AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1996
SECURITIES AND EXCHANGE COMMISSION
FORM S-2/A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
(Amendment No. 1)
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 identification
incorporation or organization) number)
1501 Lady Street (PO Box 1)
Columbia, SC 29201 (29202)
(803) 748-2000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive
offices)
Priscilla Brooks, Corporate Secretary
The Seibels Bruce Group, Inc.
1501 Lady Street (PO Box 1)
Columbia, SC 29201 (29202)
(803) 748-2000
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
Copies to:
John C. West, Jr., Esq. Robert S. Smith, Esq.
John C. West, Jr., PA McGuire, Woods, Battle & Boothe, LLP
PO Box 661 The Army and Navy Club Building
1111 Broad Street 1627 Eye Street, NW
Camden, SC 29020 Washington, DC 20006-4007
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. X
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. X
CALCULATION OF REGISTRATION FEE
Title of each
class of Porposed maximum Proposedmaximum Amount of
securities to Amount to offering price aggregate registration
be registered be registered per unit(1) offering price1 fee
- ------------- ------------- ---------------- --------------- ------------
Common Stock, 500,000 $2.563 $1,281,500 $388.33
$1.00 par value
(1)Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457
PART I
INFORMATION REQUIRED IN PROSPECTUS
THE SEIBELS BRUCE GROUP, INC.
Cross Reference Sheet pursuant to Regulation S-K, Item 501(b)
Form S-2 Item Number and Heading Location In Prospectus
- -------------------------------- ----------------------
1. Forepart of the Registration Statement Outside Front Cover Page
and Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Inside Front and Outside Back
Pages of Prospectus Cover Pages of Prospectus:
Available Information
3. Summary Information, Risk Factors, Risk Factors
and Ratio of Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Description of the 1995 Stock
Option Plan for Independent
Agents
6. Dilution Not applicable
7. Selling Security Holders Not applicable
8. Plan of Distribution Outside Front Cover Page;
Description ofthe 1995 Stock
Option Plan for Independent
Agents
9.Description of Securities Outside Front Cover Page;
to be Registered Description of Capital Stock
10. Interests and Named Experts and Counsel Not applicable
11. Information with Respect to the Outside Front Cover Page;
Registrant Incorporation of Certain
Information by Reference; Risk
Factors; The Company
12. Incorporation of Certain Information by Incorporation of Certain
Reference Information by Reference
13. Disclosure of Commission Position on Not Applicable
Indemnification for Securities
Act Liabilities
SUBJECT TO COMPLETION, DATED October 15, 1996
PROSPECTUS
THE SEIBELS BRUCE GROUP, INC.
1501 LADY STREET (PO BOX 1)
COLUMBIA, SOUTH CAROLINA 29201 (29202)
500,000 Shares of
COMMON STOCK
$1.00 Par Value Per Share
The 1995 Stock Option Plan for Independent Agents (the "1995 Agents
Plan") of The Seibels Bruce Group, Inc. (the "Company") described herein
offers principals of any independent agencies who have contracted with the
Company or its subsidiaries, but who are not directly or indirectly
beneficial owners of more than 10% of the Company's Common Stock,
$1.00 par value, (the "Common Stock") and who are not directors or
officers of the Company an opportunity to take a proprietary interest in the
Company which the Company hopes will stimulate the efforts of agents
upon whose efforts the Company is and will be largely dependent for the
successful conduct of its business.
The right to buy, sometime in the future, the Company's Common Stock
at a specified exercise price will be granted to certain agents. The agents
will then have the "option" of whether or not to exercise the options. The
1995 Agents Plan authorizes the granting of options to purchase an
aggregate maximum of 500,000 shares of Common Stock to eligible
independent agents of the Company.
Options will be granted to agents for no cash consideration; the purchase
price for shares of Common Stock purchased from the Company upon
exercise of the option, will be the fair market value (as defined in the 1995
Stock Option Plan for Independent Agents) of the Common Stock on the
date the option is granted. The Common Stock of the Company is traded
on the NASDAQ National Market under the symbol "SBIGE." On
November 6, 1996, the last reported sales price of the Common Stock on
the NASDAQ National Market was $2-5/16 per share.
There will be no brokerage commissions or service charges upon the
purchase of shares under the 1995 Agents Plan. The Company will bear all
other costs of administering the 1995 Agents Plan.
It is recommended that this Prospectus be retained for future reference.
