit life.................................................................... 13 156 478
Net investment income............................................................ 3,271 3,121 3,006
Other interest income............................................................ 1,374 766 801
Realized gains (losses).......................................................... 55 529 (14)
Other income..................................................................... 4,644 112 151
--------- --------- ---------
Total revenue................................................................ 81,417 55,369 58,027
--------- --------- ---------
Expenses
Property & casualty:
Losses & loss adjustment expenses............................................ 25,269 8,840 11,814
Policy acquisition costs..................................................... 10,237 1,207 1,777
Credit life benefits........................................................... (46) 70 203
Interest expense............................................................... 981 89 174
Other operating costs & expenses............................................... 46,808 41,114 39,014
Restructuring charge........................................................... 546 -- --
--------- --------- ---------
Total expenses............................................................... 83,795 51,320 52,982
--------- --------- ---------
--------- --------- ---------
(Loss) income from operations, before (benefit) provision for income taxes and
effect of change in accounting principle....................................... (2,378) 4,049 5,045
(Benefit) provision for income taxes............................................. (85) 46 (131)
--------- --------- ---------
(Loss) income before effect of change in accounting principle.................... (2,293) 4,003 5,176
Effect of change in accounting principle......................................... (601) -- --
--------- --------- ---------
Net (loss) income................................................................ (2,894) 4,003 5,176
Other Comprehensive Income
Change in value of marketable securities, less reclassification adjustment of
$85, $218 and $(14) for gains (losses) included in net (loss) income in 1998,
1997 and 1996, respectively.................................................. 860 583 (937)
--------- --------- ---------
Comprehensive (loss) income...................................................... $ (2,034) $ 4,586 $ 4,239
--------- --------- ---------
--------- --------- ---------
Basic earnings per share before change in accounting principle:
Net (loss) income.............................................................. $ (0.31) $ 0.57 $ 1.05
--------- --------- ---------
--------- --------- ---------
Weighted average shares outstanding............................................ 7,763 7,002 4,918
--------- --------- ---------
--------- --------- ---------
Diluted earnings per share before change in accounting principle:
Net (loss) income.............................................................. $ (0.31) $ 0.55 $ 0.94
--------- --------- ---------
--------- --------- ---------
Weighted average shares outstanding............................................ 7,763 7,274 5,492
--------- --------- ---------
--------- --------- ---------
Basic earnings per share after change in accounting principle:
Net (loss) income.............................................................. $ (0.39) $ 0.57 $ 1.05
--------- --------- ---------
--------- --------- ---------
Weighted average shares outsanding............................................. 7,763 7,002 4,918
--------- --------- ---------
--------- --------- ---------
Diluted earnings per share after change in accounting principle:
Net (loss) income.............................................................. $ (0.39) $ 0.55 $ 0.94
--------- --------- ---------
--------- --------- ---------
Weighted average shares outstanding............................................ 7,763 7,274 5,492
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
32
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
1998 1997 1996
---------- ---------- ----------
Common stock outstanding:
Beginning of year........................................................... $ 7,731 $ 6,168 $ 4,193
Stock issued in connection with offering.................................... -- 1,428 --
Stock issued under benefit and stock option plans........................... 42 135 4
Stock issued in connection with capital contributions....................... -- -- 1,971
---------- ---------- ----------
End of year................................................................. $ 7,773 $ 7,731 $ 6,168
---------- ---------- ----------
---------- ---------- ----------
Additional paid-in-capital:
Beginning of year........................................................... $ 61,665 $ 54,050 $ 46,660
Stock issued in connection with offering.................................... -- 7,175 --
Stock issued under benefit and stock option plans, net of repurchase........ 196 440 21
Stock issued in connection with capital contributions....................... -- -- 7,369
---------- ---------- ----------
End of year................................................................. $ 61,861 $ 61,665 $ 54,050
---------- ---------- ----------
---------- ---------- ----------
Accumulated other comprehensive income:
Beginning of year........................................................... $ 47 $ (536) $ 401
Change during the year...................................................... 860 583 (937)
---------- ---------- ----------
End of year................................................................. $ 907 $ 47 $ (536)
---------- ---------- ----------
---------- ---------- ----------
Accumulated deficit:
Beginning of year........................................................... $ (31,899) $ (35,891) $ (41,067)
Net (loss) income for the year.............................................. (2,894) 4,003 5,176
Special stock dividend...................................................... (160) (11) --
---------- ---------- ----------
End of year................................................................. $ (34,953) $ (31,899) $ (35,891)
---------- ---------- ----------
---------- ---------- ----------
Total shareholders' equity................................................ $ 35,588 $ 37,544 $ 23,791
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements
33
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net (loss) income................................................................. $ (2,894) $ 4,003 $ 5,176
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Amortization of deferred policy acquisition costs................................. 10,237 1,207 1,777
Equity in earnings of unconsolidated subsidiary................................... (392) -- --
Depreciation and amortization..................................................... 2115 856 979
Realized (gains) losses on investments............................................ (85) (218) 14
Realized loss (gain) on sale of property and equipment............................ 31 (311) --
Stock issued as compensation...................................................... -- 81 16
Change in assets and liabilities:
Accrued investment income....................................................... (95) 72 (75)
Premium and agents' balances receivable, net.................................... 5,838 1,165 528
Reinsurance recoverable on losses and loss adjustment expenses.................. (7,766) 27,972 (1,028)
Prepaid reinsurance premiums--ceded business.................................... (9,017) 964 (2,649)
Deferred policy acquisition costs............................................... (11,129) (1,006) (1,580)
Unpaid losses and loss adjustment expenses...................................... 5,206 (34,899) (13,371)
Unearned premiums............................................................... 18,178 (2,831) 1,565
Balances due other insurance companies.......................................... 1,964 3,383 (3,702)
Current income taxes payable.................................................... (41) 24 (174)
Other, net...................................................................... (2,758) (3,026) (414)
--------- --------- ---------
Net cash provided by (used in) operating activities................................. 9,392 (2,564) (12,938)
--------- --------- ---------
Cash flows from investing activities:
Proceeds from investments sold or matured......................................... 31,542 4,262 7,049
Cost of investments acquired...................................................... (28,495) (1,554) (14,288)
Premium notes receivable.......................................................... (1,373) 194 --
Proceeds from property and equipment sold......................................... 40 665 116
Purchase of property and equipment................................................ (1,392) (1,074) (797)
Cost of purchased subsidiary, net of cash acquired of $4,111...................... (5,598) -- --
--------- --------- ---------
Net cash (used in) provided by investing activities................................. (5,276) 2,493 (7,920)
--------- --------- ---------
Cash flows from financing activities:
Issuance of capital stock......................................................... 238 575 9,349
Issuance of debt, net of repayment................................................ 10,025 (2,849) (2,476)
Dividends paid.................................................................... (160) -- --
Proceeds from stock offerings..................................................... -- 8,603 --
--------- --------- ---------
Net cash provided by financing activities........................................... 10,103 6,329 6,873
--------- --------- ---------
Net increase (decrease) in cash and short term investments.......................... 14,219 6,258 (13,985)
Cash and short term investments, beginning of year.................................. 8,922 2,664 16,649
--------- --------- ---------
Cash and short term investments, end of year........................................ $ 23,141 $ 8,922 $ 2,664
--------- --------- ---------
--------- --------- ---------
Supplemental cash flow information:
Interest paid..................................................................... $ 922 $ 61 $ 350
Income taxes paid................................................................. 39 21 43
--------- --------- ---------
--------- --------- ---------
Noncash investing activities:
Acquisition:
Cash paid, net of cash acquired of $4,111....................................... $ (5,598) $ -- $ --
Issuance of debt................................................................ (2,700) --
Preferred stock issued.......................................................... (500) (2,200) --
Assets acquired................................................................. 17,563 36,831 --
Liabilities assumed............................................................. (27,247) (37,224) --
--------- --------- ---------
Goodwill........................................................................ $ (18,482) $ (2,593) $ --
--------- --------- ---------
Stock issued for consulting services/compensation................................... $ -- $ 81 $ 16
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements
34
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The Seibels Bruce Group, Inc. ("SBIG", or the "Company") provides
automobile, flood, and other property and casualty insurance services and
products to customers located primarily in the southeastern United States. The
Company's largest source of revenues derives from its role as one of three
servicing carriers for the South Carolina Reinsurance Facility (the "SC
Facility"), a state-sponsored plan for insuring South Carolina drivers outside
of the voluntary market. The Company also is a leading provider, and an original
participant, in the National Flood Insurance Program (the "NFIP"), a flood
insurance program administered by the federal government. As a servicing carrier
for the SC Facility and the NFIP, the Company receives commissions and fees, but
retains no underwriting risk. Prior to February 1, 1998, the Company provided
other fee-based services in its capacity as a managing general agent ("MGA") for
commercial insurance policies underwritten by unaffiliated insurance companies.
The Company also receives fee-based income from its catastrophe claims adjusting
services, excess and surplus lines brokerage services and liability runoff
management services.
In 1997, the Company began marketing and underwriting nonstandard automobile
insurance on a risk-bearing basis. In the fourth quarter of 1997, the Company
purchased The Innovative Company ("Innovative") and its subsidiaries Universal
Insurance Company ("Universal") and Premium Budget Plan, Inc. ("PBP"). Universal
is a nonstandard automobile insurance company domiciled in North Carolina.
Universal receives commission and service income for a large portion of its
business which it cedes to the North Carolina Reinsurance Facility ("NC
Facility"). The NC Facility is a state sponsored plan for insuring North
Carolina drivers outside of the voluntary market. PBP is a premium finance
company incorporated in North Carolina. Only one month's operations of
Innovative is included in the financial statements for 1997. On July 1, 1998,
Innovative (the holding company only) was merged into the Company.
In the first quarter of 1998, the Company purchased America's Flood
Services, Inc. ("AFS") located in California. AFS offers flood zone
determinations and compliance tracking for a fee. 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 and offers 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, in the new South Carolina Associated Auto Insurers Plan ("SCAAIP"), a
joint underwriting association which takes effect March 1, 1999. The SCAAIP will
survive the SC Facility and offers the Company access to additional fee-based
revenue with no underwriting risk.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP) and include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain classifications previously presented in the consolidated financial
statements for prior years have been changed to conform to current
classifications.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the
35
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates, although, in the opinion of the
management, such differences would not be significant.
CASH AND SHORT-TERM INVESTMENTS
For purposes of the Consolidated Statements of Cash Flows, the Company
considers both cash and short-term investments within the caption "cash and
short-term investments" to be those highly liquid investments purchased with an
initial maturity of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with FASB (Financial Accounting Standards Board) Statement No.
115, investments in debt and equity securities are classified as either
held-to-maturity, available-for-sale or trading. The Company currently holds all
securities as available-for-sale, and reports them at fair value, with
subsequent changes in value reflected as unrealized investment gains and losses
credited or charged directly to other accumulated comprehensive income included
in shareholders' equity. The fair values of cash and short-term investments
approximate carrying value because of the short maturity of those instruments.
The fair values of debt securities and equity securities were determined in
accordance with methods prescribed by the National Association of Insurance
Commissioners ("NAIC") which do not differ materially from nationally quoted
market prices. The fair market value of certain municipal bonds is assumed to be
equal to amortized cost where no market quotations exist.
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. Debt is carried at
the outstanding balance which approximates fair value as a result of the debt at
a market rate.
STOCK SPLIT
In April, 1997, the Company executed a 1-for-4 reverse stock split of its
common stock. All references in the financial statements, notes thereto and
other references to number of shares or earnings per share reflect this
transaction for all periods disclosed.
PROPERTY AND CASUALTY PREMIUMS
Property and casualty premiums are reflected in income when earned as
computed on a monthly pro-rata basis. Written premiums and earned premiums have
been reduced by reinsurance placed with other companies, including substantial
amounts related to business produced as a servicing carrier.
PREMIUM NOTES RECEIVABLE
The Company offers premium financing arrangements which require a down
payment and is collected in equal installments over the policy term.
CREDIT LIFE PREMIUMS
Credit life premiums are reflected in income when earned as computed on a
monthly pro-rata basis for level term premiums and on a sum-of-the-digits method
for decreasing term premiums.
36
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
COMMISSION AND SERVICE INCOME
Commission and service income is predominately derived from servicing
carrier and certain managing general agent activities. The commission income
related to producing and underwriting the business is recognized in the period
in which the business is written. Service income related to claims processing is
recognized on an accrual basis as earned.