This Prospectus is accompanied by a copy of the Company's 1995 Annual
Report.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting, Discounts,
Price to Public and Commissions Proceeds to Company(1)
--------------- ------------------------ ----------------------
Per Share See Footnote(2) None 100%
Total See Footnote(2) None 100%
The date of this Prospectus is ____________________.
(1) Before deducting expenses payable by the Company estimated at $1,281,500
(2)The Common Stock of the Company is traded on the NASDAQ National Market
under the symbol "SBIGE." The Common Stock is offered to participants in
the 1995 Agents Plan at the fair market value (as defined below) of the
Common Stock on the date the option is granted. On November 6, 1996, the
last reported sales price of the Common Stock on the NASDAQ National Market
was $2-5/16 per share.
Subject to Completion - A registration statement relating to these securities
has been filed with the Securities and Exchange Commission but has not
yet become effective. Information contained herein is subject to
completion or amendment. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
TABLE OF CONTENTS
AVAILABLE INFORMATION 1
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE 1
THE COMPANY 3
RISK FACTORS 5
MARKET PRICE AND DIVIDENDS 9
DESCRIPTION OF THE 1995 STOCK OPTION PLAN FOR INDEPENDENT AGENTS 10
DESCRIPTION OF CAPITAL STOCK 11
USE OF PROCEEDS 13
LEGAL MATTERS 13
EXPERTS 13
ADDITIONAL INFORMATION 13
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 ("Exchange Act"), and, in accordance
therewith, files periodic reports and other information with the Securities
and Exchange Commission (the "Commission"). Reports and other
information concerning the Company may be inspected and copied at the
public reference facilities of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, NW, Washington, DC 20549. Copies of such
material also can be obtained by mail from the Public Reference Section of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, NW,
Washington, DC 20549, at prescribed rates. The Company's Common
Stock is listed on the NASDAQ National Market. Reports and other
information concerning the Company can be inspected at the offices of the
NASDAQ Stock Market, 1735 K Street, NW, Washington, DC 20006-
1506. The Commission also maintains a world wide web site that contains
reports, proxy and information statements and other information regarding
the Company. The world wide web site address is http://www.sec.gov.
INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE
The following documents filed with the Commission (File No. 0-8804)
pursuant to Sections 13(a) or 15(d) of the Exchange Act are incorporated
herein by reference:
1. The Company's Annual Report on Form 10-K/A-1 for the
fiscal year ended December 31, 1995;
2. The Company's 1995 Annual Report to Shareholders;
3. The Company's 1996 Notice of Special Meeting of
Shareholders and Proxy Statement;
4. The Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1996;
5. The Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1996;
6. The Company's Reports on Form 8-K dated January 19,
February 2, March 14, and April 8, 1996; and
7. The Company's 1996 Notice of Annual Meeting of
Shareholders and Proxy Statement.
The Company's annual report on Form 10-K/A-1 includes audited
financial statements as of December 31, 1995. Unaudited interim financial
statements of the Company are contained in the Company's Form 10-Q
quarterly reports.
The information relating to the Company in this Prospectus does not
purport to be complete and should be read together with the information in
the documents incorporated be reference herein.
Any statement contained in any document incorporated or deemed to be
incorporated by reference herein shall be modified or superseded for
purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which is incorporated or deemed to
be incorporated by reference herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
Where any document or part thereof is incorporated by reference in this
Prospectus and not delivered herewith, the Company will undertake to
provide without charge to each person, including any beneficial owner to
whom a Prospectus is delivered, upon written or oral request, a copy of
any and all of the information that has been incorporated by reference in
this Prospectus. Any request for such information should be addressed to
the Corporate Secretary, The Seibels Bruce Group, Inc., PO Box 1,
Columbia, South Carolina 29202.
No person has been authorized to give any information or to make any
representation not contained in this Prospectus and, if given or made, the
information or representation must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any securities other that the
shares of Common Stock to which it relates or an offer to any person in any
jurisdiction where such an offer would be unlawful. Neither the delivery of
this Prospectus, nor any distribution of securities pursuant hereto shall
imply or create an implication that there has been no change in the affairs
of the Company or in the information set forth or incorporated be reference
herein subsequent to the date hereof.
THE COMPANY
Profile
The Seibels Bruce Group, Inc. (the "Company") is the parent
company of South Carolina Insurance Company ("SCIC") and Seibels Bruce and
Company ("SBC") and their wholly-owned subsidiaries. Founded in 1869, the
Company performs servicing carrier activities for state and federal
insurance facilities. MGA services are also performed for nonaffiliated
insurance companies. SCIC consists of a group of multi-line property and
casualty insurance companies and associated companies with headquarters
in South Carolina and Kentucky. The underwriting activities are primarily
conducted in North Carolina, South Carolina, Kentucky, Georgia and
Tennessee by offering insurance products through independent insurance
agents. During the third quarter of 1996, the South Carolina Department
of Insurance gave its approval for SCIC to write risk bearing business in
both personal and commercial lines in the southeastern states, not to
exceed a "net premiums written to surplus" ratio of one to one during
either 1996 or 1997.
Capitalization
The Company initiated a recapitalization plan in December 1993.
Prior to the plan, operating losses were experienced for several consecutive
years as a consequence of unfavorable underwriting experience, wind
losses due to Hurricanes Hugo and Andrew and losses developed from
environmental and construction defect exposures on the West Coast.
Under the recapitalization plan, a previously outstanding $23 million loan
and the accrued interest thereon was purchased from the original holder by
new investors (the "Alissa Group"). These new investors then exchanged
the note for a new note with a principal balance of $10 million, bearing
interest at 8.5%, due June 30, 1994 and secured by 100% of the stock of
SCIC. The effect of this transaction for 1993 was a reduction of the loss
for the year of $9.2 million, net of taxes ($1.23 per share).
In accordance with the recapitalization plan, on June 28, 1994, the
new note was then canceled and exchanged in a private transaction for
7,000,000 newly issued shares of the Company's common stock. A note
for $400,000, representing accrued interest on the new note, was then
executed in favor of the new investors. The result of this exchange, which
was completed in the second quarter of 1994, was that $1O million was
added to the Company's shareholders' equity.
During the first quarter of 1995, the Company received net
proceeds from a Rights Offering (the "Rights Offering") in the amount of
$5.1 million. Pursuant to the Rights Offering, each shareholder of record
received one Right for each five shares of Common Stock held of record at
the close of business on December 9, 1994. The Right allowed the
shareholders to purchase shares of Common Stock at a price of $2.40 per
share. The gross proceeds were generated from 2,217,152 Rights being
exercised. On the date of receipt of the proceeds, the Company made a
capital contribution of $5 million to SCIC.
During the second quarter of 1995, the Alissa Group loaned the
Company $2 million. The $2 million was then contributed to SCIC in
order to increase its statutory capital. The $2 million note and the
$400,000 note became due in May, 1996. In May, 1996, the notes payable
to the Alissa Group were liquidated.
Additional steps taken to protect statutory capital included a
decision in the first quarter to cede all auto liability business written in
North Carolina to the North Carolina Reinsurance Facility, and in the
second quarter of 1995, to non-renew all property business and temporarily
suspend all new and renewal activity where the Company retained any net
underwriting risk.
During the fourth quarter of 1995, an investor group (the "Powers
Group") signed a letter of intent to acquire 6,250,000 of authorized but
unissued shares plus options to purchase a further 6,250,000 shares of the
Company in a private transaction at a cost of $1.00 per share, the
approximate market price at the time of reaching agreement with the
Company. The $6,250,000 proceeds from the investment were deposited
into escrow in January, 1996. A special shareholders meeting was to be
held during the second quarter of 1996 to approve the issuance and to
allow voting rights for the Powers Group in accordance with South
Carolina law, which requires approval for stock ownership above a 20%
interest in the Company. Upon such approval and the approval of the
South Carolina Department of Insurance to write new business, the funds
were transferred by the Company from the escrow account and contributed
to the statutory capital of SCIC.
During the first quarter of 1996, the Company issued 1,635,000
shares of authorized but unissued shares and options to purchase a further
1,635,000 shares in a private transaction to a different group of investors
(the "Avent Group"). The proceeds of this sale were applied to liquidate
the notes payable to the Alissa Group that were due May 1, 1996. The
grant of options was subject to shareholder approval of increasing the
number of authorized shares the of Company; such approval was granted in
the second quarter of 1996.
Fee-generating Activities
The Company provides services to the South Carolina and North Carolina
Reinsurance Facilities, two automobile residual market plans, and the
Kentucky Fair Plan, a homeowners' residual market. Additionally, the
Company is a major participant in the "Write Your Own" federal flood
facility of the National Flood Insurance Program. All servicing functions
are performed on a commission basis without any underwriting risk to the
Company. Effective in the fourth quarter of 1995, the Company ceased to
operate as a servicing carrier for the North Carolina Reinsurance Facility.