POLICY ACQUISITION COSTS
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.
PROPERTY AND CASUALTY UNPAID LOSS AND LOSS ADJUSTMENT EXPENSE
The liability for property and casualty unpaid losses and loss adjustment
expenses includes:
(1) An accumulation of case estimates for losses reported prior to the close of
the accounting period.
(2) Estimates of incurred-but-not-reported losses based upon past experience and
current circumstances.
(3) Estimates of allocated, as well as unallocated, loss adjustment expense
liabilities by applying percentage factors to the unpaid loss reserves, with
such factors determined on a by-line basis from past results of paid loss
expenses to paid losses.
(4) The deduction of estimated amounts recoverable from salvage, subrogation,
and second injury funds.
(5) Estimated losses for reinsurance ceded and assumed.
Management, in conjunction with the Company's consulting actuaries, performs
a complete review of the above components of the Company's loss reserves to
evaluate the adequacy of such reserves. Management believes the reserves, which
approximate the amount determined by independent actuarial reviews, are
sufficient to prevent prior years' losses from adversely affecting future
periods; however, establishing reserves is an estimation process and adverse
developments in future years may occur and would be recorded in the year so
determined.
EARNINGS PER SHARE
Basic per share data is based on the weighted average number of shares
outstanding. Diluted per share data is based on the weighted average number of
shares outstanding including the effects of stock options and/or convertible
preferred stock (See Note 9).
ALLOWANCE FOR UNCOLLECTABLE ACCOUNTS
The Company routinely evaluates the collectibility of receivables and has
established an allowance for uncollectable accounts for agents' balances and
direct bill balances receivable, other receivables, and premium notes receivable
in the amount of approximately $2,935 and $1,321 at December 31, 1998 and
December 31, 1997, respectively.
37
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
PROPERTY, EQUIPMENT AND SOFTWARE
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.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill and deferred loan costs.
Goodwill is the excess of the amount paid to acquire a company over the fair
value of its net assets, reduced by amortization and any subsequent valuation
adjustments. The Company amortizes goodwill over a period of 40 years. Deferred
loan costs are the costs associated with issuing long term debt. The costs are
amortized over the life of the debt. Intangible assets are evaluated regularly
for other-than-temporary impairment. If circumstances suggest that their value
may be impaired and the write-down would be material, an assessment of
recoverability is performed and any impairment is recorded through a valuation
allowance with a corresponding charge recorded in the income statement.
OTHER INTEREST INCOME
Other interest income includes interest received on reinsurance balances
withheld, agents' balances receivable, balances due from the SC Facility, and
financing of premium notes receivable.
CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1998, the Company adopted the provisions of SOP 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments", and recorded it as a cumulative effect of a change in accounting
principle of $601. As a result, the Company's participation in the North
Carolina Reinsurance Facility ("NC Facility") is no longer being treated as
assumed reinsurance and all amounts assumed from the NC Facility have been
eliminated. The NC Facility is now treated as an assessment organization. The
effect of the change in accounting principle was a reduction of $.08 per share
on both a basic and diluted basis. Below are the actual and pro forma EPS for
the twelve months ended December 31, 1998 and 1997, respectively assuming the
change in accounting principle was applied retroactively.
TWELVE MONTHS ENDED
DECEMBER 31
--------------------
1998 1997
--------- ---------
Net (loss) income
Earnings per common share:................................................ $ (2,293) $ 3,544
Basic................................................................... $ (0.31) $ 0.51
Diluted................................................................. $ (0.31) $ 0.49
RESTRUCTURING CHARGE
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
38
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
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.
RECENT ACCOUNTING PRONOUNCEMENTS
During the first quarter of 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
capitalization of computer software costs that meet certain criteria. The
statement is effective for fiscal years beginning after December 15, 1998. The
Company adopted SOP 98-1 effective January 1, 1999. SOP 98-1 is not expected to
have a material impact on the Company's financial position or results of
operations.
Effective January 1, 1998, the Company adopted FASB 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.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statements establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
This statement could increase volatility in earnings and other comprehensive
income. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will adopt SFAS No. 133 effective
January 1, 2000; it is not expected to have a material impact on the Company's
financial position or results of operations.
NOTE 2 INVESTMENTS
Investments in notes and other debt securities and common stocks are all
considered available-for-sale securities and are carried at market value at
December 31, 1998 and 1997. Short-term investments are carried at cost, which
approximates market value.
Unrealized gains and losses on marketable debt and equity securities are
credited or charged directly to accumulated other comprehensive income and
included in shareholders' equity. Realized gains and losses on investments
included in the results of operations are determined using the "identified
certificate" cost method.
39
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
Realized gains (losses) on investments are summarized as follows:
DEBT EQUITY
SECURITIES SECURITIES OTHER TOTAL
----------- ----------- ----------- ---------
Realized:
1998.............................................. $ 85 $ -- $ -- $ 85
1997.............................................. $ 12 $ 227 $ 290 $ 529
1996.............................................. $ (62) $ 48 $ -- $ (14)
Change in unrealized:
1998.............................................. $ 893 $ (47) $ 14 $ 860
1997.............................................. $ 581 $ 8 $ (6) $ 583
1996.............................................. $ (902) $ (154) $ 119 $ (937)
Net bond discount accretion and premium amortization charged to income for
the years ended December 31, 1998, 1997 and 1996 was not material.
Unrealized gains and losses reflected in equity are as follows:
1998 1997 1996
--------- --------- ---------
Gross unrealized gains............................................... $ 907 $ 202 $ 8
Gross unrealized losses.............................................. -- (155) (544)
--------- --------- ---------
Net unrealized gain (loss)......................................... $ 907 $ 47 $ (536)
--------- --------- ---------
--------- --------- ---------
Proceeds from sales of debt securities and related realized gains and losses
were as follows:
1998 1997 1996
--------- --------- ---------
Proceeds from sales............................................. $ 31,542 $ 2,145 $ 3,554
Gross realized gains............................................ $ 523 $ 12 $ 30
Gross realized losses........................................... $ 409 $ -- $ (92)
Proceeds from sales of equity securities and related realized gains and
losses were as follows:
1998 1997 1996
--------- --------- ---------
Proceeds from sales................................................... $ -- $ 254 $ 400
Gross realized gains.................................................. $ -- $ 227 $ 75
Gross realized losses................................................. $ -- $ -- $ (127)
Investments which exceed 10% of shareholders' equity, excluding investments
in U. S. Government and government agencies and authorities, at December 31,
1998, are as follows:
SHORT-TERM INVESTMENTS: CARRYING VALUE
- ------------------------------------------------------------------------------ ---------------
Norwest Money Market.......................................................... $ 5,567
There were no debt securities which were non-income producing for the 12
months ended December 31, 1998. Debt securities with an amortized cost of $25
million at both December 31, 1998 and 1997, were on deposit with regulatory
authorities.
40
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
The amortized cost and estimated market values of investments in debt and
equity securities were as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1998 COST GAINS LOSSES VALUE
- ------------------------------------------- ----------- ------------- ------------- ------------
U. S. Government & government agencies and
authorities.............................. $ 33,941 $ 859 $ (14) $ 34,786
States, municipalities & political
subdivisions............................. 594 41 -- 635
Corporate bonds............................ 4,253 25 (4) 4,274
----------- ----- --- ------------
Total debt securities.................... 38,788 925 (18) 39,695
----------- ----- --- ------------
Common stocks.............................. 1,306 -- -- 1,306
----------- ----- --- ------------
Other long-term investments................ 108 -- -- 108
----------- ----- --- ------------
Total.................................... $ 40,202 $ 925 $ (18) $ 41,109
----------- ----- --- ------------
----------- ----- --- ------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DECEMBER 31, 1997 COST GAINS LOSSES MARKET VALUE
- ------------------------------------------- ----------- ------------- ----------- ------------
U. S. Government & government Agencies and
authorities.............................. $ 38,581 $ 146 $ (103) $ 38,624
States, municipalities & political
Subdivisions............................. 2,246 43 -- 2,289
Corporate bonds............................ 1,018 4 (1) 1,021
----------- ----- ----- ------------
Total debt securities.................... 41,845 193 (104) 41,934
----------- ----- ----- ------------
Common stocks.............................. 906 9 -- 915
----------- ----- ----- ------------
Other long-term investments................ 73 -- (51) 22
----------- ----- ----- ------------
Total.................................... $ 42,824 $ 202 $ (155) $ 42,871
----------- ----- ----- ------------
----------- ----- ----- ------------
Actual maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without penalties. The
amortized cost and estimated market value of debt securities at December 31,
1998 by contractual maturity, are as follows:
MARKET
TOTAL COST VALUE
----------- ---------
Due in one year or less................................................ $ 5,821 $ 5,884
Due after one year through five years.................................. 29,264 29,981
Due after five years through ten years................................. 3,434 3,539
Due after ten years.................................................... 269 291
----------- ---------
Total.................................................................. $ 38,788 $ 39,695
----------- ---------
----------- ---------
41
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
Investment income as of December 31 consists of the following:
1998 1997 1996
--------- --------- ---------
Debt securities.................................................. $ 2,474 $ 2,253 $ 2,122
Equity securities................................................ 97 8 9
Short-term investments........................................... 699 855 849
Other............................................................ 56 39 56
--------- --------- ---------
Total investment income........................................ 3,326 3,155 3,036
Investment expenses.............................................. (55) (34) (30)
--------- --------- ---------
Net investment income.......................................... $ 3,271 $ 3,121 $ 3,006
--------- --------- ---------
--------- --------- ---------
NOTE 3 PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
DESCRIPTION LIFE IN YEARS 1998 1997
- -------------------------------------------------------- ------------- ---------- ----------
Land.................................................... -- $ 1,054 $ 1,054
Buildings............................................... 10-40 4,210 4,210
Data processing equipment and software.................. 3-7 7,845 6,115
Furniture and equipment................................. 3-10 9,161 7,584
---------- ----------
22,270 18,963
Accumulated depreciation................................ (16,242) (13,501)
---------- ----------
$ 6,028 $ 5,462
---------- ----------
---------- ----------
Depreciation expense charged to operations was $1.5 million in 1998, $.9
million in 1997, and $1 million in 1996.
NOTE 4 DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs incurred and amortized to income on property and
casualty business were as follows:
1998 1997
---------- ---------
Deferred at beginning of year........................................... $ 1,565 $ --
---------- ---------
Deferred costs acquired................................................. -- 1,686
---------- ---------
Costs incurred and deferred during year:
Commissions and brokerage............................................. 8,347 1,064
Taxes, licenses and fees.............................................. 1,113 10
Other................................................................. 1,669 12
---------- ---------
Total................................................................... 11,129 1,086
Amortization charges to income during year.............................. (10,222) (1,207)
---------- ---------
Deferred at end of year................................................. $ 2,472 $ 1,565
---------- ---------
---------- ---------
42
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
Deferred policy acquisition costs attributable to the credit life operation
were none in 1998 and $15 in 1997. These costs represent that portion of the
cost of writing business which is deferred and charged against income, through
other operating costs and expenses, as premiums are earned.
NOTE 5 DEBT
Debt consisted of the following as of December 31:
1998 1997
--------- ---------
Credit facility with a major lending institution......................... $ 13,550 $ --
Subordinated convertible notes........................................... 2,700
Notes payable with a regional lending institution........................ -- 3,036
--------- ---------
$ 16,250 $ 3,036
--------- ---------
--------- ---------
On May 1, 1998, the Company issued subordinated convertible notes (the
"Notes") (See Note 8). The Notes bear interest at a rate equal to 5% per annum.
The entire principal amount due under the Notes is payable in full on December
31, 2004, provided however, that if certain outstanding debt is paid in full and
upon 60 days prior written notice, the Notes will become payable six months
after such debt is paid in full provided, however, that in no event will the
Notes become payable earlier than April 1, 2003. At the election of the holder
of the Notes, the Notes may be converted into 300,000 shares of Common Stock on
the maturity date, provided, however, that notice has been given of such
election at any time on or after the 45(th) day prior to the maturity date of
the Notes up to but not including the 15(th) day prior to the maturity date.
Effective March 31, 1998 the Company closed a $15,000,000 Credit Facility
(the "Facility") with a major lending institution for the purpose of financing
its acquisition activity and other general corporate purposes. Principal
payments are due quarterly beginning March 1999 with a final payment of all
remaining principal and accrued interest due in June 2004. Accrued interest is
payable monthly on the outstanding balance under the Facility and is calculated,
at the Company's discretion, using a pre-determined spread over LIBOR or the
prime interest rate of the lending institution. The effective interest rate as
of December 31, 1998 was 8.3125%. The Facility is secured by a lien on the
assets of the Company. As of December 31, 1998, the outstanding balance under
the Facility was $13,550,000.