The auto business previously written in that state and ceded to the Facility
continues to be handled in a similar manner but with a change in the
Company's compensation. Instead of commission and service income, the
Company now receives a reinsurance commission, which is not significant
for 1995 or 1996 and is netted against other operating costs and expenses
on the income statement. Effective in the fourth quarter of 1996, the
Company will cease to provide services to the Kentucky Fair Plan. The
impact on overall profitability is not expected to be significant. Ceded
premiums written and commission and service income for the facilities in
1995 and 1994 were as follows:
<TABLE>
(thousands of dollars) 1995 1994
Ceded Commission and Ceded
Commission and
Facility Premiums Service Income Premiums Service Income
<S> <C> <C> <C> <C>
South Carolina Reinsurance Facility $62,206 $27,795 $80,073 $39,121
National Flood Insurance Program 28,576 12,270 29,517 10,898
Kentucky Fair Plan 6,741 1,143 5,852 987
North Carolina Reinsurance Facility 3,016 1,470 6,513 2,201
-------- -------- -------- -------
Total $102,539 $42,678 $121,955 $53,207
</TABLE>
The ceded premium amounts above represent 94.5% and 92.8% of
the Company's total consolidated ceded premiums written during 1995 and
1994, respectively. The commission and service income amounts above
represent 86.1 % and 87.7% of the Company's total commission and
service income as stated in the consolidated financial statements for 1995
and 1994, respectively. Each of these profit centers has operated profitably
over the last three years.
All of the Company's commercial business was underwritten under
an MGA agreement with an unaffiliated insurance company. The Company
serviced these policies and claims on a commission basis without any
underwriting risk. This agreement became effective May 1, 1993.
Commission and service income generated under this agreement was $6.7
million and $7.1 million during 1995 and 1994, respectively, which
represents 13.5% and 11.7%, respectively, of the Company's total
commission and service income as stated in the consolidated financial
statements. With the premium volume and the corresponding expenses
involved, the Company did not make a profit through the end of 1995
under the 1993 agreement. The Company undertook significant cost
reductions in the last half of 1995 and first half of 1996 and plans further
cost reductions for the remainder of 1996 to seek to make this business
profitable. Furthermore, an additional MGA agreement was reached with
unaffiliated company for personal lines business, and other similar
arrangements are planned for the remainder of 1996 in order to seek to
enhance revenues within the existing cost structure.
The Company also assists subagents in providing excess and surplus
lines for difficult or unusual risks. This business is placed with non-
affiliated insurers on a commission basis. Under these arrangements, the
Company has varying degrees of underwriting and claims authority.
RISK FACTORS
Because of the Company's recent operating history, including
losses for two of its last three fiscal years, and its financial condition, an
investment in the Common Stock is subject to certain investment
considerations that should be carefully reviewed prior to determining
whether to purchase Common Stock. Further, an investment in the
Common Stock must be made pursuant to each investor's evaluation of
his, her or its best interests. Potential purchasers should carefully
consider the following investment considerations, as well as all the other
information set forth in or incorporated into this Prospectus.
Insurance Business Generally
Insurance involves the transfer of risk from one party (the "insured")
to another party, such as the Company's insurance subsidiaries, (the "insurer").
Premium payments of the insured are made in exchange for the commitment of the
insurer to reimburse the insured for specific types of losses under certain
circumstances. The insurer in turn uses reinsurance as a mechanism to further
spread the consequences of financial loss. Analysis and study of historical and
competitive loss history permits the Company to predict its ultimate losses more
accurately, thereby enabling it to charge an adequate premium. Adequate product
pricing is fundamental to the insurer's continued solvency. The Company is
exposed to the risks inherent in an insurance business. See "The Company."
Regulation
Insurance companies are subject to supervision and regulation in
the jurisdictions in which they transact business, and such supervision and
regulation relates 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; impose limitations on the nature and amount of
investments; regulate premium rates; delineate the provisions which
insurers must make for current losses and future liabilities; require the
deposit of securities for the benefit of policyholders; and 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 also enacted legislation which regulates insurance
holding company systems, including acquisitions, dividends, the terms of
surplus notes (debt instruments specific to the insurance industry), the
terms of affiliate transactions and other related matters. Three 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. The Kentucky Insurance Company ("KIC") is domiciled in
Kentucky.