The Credit Agreement stipulates that the Company demonstrate compliance with
a number of affirmative and negative covenants on a quarterly basis. Significant
financial covenants include minimum statutory surplus levels, ratios of debt to
total capitalization and cash flow coverage. As of December 31, 1998, the
Company was either in compliance or obtained waivers of non-compliance for all
covenants. Management is of the opinion that it will maintain compliance with
the covenants.
43
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
Scheduled maturities of the debt are as follows:
1999............................................................... $ 1,264
2000............................................................... 1,626
2001............................................................... 2,439
2002............................................................... 2,530
2003............................................................... 2,530
Thereafter......................................................... 5,861
---------
$ 16,250
---------
---------
NOTE 6 INCOME TAXES
The Company files a consolidated federal income tax return which includes
all companies. A formal tax-sharing agreement has been established by the
Company with its subsidiaries.
The Company uses the liability method in accounting for income taxes.
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given currently enacted tax laws. A reconciliation of the difference
between income tax provision (benefit) on income from operations computed at the
federal statutory income tax rate is as follows:
1998 1997 1996
--------- --------- ---------
Federal income tax (benefit) provision at statutory rates....... $ (808) $ 1,376 $ 1,715
Increase (decrease) in taxes due to:
Tax exempt interest........................................... (18) (2) (5)
Dividends received deduction.................................. -- (3) (2)
Overaccrual from prior years.................................. (85) -- (187)
Limitation of net operating loss carryforward due to change in
control..................................................... -- -- 3,617
Changes in valuation allowances:
Utilization of net operating loss........................... -- (1,339) (1,590)
Reduction due to limitation of net operating loss........... 751 -- (3,617)
Other........................................................... 75 14 (62)
--------- --------- ---------
Tax (benefit) provision....................................... $ (85) $ 46 $ (131)
--------- --------- ---------
--------- --------- ---------
The provision for income taxes on income from operations consists primarily
of current income taxes resulting from alternative minimum tax. The change in
deferred amounts has been offset by the valuation allowance.
44
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
Deferred tax liabilities and assets at December 31, 1998, 1997 and 1996 are
comprised of the following:
1998 TAX 1997 TAX
EFFECT EFFECT
-------------- --------------
Deferred tax liabilities:
Deferred acquisition costs.................................. $ 840 $ 559
Property and equipment...................................... 57 57
Net unrealized investment gains............................. 287 16
Other....................................................... 106 221
-------------- --------------
Total deferred liabilities................................ 1,290 853
-------------- --------------
Deferred tax assets:
Net operating loss carryforwards............................ (10,961) (10,203)
Insurance reserves.......................................... (2,957) (2,460)
Bad debts................................................... (998) (475)
Other....................................................... (316) (287)
-------------- --------------
Total deferred tax assets................................. (15,232) (13,425)
-------------- --------------
Valuation allowance........................................... 13,942 12,572
-------------- --------------
Net deferred tax liabilities.................................. $ -- $ --
-------------- --------------
-------------- --------------
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, 1998.
The Company has unused tax operating loss carryforwards and capital loss
carryforwards of $99.8 million for income tax purposes. However, due to a
"change in ownership" event that occurred in January, 1995, the Company's use of
the net operating loss carryforwards are subject to maximum limitations in
future years of approximately $2 million per year. Net operating loss
carryforwards available for use in 1999 are approximately $7.2 million due to
losses incurred in 1995 after the change in ownership event occurred and
carryover of previous years' unused limitations.
The years of expiration of the tax carryforwards are as follows:
NET OPERATING
YEAR OF EXPIRATION LOSS CAPITAL LOSS
- ----------------------------------------------------------------- ------------- -------------
1999......................................................... $ -- $ 4,025
2000......................................................... -- 824
2001......................................................... -- 13
2004......................................................... 12,825 --
2006......................................................... 20,411 --
2007......................................................... 31,931 --
2009......................................................... 19,342 --
2010......................................................... 3,918 --
2011......................................................... 1,764 --
2012......................................................... 690 --
2013......................................................... 4,030 --
------------- ------
$ 94,911 $ 4,862
------------- ------
------------- ------
45
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
NOTE 7 PROPERTY AND CASUALTY UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE
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. As of December 31, 1998 and 1997, $8.7 and $7.5 million
respectively of claims payments have been made since June 7, 1994.
Of the remaining environmental, pollution and toxic tort claims, the
following activity took place during 1998 and 1997:
1998 1997
----- -----
Pending, January 1.............................................................. 47 71
New claims advised.............................................................. 10 11
Claims settled.................................................................. 14 35
-- --
Pending, December 31............................................................ 43 47
-- --
-- --
The policies corresponding to these claims were written on a direct basis.
The Company has excess of loss reinsurance with company retention through 1980
of $ 100 and $ 500 after that date. The claims are reserved as
follows as of December 31, 1998 and 1997:
1998 1997
--------- ---------
Case reserves.............................................................. $ 2,625 $ 2,960
IBNR reserves.............................................................. 4,310 4,641
LAE reserves............................................................... 1,900 1,820
--------- ---------
Total.................................................................... $ 8,835 $ 9,421
--------- ---------
--------- ---------
The claims involve four Superfund sites, seven asbestos or toxic claims, two
underground storage tanks and 30 miscellaneous clean-up sites. For this direct
business there are usually several different insurers participating in the
defense and settlement of claims made against the insured. Costs and settlements
are pro-rated by either time on the risk or policy limits.
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. 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.
Because only 43 claims remain open as of December 31,1998, 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.
46
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
Losses incurred are reduced by recoveries made and estimated to be made from
reinsurers based on projected ultimate losses. Such amounts also include
substantial amounts related to the business produced as a servicing carrier.
Estimated reinsurance recoveries are as follows:
1998 1997 1996
---------- ---------- ----------
Losses incurred.......................................... $ 147,316 $ 100,182 $ 158,307
Loss adjustment expenses................................. 7,122 4,380 5,583
---------- ---------- ----------
Total.................................................. $ 154,438 $ 104,562 $ 163,890
---------- ---------- ----------
---------- ---------- ----------
The following table summarizes net property and casualty losses and LAE
incurred:
1998 1997 1996
---------- ---------- ----------
Estimated losses and LAE incurred........................ $ 179,707 $ 113,402 $ 175,704
Estimated reinsurance loss recoveries on incurred
losses................................................. (154,488) (104,582) (163,890)
---------- ---------- ----------
$ 25,269 $ 8,840 $ 11,814
---------- ---------- ----------
---------- ---------- ----------
47
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
Activity in the liability for unpaid losses and LAE is summarized as
follows:
1998 1997 1996
---------- ---------- ----------
Liability for losses and LAE at the beginning of the
year:
Gross liability per balance sheet...................... $ 114,770 $ 132,152 $ 145,523
Ceded reinsurance recoverable, classified as an
asset................................................ (75,616) (84,725) (84,492)
---------- ---------- ----------
Net liability.......................................... 39,154 47,427 61,031
---------- ---------- ----------
Reserves acquired in purchase of Universal............... -- 2,655 --
---------- ---------- ----------
Provision for losses and LAE for claims occurring in the
current year........................................... 24,450 12,202 10,697
(Decrease) Increase in estimated losses and LAE for
claims occurring in prior years........................ 819 (3,362) 1,117
---------- ---------- ----------
25,269 8,840 11,814
---------- ---------- ----------
Losses and LAE payments for claims occurring during
Current year........................................... 18,398 8,845 9,151
Prior years............................................ 9,703 10,923 16,267
---------- ---------- ----------
28,101 19,768 25,418
---------- ---------- ----------
Liability for losses and LAE at the end of the year:
Net liability.......................................... 36,322 39,154 47,427
Ceded reinsurance recoverable, classified as an
asset................................................ 83,654 75,616 84,725
---------- ---------- ----------
Gross liability per balance sheet...................... $ 119,976 $ 114,770 $ 132,152
---------- ---------- ----------
---------- ---------- ----------
NOTE 8 MERGERS AND ACQUISITIONS
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 seller of Graward, a
final balance sheet as required under the purchase agreement (See Note 14(e)).
The final balance sheet identifies significant purchase price adjustments 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
Seibels
48
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
Bruce Group, Inc. The Company accounted for the transaction as a purchase. The
excess purchase price over the fair value of the assets was $2.3 million.
Effective December 1, 1997, the Company acquired all of the issued and
outstanding shares of common stock of Innovative, including its subsidiaries,
Universal and PBP. Consideration in the transaction consisted of 220,000 shares
of Cumulative, Convertible, Redeemable, Nonvoting Special Preferred Stock of The
Seibels Bruce Group, Inc. The Company accounted for the transaction as a
purchase and repaid $1.8 million of debt due the shareholders of Innovative out
of cash and liquid investments. The excess purchase price over the fair value of
the assets was $2.6 million.
The results of operations in the consolidated financial statements of the
Company include the following number of months of operations of the Companies
acquired above:
1998 1997
----- -----
Graward......................................................................... 8 0
AFS............................................................................. 9 0
Universal and PBP............................................................... 12 1
-- --
-- --
The following pro forma un-audited consolidated results of operation for
1998 and 1997 give affect to the acquisitions as though they had occurred at the
beginning of the year they were acquired. The dividends on the preferred stock
and interest of the notes have been considered.
1998 1997
--------- ---------
Revenues................................................................ $ 89,133 $ 85,945
Net (loss) income....................................................... $ (3,968) $ 1,740
Basic Earnings Per Share................................................ $ (0.51) $ 0.25
Diluted Earnings Per Share.............................................. $ (0.51) $ 0.24
On July 1, 1998, Innovative was merged into the Company. The Board of
Directors of the Company approved the Plan of Merger (the "Plan") on February
10, 1998. The Plan did not require approval of the shareholders of either
company. The capital stock of Innovative was cancelled and no cash, securities
or other consideration of any kind was issued or paid for the shares.
49
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
NOTE 9 SPECIAL STOCK, DIVIDEND RESTRICTIONS AND COMPUTATION OF EARNINGS PER
SHARE
SPECIAL STOCK
On March 31, 1998, the Company issued 50,000 shares of $0.625 Cumulative,
Convertible, Redeemable, Nonvoting Special Preferred Stock ("$0.625 Special
Stock") in connection with an acquisition. The Company determined the value of
the $0.625 Special Stock at issuance date to be $500. The $0.625 Special Stock
pays quarterly dividends at an annual rate of $0.625 per share. The Company paid
$24 in special stock dividends in 1998. On or after August 15, 2000, but prior
to August 15, 2002, the Company at its option only, may redeem in whole or in
part the $0.625 Special Stock at a price of $15.00 per share. On August 15,
2002, the Company must redeem any remaining shares at a rate of $10.00 per
share. On or after August 15, 2000, but prior to August 15, 2002, holders of the
shares have the right to convert each share of the $0.625 Special Stock in 1.23
shares or a total of 61,500 shares of Common Stock.
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 issuance date to be $2,200. The Special Stock pays quarterly dividends
at an annual rate of $0.62 per share. The Company paid $136 in Special Stock
dividends in 1998 and $11 in 1997. 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, or a
total of 270,600 shares of Common Stock.
DIVIDEND RESTRICTION
The ability of the Company to declare and pay cash dividends, as well as to
service any debt, is dependent to some degree upon the ability of SCIC and
Universal to declare and pay dividends to the Company.
The North Carolina Insurance Holding Company System Regulatory Act provides
that, without prior approval of the Commissioner of Insurance of the State of
North Carolina, dividends within any 12-month period may not exceed the lessor
of (i) 10% of a domestic insurer's surplus as regarding policyholders as of the
preceding December 31 or (ii) the net income, not including realized capital
gains, for the 12-month period ending the preceding December 31. For 1999, no
dividends are available from Universal to the Company.
The South Carolina Insurance Holding Company Regulatory Act provides that,
without prior approval of the Director of Insurance of the State of South
Carolina, dividends within any 12-month period may not exceed the greater of (i)
10% of a domestic insurer's surplus as regarding policyholders as shown in the
insurer's most recent annual statement or (ii) a domestic insurer's net income,
not including realized capital gains or losses as shown in the insurer's most
recent annual statement. Furthermore, dividends may only be paid out of positive
earned surplus unless approved by the Director. As of December 31, 1998. SCIC
had negative earned surplus.