The insurance industry has received a considerable amount of
publicity because of rising insurance costs, a number of high profile
insurance company insolvencies and a limited exemption from the
provisions of federal anti-trust prohibitions. Changes in the law are being
proposed which would bring the insurance industry under the regulation of
the Federal government and eliminate current exemptions from anti-trust
prohibitions. It is not possible to predict whether, in what form or in which
jurisdictions any of these proposals might be adopted, or the effect, if any,
on the Company. The National Association of Insurance Commissioners
(the "NAIC") has developed and recommended for adoption by the state
insurance regulatory authorities various model laws and regulations
pertaining to, among other things, capital requirements for the insurance
industry members.
The 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 will be used by state
insurance regulators as an early warning tool to identify, for the purpose of
initiating regulatory action, insurance companies that potentially are
inadequately capitalized. Compliance is determined by the ratio of the
Company's regulatory total adjusted capital to its authorized control level
RBC (as defined by the NAIC). Companies which fall below the
authorized RBC level may be required to disclose plans to remedy the
situation. As of June 30, 1996, three of the four Company's insurance
subsidiaries have ratios of total adjusted capital to RBC that are
comfortably in excess of the level which would prompt regulatory action.
SCIC currently falls below the required RBC level.
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 insurance laws, rather than federal
bankruptcy laws, would apply to the liquidation or reorganization of the
Company's insurance companies other than KIC. KIC would be governed
by Kentucky insurance law.
Financial Condition
For the year ended December 31, 1995, the Company reported net
income of $1,152,000. However, for the years ended December 31, 1994
and 1993, the Company recorded net losses of $19,074,000 and
$1,014,000 (after an extraordinary item) respectively. Following several
years of operating losses, and a resulting shortfall in statutory capital, the
Company suspended underwriting new and renewal personal lines of
business in the second quarter of 1995. Having raised sufficient capital and
in combination with improved operating results, the Company received
authorization from the South Carolina Department of Insurance and
resumed underwriting new business during the third quarter of 1996.
Although operating and strategic plans provide for underwriting
profitability, there can be no assurance that the Company will achieve this
objective, or will not suffer further operating losses.
The Company has experienced negative cash flows from operations
for each of the last three fiscal years, plus the first half of 1996, and
expects to continue to experience negative cash flows from operations for the
remainder of 1996. The Company invests its cash in bonds and securities,
and such instruments are subject to market fluctuations. To the extent that
the Company is required to sell marketable securities in order to fund
operations, the Company may experience realized losses on its investment
portfolio. The Company believes that its cash and short-term investments,
which are generally not subject to market fluctuation, will be sufficient to
fund such negative cash flows.
The Company's loss reserves are an estimate at a given point in
time of the amount that the Company expects to pay insurance claimants
based on the facts and circumstances known at the time. It can be
expected that the ultimate liability in each case will differ from such
estimates. For each of the three years ended December 31, 1995, 1994,
and 1993, the results of operations were affected by reserves from prior
years having been deficient in those earlier periods. The impact of the
adverse development was $3.4 million in 1995, $17.0 million in 1994, and
$10.5 million in 1993. The Company has constantly striven for reserve
adequacy, and currently believes that the reserves are sufficient to prevent
prior years' losses from adversely affecting future periods. However,
establishing reserves remains an estimation process, and there can be no
assurance that adverse developments will not occur in the future or that
reserves will be adequate to cover actual losses.
Significant Contracts
The Company derives a substantial portion of its net income from a
Servicing Agreement with the South Carolina Reinsurance Facility and the
National Flood Insurance Program.. The agreement with the South
Carolina Reinsurance Facility does not expire until September 30, 1999.
However, legislative initiatives could potentially lessen the profitability of
the business prior to expiration of the contract. The agreement with the
National Flood Insurance Program is renewed annually and is conditioned
upon the Company meeting reporting requirements and other obligations.
Accordingly, there can be no assurance that the Company will continue to
benefit form agreements with these programs; or that, if the agreements
continue, their terms will be consistent with past agreements.
A.M. Best Rating
The Company's current A.M. Best rating is a group rating of NA-9
("Not Assigned - Company Request"). A.M. Best is an independent
company which rates insurance companies based on its judgment of factors
related to the ability to meet policy holder and other contractual
obligations. A low rating would not directly impact the Company's
servicing carrier or MGA operations However, the Company's operating
prospects may be affected by the lack of a satisfactory A.M. Best rating.
Competition
All of the areas of business in which the Company engages are
highly competitive. The principal methods of competing are service and
pricing. Many competing property and casualty companies have available
more diversified lines of insurance than the Company's property and
casualty insurance group and have substantially greater financial resources.
In addition, effective October 1, 1994, the Company received a smaller
book of business from the South Carolina Reinsurance Facility due to a
competitive bidding process. The Company responds to this competitive
environment by constantly updating its policy offerings, improving
operating procedures and constantly reviewing expenses. There can be no
assurance that the Company's responses to competition will be successful.
Limitation on Net Operating Loss Carry Forwards
As of December 31, 1995, the Company had unused net operating
tax loss carry forwards and capital loss carry forwards of $97.9 million for
income tax purposes, all of which have been reserved through valuation
allowance for financial reporting purposes. However, due to a "change in
ownership" condition that occurred in 1995, the Company's use of the net
operating loss carry forwards is subject to limitation in future years to an
amount estimated to be in the range of approximately $2.5 million to $3.5
million per year. A future change in ownership resulting from the
registration of shares could further limit the utilization of net operating
loss carry forwards.
Tax Considerations
There are various applicable tax consequences associated with an
investment in the Common Stock. Each investor is urged to consult with
his, her or its own tax advisor concerning the effects of applicable income
tax laws and regulations on an investment by him, her or it in the Company
and his, her or its individual tax situation. The Company will not seek or
receive a ruling from the Internal Revenue Service or a tax opinion as to
the tax consequences of an investment in the Common Stock.
Dividends
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 statutorily permitted payments
from its subsidiaries and affiliates. South Carolina insurance laws and
regulations require a domestic insurer such as SCIC, the Company's
principal subsidiary, to report any action authorizing distributions to
shareholders and material payments from subsidiaries and affiliates at least
thirty days prior to distribution or payment except in limited circumstances.
Additionally, those laws and regulations provide the South Carolina
Department of Insurance with the right to disapprove and prohibit
distributions meeting the definition of an "Extraordinary Dividend" under
the statutes and regulations. If the ability of SCIC and the Company's
other insurance subsidiaries to pay dividends or make other payments to
the Company is materially restricted by regulatory requirements, it could
affect the Company's ability to service its debt and/or pay dividends.
Moreover, no assurance can be given that legislative changes will not result
in statutory provisions more restrictive than those currently in effect.
The ability of the Company to declare and pay cash dividends is
dependent upon the ability of SCIC to declare and pay dividends to the
Company. SCIC is regulated as to its payment of dividends by the South
Carolina Insurance Holding Company Regulatory Act. This Act provides
that, without the prior approval of the Chief Insurance Commissioner of
the State of South Carolina, dividends within any twelve-month period may
not exceed the greater of (i) 10% of SCIC's surplus as regards
policyholders as of December 31 of the prior year or (ii) SCIC's statutory
net income, not including realized capital gains or losses, for the prior
calendar year. Notwithstanding the foregoing, SCIC may not pay any
dividend without the prior approval of the Chief Insurance Commissioner.
The Chief Insurance Commissioner has stated that no dividends would be
permitted until the financial position of SCIC is materially improved. The
Company's payment of cash dividends is at the discretion of the Board of
Directors, upon approval of the Commissioner, and is based on its
earnings, financial condition, capital requirements, and other relevant
factors. The Board of Directors does not presently intend to pay any cash
dividends in the foreseeable future.
Possible Volatility of Price of Shares of Common Stock
The market price of the Company's Common Stock has
experienced significant volatility over the last four years. Factors such as
events resulting in significant claims on policies issued by the Company and
its subsidiaries, adjustments in reserves, changes in the value of the
Company's investment portfolio, cancellation or amendment of contractual
relationships, announcements of technological innovations or new products
by the Company or its competitors, governmental regulation, regulatory
approvals or developments relating to corporate alliances or patent or
proprietary rights may have a significant impact on the market price of the
Company's Common Stock. In addition, general market price declines,
volatility or share illiquidity in the future could adversely affect the market
price of the Company's Common Stock. There can be no assurance that
the market price of the Common Stock will not decline after an investor
purchases shares, or that following the purchase of the shares of Common
Stock, a shareholder will be able to sell shares at a price equal to or greater
than the acquisition price. See "Market Price and Dividends."
Shares Eligible for Future Sale
Future sales of substantial amounts of Common Stock in the public
market, or the possibility of such future sales, could adversely affect the
market price of the Common Stock. The Company has outstanding a
substantial number of unregistered shares of Common Stock, and a
substantial number of authorized shares available for future issuance. The
Company may also register shares of Common Stock or grant registration
rights in connection with future financings. In addition, certain employees,
officers and directors of the Company hold Common Stock and/or options
to purchase Common Stock. See "Description of Capital Stock."