50
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
The following table shows the computation of per share earnings (the
following table is not in thousands).
PER SHARE AMOUNT
AFTER CHANGE IN
INCOME SHARES ACCOUNTING
FOR THE YEAR ENDED 1998 (NUMERATOR) (DENOMINATOR) PRINCIPLE
- ------------------------------------------ ------------- ------------- -------------------
Net Income................................ $ (2,893,693)
Less: Preferred stock dividends........... (159,839)
-------------
-------------
Basic and diluted EPS
Income available to common
stockholders.......................... $ (3,053,532) 7,763,252 $ (0.39)
------
------
FOR THE YEAR ENDED 1997
Net Income................................ $ 4,002,587
Less: Preferred stock dividends........... (11,367)
-------------
-------------
Basic EPS
Income available to common
stockholders.......................... $ 3,991,220 7,001,552 $ 0.57
------
------
Effect of Dilutive Securities
Convertible preferred stock............. 11,367 23,356
Options................................. -- 249,063
------------- -------------
Diluted EPS
Income available to common stockholders
plus assumed conversions.............. $ 4,002,587 7,273,971 $ 0.55
------------- ------------- ------
------------- ------------- ------
FOR THE YEAR ENDED 1996
Basic EPS
Income available to common
stockholders.......................... $ 5,176,204 4,918,346 $ 1.05
------
------
Effect of Dilutive Securities
Warrants................................ -- 46,278
Options................................. -- 526,929
------------- -------------
Diluted EPS
Income available to common
stockholders.......................... $ 5,176,204 5,491,553 $ 0.94
------------- ------------- ------
------------- ------------- ------
NOTE 10 STATUTORY REPORTING
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,
51
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
(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 net (loss) income and statutory net (loss)
income of the property and casualty insurance subsidiaries is as follows for the
year ended December 31:
1998 1997 1996
--------- --------- ---------
GAAP (loss) income............................................. $ (2,894) $ 4,003 $ 5,176
Increase (decrease) due to:
Deferred policy acquisition costs............................ (892) 201 198
Salvage/subrogation recoverable and reserves................. (246) 139 256
Parent company GAAP-only items and other non-statutory
subsidiaries................................................. (848) 2,469 1,252
Intercompany dividends......................................... -- 32,947 2,400
Gain on sale of subsidiary..................................... -- 450 --
Adjustment to premium and loss reserves........................ -- 28 (278)
Other.......................................................... (876) 52 50
--------- --------- ---------
Statutory net (loss) income.................................... $ (5,756) $ 40,289 $ 9,054
--------- --------- ---------
--------- --------- ---------
A reconciliation between GAAP shareholders' equity and statutory capital and
surplus, at December 31, is as follows:
1998 1997 1996
--------- --------- ---------
GAAP shareholders' equity.................................... $ 35,588 $ 37,544 $ 23,791
Increase (decrease) due to:
Deferred policy acquisition costs.......................... (2,472) (1,580) (96)
Non-statutory companies' shareholders' equity.............. (1,013) (165) (840)
Adjustments to premium and loss reserves................... (1,819) (1,903) (1,128)
Allocation of Seibels Bruce and Company expenses........... -- 192 --
Assets nonadmitted for statutory surplus................... (3,745) -- (95)
--------- --------- ---------
Statutory surplus............................................ $ 26,539 $ 34,088 $ 21,632
--------- --------- ---------
--------- --------- ---------
Net income and shareholders' equity of the credit life insurance subsidiary
as determined in accordance with statutory accounting practices are as follows
for the year ended December 31, is as follows:
1998 1997 1996
--------- --------- ---------
Net income....................................................... $ 191 $ 203 $ 460
Shareholders' equity
("surplus as regards policyholders")........................... $ 2,708 $ 4,511 $ 4,769
52
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
NOTE 11 BENEFIT AND STOCK OPTION PLANS
STOCK OPTIONS AND STOCK OPTION PLANS
During the first quarter of 1996, the Company issued to a group of investors
stock options expiring December 31, 2000 to acquire 408,750 shares of
unregistered Company Common Stock at the greater of the price of $10.00 per
share or book value at the date of exercise.
In the third quarter of 1996, the Company issued to a different group of
investors stock options to acquire 781,250 shares of unregistered Company Common
Stock at the greater of the price of $8.00 or the book value at date of
exercise, expiring December 31, 2000.
During the first quarter of 1998, the Company granted a warrant to purchase
up to 57,971 shares of Common Stock in connection with its Credit Facility (See
Note 5).
The 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 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.
The 1996 Stock Option Plan (the "1996 Plan") for Employees became effective
on November 1, 1995 and supersedes the 1987 Stock Option Plan (the "1987 Plan").
The 1996 Plan has reserved 2,500,000 share of Company common stock for issuance
under the plan as options and incentive stock to employees and consultants of
the Company. The following table shows the options under the 1987 and 1996 plans
for the past three years.
1998 1997 1996
---------- ---------- ---------
Shares under options outstanding, beginning of year....... 766,215 582,169 215,294
Granted under 1996 Plan................................... 776,112 332,517 368,450
Exercised during year..................................... (19,446) (9,375) --
Canceled or expire during year............................ (469,401) (139,096) (1,575)
---------- ---------- ---------
Shares under options outstanding, end of year........... 1,053,480 766,215 582,169
---------- ---------- ---------
---------- ---------- ---------
Shares under options exercisable, end of year............. 472,199 324,718 214,531
---------- ---------- ---------
---------- ---------- ---------
All grants made under the Plan have exercise prices no lower than the market
price at the date of grant. At December 31, 1998, 1,388,435 shares of the
Company's common stock have been reserved for
53
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
future grants. The following table summarizes options outstanding and
exercisable by price range as of December 31, 1998.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE REMAINING EXERCISE EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- -------------------- ----------- ------------------- ------------- ----------- -------------
$2.20- $4.40.... 32,668 5.9 $ 3.39 29,290 $ 3.34
$4.40- $6.60.... 52,501 2.0 $ 6.42 52,501 $ 6.42
$6.60- $8.80.... 515,113 4.3 $ 7.37 116,203 $ 7.25
$8.80- $11.00... 356,081 3.3 $ 9.51 193,364 $ 9.74
$11.00- $13.20... 1,025 2.3 $ 12.00 1,025 $ 12.00
$15.40- $17.60... 46,099 2.7 $ 16.00 37,961 $ 16.00
$19.80- $22.00... 46,099 2.7 $ 22.00 37,961 $ 22.00
$42.50- $45.00... 3,894 1.0 $ 43.66 3,894 $ 43.66
----------- --- ------ ----------- ------
1,053,480 3.7 $ 9.06 472,199 $ 10.55
----------- --- ------ ----------- ------
----------- --- ------ ----------- ------
The 1995 Stock Option Plan for Non-Employee Directors became effective June
15, 1995, with 250,000 common shares of stock reserved for grants. Under the
Plan, all non-employee directors holding office on June 15 of each year are
automatically granted 1,250 options to purchase Company common stock. The
exercise price will be the market value on the date of grant. On June 15, 1996,
8,750 shares were granted at an exercise price of $10.50. In addition, on June
15, 1997, and on June 15, 1998, 12,500 shares were granted at an exercise price
of $7.19 and $7.00 respectively.
The 1995 Stock Option Plan for Independent Agents became effective December
21, 1995. The Plan has reserved 125,000 common shares for granting under this
plan. Activity may be summarized as follows:
1998 1997 1996
--------- --------- ---------
Shares under options outstanding, beginning of year............. 36,516 54,125 17,000
Granted during year............................................. 9,400 5,526 40,125
Exercised during year........................................... -- (2,749) (1,500)
Canceled or expired during year................................. (9,711) (20,386) (1,500)
--------- --------- ---------
Shares under options outstanding, end of year................... 36,205 36,516 54,125
--------- --------- ---------
--------- --------- ---------
In 1998, 9,400 options were granted at an average exercise price of $6.97.
At December 31, 1998, 84,547 shares of the Company's common stock have been
reserved for future grants.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation costs for the Company's three stock option
plans been determined based on the fair value at the grant date for awards in
1998 and 1997 consistent
54
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
with the provisions of SFAS No. 123, the Company's net (loss) income and (loss)
earnings per share would have been reduced to the pro forma amounts indicated
below (in thousands except per share amounts):
1998 1997 1996
--------- --------- ---------
Net (loss) income--as reported.................................. $ (2,894) $ 4,003 $ 5,176
Net (loss) income--pro forma.................................... $ (3,432) $ 3,016 $ 4,026
Diluted earnings per share--as reported......................... $ (0.39) $ 0.55 $ 0.94
Diluted earnings per share--pro forma........................... $ (0.46) $ 0.41 $ 0.73
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
1998
------------------------------------------
DIRECTORS
EMPLOYEE PLAN PLAN AGENTS PLAN
-------------- ------------- -----------
Expected Dividend Yield.............................................. 0% 0% 0%
Expected Stock Price Volatility...................................... 52.75% 52.75% 52.75%
Risk-Free Interest Rate.............................................. 5.39% 5.39% 5.39%
Expected Life of Options............................................. 5 years 5 years 5 years
1997
------------------------------------------
DIRECTORS
EMPLOYEE PLAN PLAN AGENTS PLAN
-------------- ------------- -----------
Expected Dividend Yield.............................................. 0% 0% 0%
Expected Stock Price Volatility...................................... 52.75% 52.75% 52.75%
Risk-Free Interest Rate.............................................. 6.30% 6.30% 6.30%
Expected Life of Options............................................. 5 years 10 years 4.2 years
OTHER BENEFIT PLANS
The Company sponsors the South Carolina Insurance Company Employees'
Profit-Sharing and Savings Plan, which is a combined arrangement for the
profit-sharing and 401(k) elements for the employees of the Company and its
subsidiaries. As of December 31, 1998, the amount of assets available for the
plan benefits, based on information currently available, was $10,932.
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.
Under the 401(k) element of the plan, employees may elect to have a portion
of their salary withheld from pre-tax wages for investment in the plan, subject
to limitations imposed by IRS regulations. The employee has several options as
to how contributions will be invested. Effective July 1, 1997, the employer
reinstated the 50% match of the employee's contribution up to the first 6%. The
Company match is split evenly with 50% invested in accordance with the
investment options selected by the participant and the remaining 50% invested in
the Seibels Bruce Stock Fund. The employer contribution for the plan on behalf
of the participating employees was $68 in 1998 and $72 in 1997.
In April 1998, The Financial Accounting Standards Board issued Statement No.
132, "Employers' Disclosures about Pension and Other Post Retirement Benefits".
This statement only modifies the disclosures companies make about their pension
and non-pension benefit plans and does not alter the accounting for these plans.
The FASB's intention in modifying the disclosures for post-retirement benefits
55
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
is to make the disclosures more uniform and to provide better information to
investors about the economics of the benefit plans rather than focusing on
current period costs. The provisions of the statement are effective for years
beginning after December 15, 1997. FASB Statement No. 132 disclosures have been
incorporated in this document.
The Company and its subsidiaries currently provide certain health care and
life insurance benefits for retired employees. The Company and its subsidiaries
recognize the projected future cost of providing post-retirement benefits as an
expense as employees render services instead of when the benefits are paid. The
cumulative effect is being recorded as a charge against income on a prospective
basis as part of the future annual benefit cost. The post-retirement benefit
expense was approximately $90 in 1998, $77 in 1997 and $75 in 1996.
1998 1997
--------- ---------
Change in benefit obligation:
Benefit obligation........................................................... $ 575 $ 548
Service cost................................................................. 6 3
Interest Cost................................................................ 50 43
Acturial loss (gain)......................................................... 91 (19)
--------- ---------
Total benefit obligation..................................................... $ 722 $ 575
--------- ---------
--------- ---------
Fair value of plan assets.................................................... $ -- $ --
--------- ---------
--------- ---------
Funded status of plan........................................................ $ 722 $ 575
Unrecognized actuarial loss.................................................. (106) 14
Unrecognized net transition obligation....................................... (439) (471)
--------- ---------
Net amount recognized........................................................ $ 177 $ 118
--------- ---------
--------- ---------
Weighted-average assumption:
Discount rate................................................................ 6.75% 7.25%
--------- ---------
--------- ---------
The weighted average annual assumed rate of increase in the per capita cost
of covered benefits (i.e., health care cost trend rate) was 7% for 1998, 8% for
1997 and 9% for 1996 is assumed to decrease to a 5% ultimate trend (5% in 1997
and 5.5% in 1996) with a duration to ultimate trend of three years (four years
in 1997 and six years in 1996). 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, 1998 by $7.