MARKET PRICE AND DIVIDENDS
The following table sets forth the range of high and low sales prices as
reported on the NASDAQ National Market. On November 6, 1996, the last
reported sales price of the Common Stock on the NASDAQ National
Market was $2-5/16 per share.
High
Low
1996
First Quarter $4 $1-5/8
Second Quarter 3-1/8 2-3/8
Third Quarter 2-9/16 2
Fourth Quarter 2-11/16 2-5/16
(through November 6, 1996)
1995
First Quarter $3-1/16 $7/8
Second Quarter 1-7/16 3/4
Third Quarter 1-1/32 3/4
Fourth Quarter 2-3/16 7/16
1994
First Quarter $2-1/16 $1-1/4
Second Quarter 2 1-7/16
Third Quarter 3-1/8 1-3/4
Fourth Quarter 3 2-1/4
There were approximately 2,549 shareholders of record as of November 6, 1996.
This number does not include beneficial owners holding shares through nominee
or "street" names.
There have been no dividends declared by the Company during the
last three and a half years, and there is not a likelihood that any will be
considered during the remainder of 1996. 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 to declare and pay dividends to the
Company. SCIC is regulated as to its payment of dividends by the South
Carolina Insurance Holding Company Regulatory Act (the "Act"). The
Company's payment of cash dividends is at the discretion of the Board of
Directors based on its earnings, financial condition, capital requirements,
and other relevant factors. The Board of Directors does not presently
intend to pay any cash dividends in the foreseeable future. See "Risk
Factors - Dividends."
DESCRIPTION OF THE 1995 STOCK OPTION PLAN FOR
INDEPENDENT AGENTS
Introduction
On January 30, 1996, the Board of Directors of the Company adopted,
subject to shareholder approval, the 1995 Stock Option Plan for
Independent Agents (the "1995 Agents Plan"). The 1995 Agents Plan
became effective June 15, 1996 after a Special Meeting of Shareholders
where the shareholders of the Company gave their approval. The 1995
Agents Plan authorizes the granting of stock options to purchase an
aggregate maximum of 500,000 shares of Common Stock to eligible
independent agents of the Company. The principal features of the 1995
Agents Plan are summarized below. The summary is qualified by reference
to the complete text of the 1995 Agents Plan, which is incorporated by
reference.
Eligibility
Principals of any independent agencies who have contracted with the
Company or its subsidiaries, but who are not directly or indirectly
beneficial owners of more than 10% of the Common Stock and who are
not directors or officers of the Company, are eligible to receive stock
options under the 1995 Agents Plan.
Administration
The 1995 Agents Plan will be administered by a committee from among
the Company's management appointed by the Board of Directors (referred
to in this section as the "Committee"). The Committee has certain powers
vested in it by the terms of the 1995 Agents Plan, including the authority
(within the limitations described therein) to interpret the 1995 Agents Plan,
to make all determinations necessary for administration of the 1995 Agents
Plan, and to adopt and amend rules and regulations relating to the 1995
Agents Plan as it may deem desirable. Any decision of the Committee in
the administration of the 1995 Agents Plan will be conclusive and binding.
Award of Options
Subject to the provisions of the 1995 Agents Plan, the Committee shall
have the authority and sole discretion to designate those individuals (from
among those eligible) to whom options will be awarded, and determine the
manner and condition of exercise as well as the times at which options will
be awarded. In making such determinations the Committee may take into
account the nature of the services rendered by the respective individuals to
whom options may be granted, their present and potential contributions to
the Company's success and such other factors as the Committee, in its sole
discretion, deems relevant.
Options may only be exercised if the Optionee has been performing
services for the Company from the grant of the option until exercise.
Options shall be exercisable at such times as may be specified by the
Committee, provided, however, that options may not be exercised after the
first to occur of (i) the expiration date of the option, (ii) the Optionee's
termination of performing services for the Company for reasons other than
disability, retirement or death, (iii) five years from the Optionee's
termination of service on account of disability or retirement, or (iv) five
years from the Optionee's death.
Transferability of Options
The rights of an Optionee under the 1995 Agents Plan may not be
assigned or transferred except by transfer to a beneficiary upon the death of
the Optionee, and upon the death of the beneficiary, by will or the laws of
descent and distribution.