NOTE 12 SEGMENT REPORTING
FASB Statement No.131 "Disclosures about Segments of an Enterprise and
Related Information" requires public enterprises to report financial and
descriptive information about its reportable operating segments, and the
formatting of those segments in a manner that coincides with the way in which
management regularly reviews the business and formulates decisions.
The reportable segments were 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 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
56
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
compliance tracking, as well as the complementary homeowners product line and
the Company's insurance adjusting business. The Commercial segment includes all
commercial operations, as well as the commercial automobile activity for the NC
Facility and SC Facility. The All Other segment includes the runoff operations
of the Company. The results of the reportable segments are included in the
following tables:
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------
AUTOMOBILE FLOOD COMMERCIAL ALL OTHER TOTAL
----------- --------- ----------- ----------- ---------
Revenues:
Commission and service income.......................... $ 30,960 $ 16,458 $ 1,893 $ (13) $ 49,298
Property and casualty premiums earned.................. 18,337 (34) 3,976 483 22,762
Policy fees............................................ 3,474 -- -- -- 3,474
Investment and other income............................ 2,517 14 655 2,697 5,883
----------- --------- ----------- ----------- ---------
Total revenue........................................ 55,288 16,438 6,524 3,167 81,417
----------- --------- ----------- ----------- ---------
Expenses:
Losses & loss adjustment expenses...................... 20,759 837 2,249 1,424 25,269
Other.................................................. 35,290 15,552 6,394 1,290 58,526
----------- --------- ----------- ----------- ---------
Total expenses....................................... 56,049 16,389 8,643 2,714 83,795
(Loss) income from operations before (benefit)
provision from income taxes before change in
accounting principle................................. (761) 49 (2,119) 453 (2,378)
(Benefit) provision for income taxes................... 53 25 (29) (134) (85)
Loss (income) from operations, before change in
accounting principle................................. (814) 24 (2,090) 587 (2,293)
Effect of change in accounting principle............... -- -- -- (601) (601)
----------- --------- ----------- ----------- ---------
Net (loss) income...................................... $ (814) $ 24 $ (2,090) $ (14) $ (2,894)
----------- --------- ----------- ----------- ---------
57
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
OTHER SIGNIFICANT ITEMS:
YEAR END DECEMBER 31, 1998
------------------------------------------------------------
AUTOMOBILE FLOOD COMMERCIAL ALL OTHER TOTAL
----------- --------- ----------- ----------- ----------
Total Assets......................................... $ 153,074 $ 35,449 $ 16,360 $ 90,680 $ 295,563
----------- --------- ----------- ----------- ----------
----------- --------- ----------- ----------- ----------
Liabilities:
Losses & loss adjustment expenses reserves........... $ 47,008 $ 9,955 $ 3,949 $ 59,064 $ 119,976
Unearned premium..................................... 52,696 13,135 6,707 -- 72,538
Other liabilities.................................... 33,540 7,767 3,585 19,869 64,761
----------- --------- ----------- ----------- ----------
Total liabilities.................................... $ 133,244 $ 30,857 $ 14,241 $ 78,933 $ 257,275
----------- --------- ----------- ----------- ----------
----------- --------- ----------- ----------- ----------
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------
AUTOMOBILE FLOOD COMMERCIAL ALL OTHER TOTAL
----------- --------- ----------- ----------- ---------
Revenues:
Commission and service income.......................... $ 25,986 $ 12,811 $ 5,317 $ (9) $ 44,105
Property and casualty premiums earned.................. 5,647 -- 41 892 6,580
Investment and other income............................ 994 -- 701 2,989 4,684
----------- --------- ----------- ----------- ---------
Total revenue........................................ 32,627 12,811 6,059 3,872 55,369
----------- --------- ----------- ----------- ---------
Expenses:
Losses & loss adjustment expenses...................... 5,979 658 425 1,778 8,840
Other.................................................. 19,902 10,477 9,618 2,483 42,480
----------- --------- ----------- ----------- ---------
Total expenses....................................... 25,881 11,135 10,043 4,261 51,320
Income (loss) from operations, before (benefit)
provision from income taxes.......................... 6,746 1,676 (3,984) (389) 4,049
(Provision) benefit for income taxes................... 9 9 (11) (53) (46)
----------- --------- ----------- ----------- ---------
Net income (loss)...................................... $ 6,755 $ 1,685 $ (3,995) $ (442) $ 4,003
----------- --------- ----------- ----------- ---------
OTHER SIGNIFICANT ITEMS:
YEAR END DECEMBER 31, 1997
------------------------------------------------------------
AUTOMOBILE FLOOD COMMERCIAL ALL OTHER TOTAL
----------- --------- ----------- ----------- ----------
Total Assets......................................... $ 121,510 $ 28,139 $ 12,987 $ 71,982 $ 234,618
----------- --------- ----------- ----------- ----------
----------- --------- ----------- ----------- ----------
Losses & LAE reserves................................ $ 59,680 $ 2,918 $ 7,572 $ 44,600 $ 114,770
Unearned premium..................................... 24,936 11,428 3,410 14,567 54,341
Other liabilities.................................... 15,200 -- 1,546 9,017 25,763
----------- --------- ----------- ----------- ----------
Total liabilities.................................... $ 99,816 $ 14,346 $ 12,528 $ 68,184 $ 194,874
----------- --------- ----------- ----------- ----------
----------- --------- ----------- ----------- ----------
58
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
For comparison purposes, the table below presents 1997 and 1996 segment
results:
1997 1996
--------- ---------
Revenue:
Property and casualty insurance segments.............................. $ 6,580 $ 7,186
Commission and service activities segments............................ 44,105 46,419
Net investment income and other interest income....................... 3,633 3,516
Realized gains (losses) on investments................................ 529 (179)
--------- ---------
Total for property & casualty insurance segments.................... 54,847 56,942
Other business revenue.................................................. 577 1,085
--------- ---------
Total revenue....................................................... $ 55,424 $ 58,027
--------- ---------
--------- ---------
Operating profit (loss):
Property and casualty insurance segments.............................. $ 1,783 $ 25
Commission and service activities segment............................. (2,735) 1,595
Net investment income................................................. 3,633 3,516
Realized gains (losses) on investments................................ 529 (179)
--------- ---------
Subtotal............................................................ 3,210 4,957
Other business segments................................................. 463 441
--------- ---------
Operating income........................................................ 3,673 5,398
General corporate expenses, net of miscellaneous income and expense... 495 (179)
Interest expense...................................................... (119) (174)
--------- ---------
Consolidated income before income taxes................................. $ 4,049 $ 5,045
--------- ---------
--------- ---------
For comparison purposes, the table below presents 1997 and 1996 segment
identifiable assets
(in thousands):
1997 1996
---------- ----------
Identifiable Assets
Property and casualty insurance underwriting segment, including
related investment activity......................................... $ 92,896 $ 55,427
Commission and service activities segment............................. 133,722 158,237
Other business segments............................................... 4,743 5,187
General corporate assets.............................................. 3,257 1,621
---------- ----------
Total assets...................................................... $ 234,618 $ 220,472
---------- ----------
---------- ----------
NOTE 13 REINSURANCE
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
59
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
ceded entirely to the applicable state's reinsurance facility. A reconciliation
of direct to net premiums, on both a written and an earned basis is as follows:
1998 1997 1996
------------------------ ------------------------ ------------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
----------- ----------- ----------- ----------- ----------- -----------
Direct...................................... $ 181,574 $ 163,485 $ 108,395 $ 109,277 $ 106,925 $ 105,212
Assumed..................................... 9,831 6,920 5,386 5,529 6,235 5,819
Ceded....................................... (159,179) (147,643) (107,155) (108,226) (106,494) (103,845)
----------- ----------- ----------- ----------- ----------- -----------
Net......................................... $ 32,226 $ 22,762 $ 6,626 $ 6,580 $ 6,666 $ 7,186
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
The amounts of premiums pertaining to catastrophe reinsurance that were
ceded from earned premium during 1998 and 1996 were $0.4 million and $0.2
million respectively. The Company carried no catastrophe reinsurance in 1997.
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:
1998 1997
--------- ---------
Unearned premiums....................................................... $ 59,619 $ 50,602
Unpaid losses and LAE................................................... $ 83,654 $ 75,616
Paid losses and LAE..................................................... $ 29,972 $ 30,244
Four reinsurers comprise a significant portion of the Company's reinsurance
recoverable on paid and unpaid losses and loss adjustment expense, as well as
prepaid reinsurance at December 31, 1998. The reinsurers and related balances
are as follows:
REINSURANCE PREPAID
RECOVERABLE REINSURANCE
----------- -----------
South Carolina Reinsurance Facility................................ $ 62,907 $ 21,827
North Carolina Reinsurance Facility................................ 23,413 4,838
National Flood Insurance Program................................... 8,120 22,642
Swiss Reinsurance Corp............................................. 6,625 53
National Reinsurance Corp.......................................... 499 --
Gerling Global Reinsurance Corp.................................... 688 270
TIG Reinsurance Company............................................ 563 254
All others......................................................... 10,811 9,735
----------- -----------
Totals........................................................... $ 113,626 $ 59,619
----------- -----------
----------- -----------
The Company believes that the balances from the various Facilities are fully
collectable due to the governmental agency's ability to assess policyholders and
member companies for deficiencies. The remaining recoverables due from
nonaffiliated reinsurance companies have also been deemed fully collectable by
the Company.
60
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
With respect to credit concentrations, most of the Company's business
activity is with agents and policyholders located within the five operating
states. The primary reinsurance recoverables are from the state and federal
servicing carrier activities. There are otherwise no material credit
concentrations related to premiums receivable, agents' balances, and premium
notes receivable.
NOTE 14 COMMITMENTS AND CONTINGENCIES
(a) The Company's and its subsidiaries lease office space, computer equipment
and automobiles under several operating leases that expire at various times.
Lease expense amount to $1,543, $425 and $24 in 1998, 1997 and 1996
respectively. Approximate minimum future lease payments under these
operating leases at December 31, 1998 are as follows (in thousands):
YEAR ENDED DECEMBER 31, 1998
1999............................................................. $ 1,002
2000............................................................. 592
2001............................................................. 410
2002............................................................. 406
2003............................................................. 219
Thereafter....................................................... 244
---------
Total.......................................................... $ 2,873
---------
---------
(b) A contingent liability exists with respect to reinsurance placed with other
companies (See Note 13).
(c) The Company was served with a complaint dated November 19, 1997 by Norwest
Financial Resources, Inc. ("Norwest") that claimed indemnification against
the Company pursuant to the Asset Purchase Agreement dated as of July 2,
1993 by and among Premium Service Corporation of Columbia ("Premium"), the
Company and Norwest. The indemnification claim relates to certain loans of
Premium which later were discovered to be incorrectly recorded as realizable
assets. Management believes the Company has no liability in the case.
(d) Catawba 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 Catawba has basis
for non-payment of such amounts.
(e) On May 1, 1998, the Company completed its acquisition of Graward. In
completing the final balance sheet in accordance with the stock purchase
agreement for the Graward acquisition, the Company identified certain
purchase price adjustments which it believes were known to certain of the
sellers, but were not disclosed to the Company during its due diligence
process. The stock purchase agreement with Graward provides methods for
resolving the differences as to the appropriate adjustments to the final
balance sheet. On December 7, 1998, the sellers notified the Company that
they intended to submit to arbitration two matters currently in dispute
between the parties. Management believes that the purchase price will be
adjusted appropriately under the purchase agreement.
(f) 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.
61
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
NOTE 15 RELATED PARTY TRANSACTIONS
A non-employee Director of the Company is also a member of the Board of
Directors of Policy Management Systems Corporation ("PMSC"), which provided
services to the Company prior to September 30, 1996. The Company paid data
processing charges of $0.9 million to PMSC in 1996.
Mr. John C. West, chairman emeritus of the Board of Directors of the
Company, is of counsel to the law firm of Bethea, Jordan & Griffin. Bethea,
Jordan & Griffin has been retained by the Company to perform legal services.
During the fiscal years ended December 31, 1998 and 1997, the Company paid a
total of $40 and $40 to Bethea, Jordan & Griffin respectively.
During the fiscal year ended December 31, 1998 and 1997, the Company paid a
total of $522 and $483 to SADISCO Corporation ("SADISCO") respectively, of which
$54 and $96 respectively was for salvage and disposal services provided to the
Company in the ordinary course of business and $468 and $386 respectively was
for reimbursement of expenses advanced by SADISCO on behalf of the Company in
connection with such services. Charles H. Powers, chairman of the Board of
Directors of the Company, is the owner and operator of SADISCO.
62
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, 1998 and 1997:
1ST 2ND 3RD 4TH
1998 QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------- --------- --------- --------- ---------
Commission & service income........................................... $ 11,139 $ 12,261 $ 13,114 $ 12,784
Property & casualty and credit life premiums earned................... 2,705 4,265 6,901 8,904
Net investment income................................................. 716 829 973 753
Other interest income................................................. 232 574 218 350
Realized gains (losses) on investments................................ (25) 23 41 16
Restructuring charge.................................................. -- (546) -- --
Effect of change in accounting principle.............................. (601) -- -- --
Net loss.............................................................. $ (1,138) $ (297) $ (142) $ (1,317)
Basic loss per share.................................................. $ (0.15) $ (0.04) $ (0.02) $ (0.18)
Diluted loss per share................................................ $ (0.15) $ (0.04) $ (0.02) $ (0.18)
Commission and service income grew during the first three quarters of 1998
due to an increase in storm related claims. During the fourth quarter of 1998,
commission and service income decreased slightly due to a decrease in written
premiums for the SC Facility. Premiums earned continued to increase throughout
1998 due to the Company's nonstandard automobile program and commercial lines
premium writings. During the second quarter of 1998, the Company booked a $0.5
million restructuring charge related to the consolidation of its automobile and
claims operations. Effective January 1, 1998, the Company adopted 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 $0.6 million. As a result, the Company's participation in the NC
Facility is no longer being treated as assumed resinurance and all amounts
assumed from the NC Facility have been eliminated. The NC Facility is now
treated as an assessment organization. Net income fell during 1998 due to
several one time charges, the gradual build up of earned premiums for the
Company's new commercial lines book of business, and losses from the Company's
runoff.
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. During the second
quarter of 1998, the Company acquired Graward for a tenative purchase price of
$10.3 million, consisting of $7.5 million in cash and $2.7 million in
subordinated convertible notes.
1ST 2ND 3RD 4TH
1997 QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------- --------- --------- --------- ---------
Commission & service income........................................... $ 11,257 $ 11,521 $ 11,082 $ 10,245
Property & casualty and credit life premiums earned................... 2,323 913 1,673 1,827
Net investment income................................................. 708 799 785 829
Other interest income................................................. 297 79 95 295
Realized gains (losses) on investments................................ 219 (1) 326 (15)
Net income............................................................ $ 703 $ 1,075 $ 1,008 $ 1,217
Basic earnings per share.............................................. $ 0.11 $ 0.17 $ 0.13 $ 0.16
Diluted earnings per share............................................ $ 0.11 $ 0.16 $ 0.13 $ 0.15
Commission and service income fell in the first quarter of 1997 as the
claims related to flood activity subsided from the very active 1996 storm
season. Commission and service income remained fairly constant through the first
three quarters of the year and decreased during the fourth quarter due to a lack
of storm related claims. Premiums earned decreased in the second quarter due to
lower assumed premiums than in the prior two quarters. Premiums earned increased
in both the third and fourth quarters of 1997 as the Company began its voluntary
nonstandard automobile program in the fourth quarter of 1997. Net income for the
year by $1.2 million mainly due to a lack of flood related claims.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
63
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS OF THE
REGISTRANT
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
Steven M. Armato.................... 47 Vice President of Human Resources of certain subsidiaries since 1993.
Employed by the Company since April 1981.
Michael A. Culbertson............... 50 Senior Vice President of the Company since June 1995 and Group Vice
President of certain subsidiaries since December 1995. Also holds the
position of Director of certain subsidiaries of the Company.
Previously held position of Vice President of Claims from June 1993
until June 1995. Employed by the Company in various claims capacities
since December 1974.
Wayne A. Fletcher................... 47 Vice President and Director of Business Development for certain
subsidiaries since 1997. From 1994 to 1997, Mr. Fletcher served as
President of Bankers Underwriters, Inc., a subsidiary of Banker's
Insurance Group. Prior to 1994, Mr. Fletcher spent a year as
Assistant to the President of the California-based American Sterling
Corporation. From 1985 to 1993, he created and developed National
Flood Services. Mr. Fletcher has served in various insurance-related
capacities for the U.S. government, including managing the Federal
Crop Insurance Program.
Steven J. Groth..................... 36 Treasurer of the Company and certain subsidiaries since October 1998
after joining the Company in 1997 as a financial analyst. Previously,
Mr. Groth was employed with Wachovia Bank from 1993 to 1997. Mr.
Groth was also a Naval Flight Officer with the U.S. Navy.
Stephen T. Harding.................. 37 Vice President for certain subsidiaries since April 1998 after
joining the Company in 1996 as South Carolina Reinsurance Facility
Underwriting and Customer Service Manager. Mr. Harding was previously
employed by GEICO from 1988 to 1996.
Kenneth W. Marter................... 37 Vice President of Audit and Planning of the Company and certain
subsidiaries since July 1998. Mr. Marter had served as Controller
since December 1997 and Director of Finance since November 1996.
Previously, Mr. Marter was Director of Finance with Air South
Airlines, Inc. from July 1994 to October 1996. He was employed by the
University of South Carolina from August 1992 to June 1994.
Andrew P. Martin.................... 41 Director, President and Chief Operating Officer of Universal
Insurance Company and Graward General Companies, Inc., subsidiaries
of the Company since November 1997 and May 1998, respectively. Also,
services as Vice President of certain subsidiaries. Previously served
as Vice President of Marketing, Administration and Strategic Planning
for Integon Corporation. Prior to Integon's acquisition of Bankers
and Shippers Insurance Company, Mr. Martin spent six years as Chief
Financial Officer, Controller and Treasurer for Bankers and Shippers
Insurance Company. Mr. Martin is a Certified Public Accountant.
64
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
Matthew P. McClure.................. 29 General Counsel and Corporate Secretary of the Company and certain
subsidiaries since July 1998. Also serves as a Director for certain
subsidiaries. Previously served as Assistant Secretary and Legal
Counsel since November 1996. Prior to joining the Company, Mr.
McClure was Manager of Financial Planning with Air South Airlines,
Inc. from July 1995 to May 1996. Employed by the South Carolina Fifth
Judicial Circuit solicitor from May 1993 to July 1995.
Elizabeth R. Monts.................. 43 Controller of the Company and certain subsidiaries since July 1998.
Ms. Monts served as Assistant Controller from February 1998 to July
1998 after joining the Company as Statutory Accounting Manager in
January 1997. Previously, Ms. Monts was employed seventeen years with
American Indemnity Group, most recently as Assistant Vice President
of Financial Accounting. Ms. Monts is a Certified Public Accountant.
R. Thomas Savage, Jr................ 52 R. Thomas Savage, Jr., joined Seibels Bruce in July 1998 as Chief
Financial Officer and assumed the position of acting President and
Chief Executive Officer in September 1988. Previously, he served for
six years as Chief Financial Officer of Unisun Insurance Company in
Charleston South Carolina after serving as its Treasurer for seven
years. Before joining Unisun, Savage was with KPMG Peat Marwick,
where as a Certified Public Accountant, served in their tax advisory
service and Integon Property and Casualty Corporation as Controller.
All of the aforementioned insurance companies' core business mirror
those of Seibels Bruce--regional carriers specializing in nonstandard
automobile and flood with agency books of commercial lines and
homeowners property and casualty business. Prior experience also
includes service on the board of directors of the North Carolina
Reinsurance Facility and a variety of roles for the South Carolina
Reinsurance Facility and the National Flood Insurance Program.
Richard A. Shaffer.................. 54 Director of Commercial Lines for certain subsidiaries since 1997.
Previously, Mr. Shaffer was employed with CNA Insurance Company with
emphasis in commercial and personal lines.
Pursuant to Instruction G(3) to Form 10-K, the information relating to
Directors of the Company required by Item 10 is incorporated by reference from
the Company's definitive proxy statement which is to be filed pursuant to
Regulation 14A within 120 days after the end of the Company's fiscal year ended
December 31, 1998.
For information pertaining to Executive Officers of the Company, as required
by Instruction 3 of Paragraph (b) of Item 401 of Regulation S-K, refer to the
Executive Officers of the Registrant" section of Part I of this document.
Pursuant to Instruction G(3) to Form 10-K, the information relating to
compliance with Section 16(a) required by Item 10 is incorporated to by
reference from the Company's definitive proxy statement which is to be filed
pursuant to Regulation 14A within 120 days after the end of the Company's fiscal
year ended December 31, 1998.
65
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to Instruction G(3) to Form 10-K, the information required by Item
11 is incorporated by reference for the Company's definitive proxy statement
which is to be filed pursuant to Regulation 14A within 120 days after the end of
the Company's fiscal year ended December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to Instruction G(3) to Form 10-K, the information required by Item
12 is incorporated by reference from the company's definitive proxy statement
which is to b filed pursuant to Regulation 14A within 120 days after the end of
the Company's fiscal year ended December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to Instruction G(3) to Form 10-K, the information required by Item
13 is incorporated by reference from the Company's definitive proxy statement
which is to be filed pursuant to Regulation 14A within 120 days after the end of
the Company's fiscal year ended December 31, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2)--List of Financial Statements and Financial Statements Schedules
The following consolidated financial statements of The Seibels Bruce Group,
Inc. and subsidiaries are included in Item 8:
Report of Independent Public Accountants--Arthur Andersen LLP
Consolidated Balance Sheets--December 31, 1998 and December 31, 1997.
Consolidated Statements of Operations--Years ended December 31, 1998,
December 31, 1997 and December 31, 1996.
Consolidated Statement of Cash Flows--Years ended December 31, 1998,
December 31, 1997 and December 31, 1996.
The notes to the consolidated financial statements included in Item 8
pertain both to the consolidated financial statements listed above and the
condensed financial information of the registrant included in Schedule 3 under
Item 14.
The following financial statement schedules are included in item 14(d):
Schedule I--Summary of Investments Other than Investments in Related Parties
Schedule II--Condensed Financial Information of Registrant
Schedule III--Supplementary Insurance Information
Schedule IV--Reinsurance
Schedule V--Valuation and Qualifying Accounts
Schedule VI--Supplemental Information Concerning Property/Casualty Insurance
Operations
All other schedules to the consolidated financial statements required by
Article 7 of Regulation S-X are not required under the related instructions or
are inapplicable and therefore have been omitted.
66
(a) (3) List of Exhibits
3.1 Articles of Incorporation of the Registrant, as restated, dated February 12, 1999.
3.2 By-laws of the Registrant, as amended and restated, dated February 4, 1999.
4.1 The rights of the Company's equity security holders are defined in the Fifth, Sixth,
Seventh and Eighth Articles of the Company's Articles of Incorporation. See Exhibit
3.1.
4.2 Form of the Certificate of the Company's Common Stock, par value $1.00 per share,
incorporated herein by reference to the Registrant's Registration Statement on From
S-2 (File No. 333-24081).
10.1 South Carolina Insurance Company Employee's Profit Sharing and Savings Plan, dated
June 30, 1992, as amended January 4, 1993, incorporated herein by reference to the
Annual Report on Form 10-K(10)(9)-9, for the year ended December 31, 1992. Amendments
dated June 2, 1993, April 21, 1994, July 1, 1994, July 1, 1995, July 1, 1996 and
September 26, 1997, incorporated herein by reference to the Annual Report on Form
10-K, Exhibit 10.1, for the year ended December 31, 1997. Amendment dated March 16,
1998.
10.2 Stock Purchase Agreement, date January 29, 1996, by and between the Registrant and
Charles H. Powers and Walker S. Powers, and amendment thereto, incorporated herein by
reference to submission DEF 14-A, filing date May 10, 1996, file number 000-08804,
accession number 0001005150-96-000127, accepted May 9, 1996.
10.3 Stock Option Agreement, dated January 30, 1996, by and between the Registrant and
Charles H. Power, Walker S. Powers and Rex and Jane Huggins, incorporated herein by
reference to submission DEF 14-A, filing date May 10, 1996, file number 000-008804,
accession number 0001005150-96-00127, accepted May 9, 1996.
10.4 Stock Purchase Agreement, dated March 28, 1996, by and between the Registrant and
Fred C. Avent, Frank H. Avent and PepsiCo of Florence, incorporated herein by
reference to submission Form S-2, filing date October 15, 1996, file number
333-14123, accession number 0000276380-96-00017, accepted October 15, 1996.
10.5 Stock Purchase Agreement, dated March 28, 1996, by and between Registrant and Junius
DeLeon Finklea, Joseph K. Newsom, Sr., Mark J. Ross, Larry M. Brice, J. Howard
Stokes, Winston W. Godwin, IRA and Peter D. and Vera C. Hyman, incorporated herein by
reference to submission Form S-2, filing date October 15, 1996, file number
333-14123, accession number 0000276380-96-00017, accepted October 15, 1996.
10.6 Stock Option Purchase Agreement, dated November 20, 1997, by and between the
Registrant; Charles H. Powers, Walker S. Powers and Rex and Jane Huggins; and High
Ridge Capital LLC, incorporated herein by reference to the Annual Report on Form
10-K, Exhibit 10.6, for the year ended December 31, 1997.
10.7 Stock Option Purchase Agreement, dated November 20, 1997, by and between the
Registrant; Charles H. Powers, Walker S. Powers and Rex and Jane Huggins; and High
Ridge Capital Partners Limited Partnership, incorporated herein by reference to the
Annual Report on Form 10-K, Exhibit 10.7, for the year ended December 31, 1997.
10.8 The Seibels Bruce Group, Inc. 1996 Stock Option Plan for Employees, dated November 1,
1995, incorporated herein by reference to submission DEF 14-A, filing date May 10,
1996, file number 000-08804, accession number 0001005150-96-000127, accepted May 9,
1996, as amended by the Amendment thereto, effective October 8, 1998, incorporated
herein by reference to submission Form S-8, filing date October 9, 1998, file number
333-65537, accession number 0001047469-98-036917, accepted October 9, 1998.
10.9 The Seibels Bruce Group, Inc. 1995 Stock Option Plan for Independent Agents, dated
June 14, 1996, incorporated herein by reference to submission DEF 14-A, filing date
May 10, 1996, file number 000-08804, accession number 0001005150-96-000127, accepted
May 9, 1996.
67
10.10 The Seibels Bruce Group, Inc. 1995 Stock Option Plan for Non-Employee Directors,
dated June 14, 1996, incorporated herein by reference to submission DEF 14-A, filing
date May 10, 1996, file number 000-08804, accession number 0001005150-96-000127,
accepted May 9, 1996.
10.11 Agreement, dated October 1, 1994, by and between Catawba Insurance Company and the SC
Facility, incorporated herein by reference to the Annual Report on Form 10-K, Exhibit
10.12, for the year ended December 31, 1996.
10.12 Managing General Agent Agreement, dated January 1, 1996, by and between Seibels Bruce
& Company and Agency Specialty of Kentucky, Inc. and Generali--US Branch,
incorporated herein by reference to the Annual Report, Exhibit 10.13, for the year
ended December 31, 1996. (Portions of this exhibit have been omitted pursuant to a
request for confidential treatment.)
10.13 Termination Agreement, dated August 27, 1997, by and between Seibels Bruce & Company
and Agency Specialty of Kentucky, Inc. and Generali--US Branch, incorporated herein
by reference to the Annual Report on Form 10-K, Exhibit 10.13, for the year ended
December 31, 1997.
10.14 Arrangement, dated October 1, 1996, by and between Catawba Insurance Company,
Kentucky Insurance Company and South Carolina Insurance Company and The United States
of America Federal Emergency Management Agency, incorporated herein by reference to
the Annual Report, Exhibit 10.14, for the year ended December 31, 1996.
10.15 Joint Underwriting Association contract, dated October 13, 1998, by and between South
Carolina Insurance Company and the South Carolina Associated Auto Insurers Plan.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule (electronic filing only).
28.1 Schedule P of Annual Report on Form 10-K/405 for the fiscal year ended December 31,
1998, incorporated herein by reference to Form SE, dated March 30, 1999.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the last quarter of the period
covered by this report.
(c) and (d) Exhibits and Financial Statement Schedules
The applicable exhibits and financial statement schedules are included
immediately after the signature pages.
For the purpose of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statements on Form S-8 Numbers
333-14135, 333-15457, 2-70057, 2-83595, 33-34973, 33-43618, 33-43601, and
2-48782, as amended.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE SEIBELS BRUCE GROUP, INC.
(Registrant)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 29, 1999 By /s/ CHARLES H. POWERS
- -------------------------- ------------------------------------------
Charles H. Powers
Chairman of the Board and Director
Date: March 29, 1999 By /s/ R. THOMAS SAVAGE, JR.
- -------------------------- ------------------------------------------
R. Thomas Savage, Jr.
Acting President and CEO and CFO
Date: March 29, 1999 By /s/ FRANK H. AVENT
- -------------------------- ------------------------------------------
Frank H. Avent
Director
Date: March 29, 1999 By /s/ A. CRAWFORD CLARKSON, JR.
- -------------------------- ------------------------------------------
A. Crawford Clarkson, Jr.
Director
Date: March 29, 1999 By /s/ SUSIE H. VANHUSS, PH D.
- -------------------------- ------------------------------------------
Susie H. VanHuss, Ph D.
Director
Date: March 29, 1999 By /s/ CLAUDE E. MCCAIN
- -------------------------- ------------------------------------------
Claude E. McCain
Director
Date: March 29, 1999 By /s/ KENNETH A. PAVIA
- -------------------------- ------------------------------------------
Kenneth A. Pavia
Director
Date: March 29, 1999 By: /s/ WALKER S. POWERS
- -------------------------- ------------------------------------------
Walker S. Powers
Director
Date: March 29, 1999 By /s/ JOHN P. SEIBELS
- -------------------------- ------------------------------------------
John P. Seibels
Director
Date: March 29, 1999 By /s/ GEORGE R.P. WALKER, JR.
- -------------------------- ------------------------------------------
George R.P. Walker, Jr.
Director
Date: March 29, 1999 By /s/ JAMES L. ZECH
- -------------------------- ------------------------------------------
James L. Zech
Director
Date: March 29, 1999 By /s/ ELIZABETH R. MONTS
- -------------------------- ------------------------------------------
Elizabeth R. Monts
Controller (Principal Accounting Officer)
69
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE I- SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1998
(IN THOUSANDS)
BALANCE SHEET
TYPE OF INVESTMENT COST MARKET VALUE VALUE
- ------------------------------------------------------------------------- --------- ------------ -------------
DEBT SECURITIES*
Bonds and Notes:
U.S. Government and government agencies and authorities.............. $ 33,941 $ 34,786 $ 34,786
State, municipalities and political subdivisions..................... 594 635 635
Corporate bonds...................................................... 4,253 4,274 4,274
--------- ------------ -------------
Total debt securities.............................................. 38,788 39,695 39,695
--------- ------------ -------------
EQUITY SECURITIES
Common stocks:
Banks, trusts and insurance companies................................ 1,306 1,306 1,306
--------- ------------ -------------
Total equity securities............................................ 906 1,306 1,306
--------- ------------ -------------
Other long-term investments.............................................. 108 108 108
Cash and short-term investments.......................................... 23,141 23,141 23,141
--------- ------------ -------------
Total cash and investments......................................... $ 63,343 $ 64,250 $ 64,250
--------- ------------ -------------
--------- ------------ -------------
- ------------------------
* These debt securities are classified as debt securities available for sale
and are valued at market.
70
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE SEIBELS BRUCE GROUP, INC. (PARENT COMPANY)
BALANCE SHEET
AS OF DECEMBER 31,
(DOLLARS SHOWN IN THOUSANDS)
1998 1997
--------- ---------
ASSETS
Cash...................................................................................... $ 395 $ 263
Investment in subsidiary companies*....................................................... 44,746 32,887
Other investments......................................................................... 1,260 868
Intercompany recoverables*................................................................ 6,246 4,936
Other assets.............................................................................. 1,868 2,351
--------- ---------
Total assets.......................................................................... $ 54,515 $ 41,305
--------- ---------
LIABILITIES
Notes payable............................................................................. $ 13,550 $ --
Intercompany payable*..................................................................... 2,240 1,550
Other liabilities......................................................................... 437 11
--------- ---------
Total liabilities....................................................................... 16,227 1,561
--------- ---------
COMMITMENTS AND CONTINGENCIES
SPECIAL STOCK, no par value, authorized 5,000,000 shares
Issued and outstanding 220,000 shares of cumulative $0.62, convertible, redeemable,
nonvoting, special preferred stock, redemption value $2,200............................. 2,200 2,200
Issued and outstanding 50,000 shares of cumulative $0.625, convertible, redeemble,
nonvoting, special preferred stock, redemption value $500............................... 500 --
--------- ---------
Total special stock..................................................................... 2,700 2,200
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, $1 par value, authorized 17,500,000 shares in 1998 and 12,500,000 shares in
1997, issued and outstanding 7,773,075 and 7,730,725 shares in 1998 and 1997,
respectively............................................................................ 7,773 7,731
Additional paid-in-capital................................................................ 61,861 61,665
Accumulated other comprehensive income.................................................... 907 47
Accumulated deficit....................................................................... (34,953) (31,899)
--------- ---------
Total shareholders' equity.............................................................. 35,588 37,544
--------- ---------
Total liabilities and shareholders' equity............................................ $ 54,515 $ 41,305
--------- ---------
--------- ---------
* Eliminated in consolidation.
The accompanying notes are an integral part of these financial statements
71
SCHEDULE II (CONTINUED)- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE SEIBELS BRUCE GROUP, INC. (PARENT COMPANY)
STATEMENTS OF OPERATIONS
AS OF DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997 1996
--------- --------- ---------
Total revenue....................................................................... $ 1,866 $ 177 $ 191
Expenses:
Interest.......................................................................... 831 99 90
Other............................................................................. 1,115 37 17
--------- --------- ---------
Total expenses.................................................................... 1,946 136 107
--------- --------- ---------
Income (loss) before equity in undistributed (loss) income of subsidiaries.......... (80) 41 84
Tax benefit......................................................................... (85) (18) (1)
--------- --------- ---------
Income before equity in undistributed (loss) income of subsidiary................... 5 59 85
Equity in undistributed (loss) income of subsidiary companies*...................... (2,899) 3,944 5,091
--------- --------- ---------
Net (loss) income................................................................. $ (2,894) $ 4,003 $ 5,176
--------- --------- ---------
--------- --------- ---------
Basic earning per share............................................................. $ (0.39) $ 0.57 $ 1.05
--------- --------- ---------
--------- --------- ---------
Diluted earnings per share.......................................................... $ (0.39) $ 0.55 $ 0.94
--------- --------- ---------
--------- --------- ---------
* Eliminated in consolidation.
The accompanying notes are an integral part of these financial statements.
72
SCHEDULE II (CONTINUED)--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE SEIBELS BRUCE GROUP, INC. (PARENT COMPANY)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
1998 1997 1996
---------- ---------- ----------
Common stock outstanding:
Beginning of year........................................................... $ 7,731 $ 6,168 $ 4,193
Stock issued in connection with offering.................................... -- 1,428 --
Stock issued under benefit and stock option plans........................... 42 135 4
Stock issued in connection with capital contributions....................... -- -- 1,971
---------- ---------- ----------
End of year................................................................. $ 7,773 $ 7,731 $ 6,168
---------- ---------- ----------
---------- ---------- ----------
Additional paid-in capital:
Beginning of year........................................................... $ 61,665 $ 54,050 $ 46,660
Stock issued in connection with offering.................................... -- 7,175 --
Stock issued under benefit and stock option plans, net of repurchase........ 196 440 21
Stock issued in connection with capital contributions....................... -- -- 7,369
---------- ---------- ----------
End of year................................................................. $ 61,861 $ 61,665 $ 54,050
---------- ---------- ----------
---------- ---------- ----------
Accumulated other comprehensive income
Beginning of year........................................................... $ 47 $ (536) $ 401
Change during the year...................................................... 860 583 (937)
---------- ---------- ----------
End of year................................................................. $ 907 $ 47 $ (536)
---------- ---------- ----------
---------- ---------- ----------
Accumulated deficit:
Beginning of year........................................................... $ (31,899) $ (35,891) $ (41,067)
Net (loss) income for the year.............................................. (2,894) 4,003 5,176
Preferred stock dividend.................................................... (160) (11) --
---------- ---------- ----------
End of year................................................................. $ (34,953) $ (31,899) $ (35,891)
---------- ---------- ----------
---------- ---------- ----------
Total shareholders' equity.............................................. $ 35,588 $ 37,544 $ 23,791
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
73
SCHEDULE II (CONTINUED)--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE SEIBELS BRUCE GROUP, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
AS OF DECEMBER 31,
(DOLLARS SHOWN IN THOUSANDS)
1998 1997 1996
---------- --------- ---------
Cash flows from operating activities:
Net (loss) income.............................................................. $ (2,894) $ 4,003 $ 5,176
---------- --------- ---------
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Equity in undistributed loss (income) of subsidiaries.......................... 2,507 (3,944) (5,091)
Changes in assets and liabilities:
Other (net).................................................................. (2,507) (3,649) (476)
---------- --------- ---------
Total adjustments.......................................................... -- (7,593) (5,567)
---------- --------- ---------
Net cash used in operating activities.......................................... (2,894) (3,590) (391)
---------- --------- ---------
Cash flows from investing activities:
Contributions of capital to subsidiaries....................................... (9,812) (1,653) (6,288)
Cost of investments acquired................................................... (300) (1,054) --
---------- --------- ---------
Net cash (used in) investing activities........................................ (10,112) (2,707) (6,288)
---------- --------- ---------
Cash flows from financing activities:
Issuance of capital stock...................................................... 238 9,178 9,349
Issuance of debt, net of repayments............................................ 13,060 (2,849) (2,476)
Dividends paid................................................................. (160) -- --
---------- --------- ---------
Net cash provided by financing activities...................................... 13,138 6,329 6,873
---------- --------- ---------
Net increase in cash and short term investments................................ 132 32 194
Cash and short term investments, beginning of year............................. 263 231 37
---------- --------- ---------
Cash and short term investments, end of year................................... $ 395 $ 263 $ 231
---------- --------- ---------
---------- --------- ---------
Supplemental cash flow information:
Income taxes recovered from subsidiaries....................................... $ 1,493 $ 1 $ 77
Interest paid.................................................................. 754 -- 271
Noncash investing activities:
Issuance of debt............................................................... $ (2,700) $ (2,200) $ --
Issuance of preferred stock.................................................... (500) -- --
---------- --------- ---------
---------- --------- ---------
Stock issued for consulting services/compensation.............................. $ -- $ 81 $ 16
---------- --------- ---------
---------- --------- ---------
The accompanying notes are an integral part of these financial statements.
74
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
FUTURE
POLICY NET AMORTIZATION
BENEFITS INVESTMENT BENEFITS, OF
DEFERRED LOSSES, INCOME(1) CLAIMS, DEFERRED
POLICY CLAIMS AND OTHER AND POLICY OTHER
ACQUISITION AND LOSS UNEARNED PREMIUM INTEREST SETTLEMENT ACQUISITION OPERATING
SEGMENT COSTS EXPENSES PREMIUMS REVENUE INCOME EXPENSES COSTS EXPENSES(1)
- ------------------------------ ----------- --------- -------- ------- ---------- ---------- ------------ -----------
Year ended December 31, 1998
Property and casualty
insurance................... $2,472 $ 119,976 $72,538 $22,762 $ 564 $25,269 $10,222 $(4,584)
Credit life insurance......... -- 20 22 13 296 (46) 15 61
Commission and service
activities.................. -- -- -- -- 3,785 -- -- 51,130
Other......................... -- -- -- -- -- -- -- 201
----------- --------- -------- ------- ---------- ---------- ------------ -----------
Total..................... $2,472 $ 119,996 $72,560 $22,775 $4,645 $25,223 $10,237 $46,808
----------- --------- -------- ------- ---------- ---------- ------------ -----------
----------- --------- -------- ------- ---------- ---------- ------------ -----------
Year ended December 31, 1997
Property and casualty
insurance................... $1,565 $ 114,770 $54,341 $6,580 $ 472 $ 8,840 $ 1,305 $(4,036)
Credit life insurance......... 15 117 41 156 248 70 (98) 55
Commission and service
activities.................. -- -- -- -- 3,167 -- -- 45,005
Other......................... -- -- -- -- -- -- -- 90
----------- --------- -------- ------- ---------- ---------- ------------ -----------
Total..................... $1,580 $ 114,887 $54,382 $6,736 $3,887 $ 8,910 $ 1,207 $41,114
----------- --------- -------- ------- ---------- ---------- ------------ -----------
----------- --------- -------- ------- ---------- ---------- ------------ -----------
Year ended December 31, 1996
Property and casualty
insurance................... $ -- $ 132,152 $47,498 $7,186 $ 482 $11,814 $ 1,580 $ 58
Credit life insurance......... 96 145 194 478 270 203 (207) 74
Commission and service
activities.................. -- -- -- -- 3,055 -- -- 38,882
Other......................... -- -- -- -- -- -- -- --
----------- --------- -------- ------- ---------- ---------- ------------ -----------
Total..................... $ 96 $ 132,297 $47,692 $7,664 $3,807 $12,017 $ 1,373 $39,014
----------- --------- -------- ------- ---------- ---------- ------------ -----------
----------- --------- -------- ------- ---------- ---------- ------------ -----------
PREMIUMS
SEGMENT WRITTEN
- ------------------------------ --------
Year ended December 31, 1998
Property and casualty
insurance................... $32,226
--------
--------
Credit life insurance.........
Commission and service
activities..................
Other.........................
Total.....................
Year ended December 31, 1997
Property and casualty
insurance................... $ 6,626
--------
--------
Credit life insurance.........
Commission and service
activities..................
Other.........................
Total.....................
Year ended December 31, 1996
Property and casualty
insurance................... $ 6,666
--------
--------
Credit life insurance.........
Commission and service
activities..................
Other.........................
Total.....................
- ------------------------
(1) Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates. Results would change if different
methods were applied.
75
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV--REINSURANCE
(IN THOUSANDS)
PERCENTAGE OF
ASSUMED FROM AMOUNT
GROSS CEDED TO OTHER OTHER ASSUMED TO
YEAR ENDED DECEMBER 31, 1998 AMOUNT* COMPANIES COMPANIES NET AMOUNT NET AMOUNT
- ------------------------------------------ ---------- -------------- ------------- ----------- ---------------
Credit life insurance in force............ $ 489 $ -- $ -- $ 489 0.0%
---------- -------------- ------ ----------- ---
---------- -------------- ------ ----------- ---
Premiums earned:
Property/casualty insurance............. $ 163,485 $ 147,643 $ 6,920 $ 22,762 30.4%
Credit life insurance................... 13 -- -- 13 --
Accident/health insurance............... -- -- -- -- --
---------- -------------- ------ -----------
Total................................. $ 163,498 $ 147,643 $ 6,920 $ 22,775
---------- -------------- ------ -----------
---------- -------------- ------ -----------
YEAR ENDED DECEMBER 31, 1997
- ------------------------------------------
Credit life insurance in force............ $ 1,466 $ -- $ -- $ 1,466 0.0%
---------- -------------- ------ ----------- ---
---------- -------------- ------ ----------- ---
Premiums earned:
Property/casualty insurance............. $ 109,277 $ 108,226 $ 5,529 $ 6,580 84.0%
Credit life insurance................... 51 -- -- 51 --
Accident/health insurance............... 105 -- -- 105 --
---------- -------------- ------ -----------
Total..................................... $ 109,433 $ 108,226 $ 5,529 $ 6,736
---------- -------------- ------ -----------
---------- -------------- ------ -----------
YEAR ENDED DECEMBER 31, 1996
- ------------------------------------------
Credit life insurance in force............ $ 5,908 $ -- $ -- $ 5,908 0.0%
---------- -------------- ------ ----------- ---
---------- -------------- ------ ----------- ---
Premiums earned:
Property/casualty insurance............. $ 105,212 $ 103,845 $ 5,819 $ 7,186 81.0%
Credit life insurance................... 265 (1) -- 266 --
Accident/health insurance............... 211 (1) -- 212 --
---------- -------------- ------ -----------
Total................................. $ 105,688 $ 103,843 $ 5,819 $ 7,664
---------- -------------- ------ -----------
---------- -------------- ------ -----------
* Includes amount written as designated carrier for two state sponsored
automobile facilities, a homeowners' residual market and the WYO National
Flood Insurance Program.
76
THE SEIBELS BRUCE GROUP, INC.
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT
BEGINNING OF BALANCE AT
DESCRIPTION YEAR ADDITIONS DEDUCTIONS END OF YEAR
- ---------------------------------------------------------------- ------------- ----------- ----------- -----------
YEAR ENDED DECEMBER 31, 1998
- ----------------------------------------------------------------
Allowance for uncollectable:
Agents' balances receivable................................... $ 957 $ 2,885* $ 1,148 $ 2,694
----- ----------- ----------- -----------
----- ----------- ----------- -----------
Other receivable.............................................. $ 63 -- 63 --
----- ----------- ----------- -----------
----- ----------- ----------- -----------
Premium notes receivable...................................... $ 301 $ 15 $ 75 $ 241
----- ----------- ----------- -----------
----- ----------- ----------- -----------
YEAR ENDED DECEMBER 31, 1997
- ----------------------------------------------------------------
Allowance for uncollectable:
Agents' balances receivable................................... $ 669 $ 2,016 $ 1,728 $ 957
----- ----------- ----------- -----------
----- ----------- ----------- -----------
Other receivable.............................................. $ 79 $ 29 $ 45 $ 63
----- ----------- ----------- -----------
----- ----------- ----------- -----------
Premium notes receivable...................................... $ 75 $ 226 $ -- $ 301
----- ----------- ----------- -----------
----- ----------- ----------- -----------
YEAR ENDED DECEMBER 31, 1996
- ----------------------------------------------------------------
Allowance for uncollectable:
Agents' balances receivable................................... $ 70 $ 738 $ 139 $ 669
----- ----------- ----------- -----------
----- ----------- ----------- -----------
Other receivable.............................................. $ 79 $ -- $ -- $ 79
----- ----------- ----------- -----------
----- ----------- ----------- -----------
Premium notes receivable...................................... $ 75 $ -- $ -- $ 75
----- ----------- ----------- -----------
----- ----------- ----------- -----------
- ------------------------
* Includes $1,889 acquired with the purchase of Graward.
77
THE SEIBELS BRUCE GROUP, INC.
SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE
OPERATIONS
(IN THOUSANDS)
CLAIMS AND CLAIM
ADJUSTMENT
RESERVES NET EXPENSES
FOR UNPAID INVESTMENT INCURRED RELATED
DEFERRED CLAIMS DISCOUNT, INCOME AND TO:
POLICY AND CLAIM IF ANY, OTHER ------------------
ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED INTEREST CURRENT PRIOR
COSTS EXPENSES COLUMN C* PREMIUMS PREMIUMS INCOME YEAR YEARS
----------- ---------- ----------- -------- -------- ---------- -------- -------
Affiliation with Registrant
Company and consolidated
subsidiaries
Year Ended December 31, 1998.. $2,472 $119,976 $-- $72,538 $22,762 $4,349 $24,450 $ 819
----------- ---------- --- -------- -------- ---------- -------- -------
----------- ---------- --- -------- -------- ---------- -------- -------
Year Ended December 31, 1997.. $1,565 $114,770 $-- $54,341 $ 6,580 $3,639 $12,202 $(3,362)
----------- ---------- --- -------- -------- ---------- -------- -------
----------- ---------- --- -------- -------- ---------- -------- -------
Year Ended December 31, 1996.. $ -- $132,152 $-- $47,498 $ 7,186 $3,537 $10,697 $ 1,117
----------- ---------- --- -------- -------- ---------- -------- -------
----------- ---------- --- -------- -------- ---------- -------- -------
AMORTIZATION
OF DEFERRED PAID CLAIMS
POLICY AND CLAIM
ACQUISITION ADJUSTMENT PREMIUMS
COSTS EXPENSES WRITTEN
------------ ----------- --------
Affiliation with Registrant
Company and consolidated
subsidiaries
Year Ended December 31, 1998.. $10,252 $28,101 $32,226
------------ ----------- --------
------------ ----------- --------
Year Ended December 31, 1997.. $ 1,305 $19,768 $ 6,626
------------ ----------- --------
------------ ----------- --------
Year Ended December 31, 1996.. $ 1,580 $25,418 $ 6,666
------------ ----------- --------
------------ ----------- --------
- ------------------------
* The Company does not discount loss and LAE reserves.
78