Amendment or Termination of the 1995 Agents Plan
The Board of Directors may amend the 1995 Agents Plan in such
respects as it deems advisable or terminate the Plan at any time. No
amendment or termination may adversely affect any outstanding options.
Federal Income Tax Consequences of the 1995 Agents Plan
The 1995 Agents Plan provides for the granting of non-statutory options
which do not qualify as incentive stock options under Section 422 of the
Code. An Optionee who receives an option will not be deemed to have
received any income at the time the option is granted. The Optionee will
recognize ordinary income in the year any part of the option is exercised in
an amount equal to the difference between the exercise price of the shares
purchased and the fair market value of such shares on the exercise date.
The Company will be entitled to a tax deduction in an amount equal to the
amount of ordinary income recognized by the Optionee. The foregoing
discussion of federal income tax aspects is only a summary and based upon
interpretations of the existing laws, regulations and rulings which could be
materially altered with enactment of any new tax legislation.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000
shares of Common Stock, par value $1.00, and 5,000,000 shares of Special
Stock, no par value. There were issued and outstanding as of November 6, 1996,
24,647,686 shares of Common Stock, all of which are fully paid and
nonassessable. No shares of Special Stock are outstanding. However, the Board
of Directors of the Company could, without stockholder approval, issue Special
Stock and establish the rights,
privileges, and preferences thereof, including, but not limited to, dividend
rights, convertibility features, redemption rates and prices, liquidation
preferences, and voting rights. Such issuance could adversely affect the
rights of the holders of shares of the Company's Common Stock.
Dividend Rights
Holders of the Common Stock and Special Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of the
assets of the Company which are by law available therefor. However, the
Board of Directors could decide upon issuing Special Stock, that no
dividends will be paid on Common Stock if dividends in full on all shares of
Special Stock to which the holders thereof are entitled shall not have been
paid or declared and set apart for payment.
Voting Rights
Holders of shares of the Common Stock are entitled to one vote per
share and, subject to the voting rights, if any, of holders of Special Stock
which may hereafter be issued, have the exclusive right to receive notice of
shareholders' meetings and to vote thereat.
Limitation of Liability of Directors and Indemnification
Section Six of Article Eight of the Company's By-laws limits the
liability of its directors to the fullest extent that the General Corporation
Law of the State of South Carolina permits.
Existing Antitakeover Provisions
South Carolina Control Share Acquisitions Act. The Company is subject
to the CSAA, which is intended to render it more difficult or to discourage
an attempt to obtain control of the Company by merger, tender offer, proxy
contest or otherwise.
South Carolina Business Combination Statute. South Carolina law
regulates business combinations such as mergers, consolidations and asset
purchases where the business acquired was, or the assets belonged to, a
public corporation, such as the Company, and where the acquirer became
an Interested Shareholder (as defined below) of the public corporation
before a majority of the disinterested members of the Board of Directors of
the public corporation approved either (i) the purchase resulting in such
acquirer becoming an Interested Shareholder or (ii) the business
combination. In the context of this law, an "Interested Shareholder" is any
person who directly or indirectly, alone or in concert with others,
beneficially owns or controls 10% or more of the voting stock of the public
corporation, and a "disinterested" board member is a person who is neither
a present nor a former officer or employee of the corporation. The law is
very broad in its scope and is designed to inhibit unfriendly acquisitions. It
does not apply to corporations whose Articles of Incorporation contain a
provision electing not to be covered by the law. The Company's Articles of
Incorporation do not contain such a provision.
The law prohibits business combinations with an unapproved Interested
Shareholder for a period of two years after the date on which the person
became an Interested Shareholder and requires that any business
combination with an unapproved Interested Shareholder after such two-
year period be approved by a majority vote of outstanding shares held by
persons other than the Interested Shareholder or, alternatively, meet certain
requirements that other shareholders receive at least a specified price for
their shares.
Supermajority Voting Requirements. Article 9(k) of the Company's
Articles of Incorporation requires a special vote of the shareholders to
approve certain transactions, including, among other things, a merger or
the sale, lease or exchange of substantially all of the assets (as therein
defined) of the Company, with any shareholder owning at least 10% of the
Company's equity securities. The approval of such transactions requires
the affirmative vote of at least 80% of the holders of each class of equity
securities of the Company entitled to vote thereon. The requirement of an
80% shareholder vote does not apply, however, to transactions approved
by at least 75% of all the members of the Board of Directors. If such
approval by the Board of Directors is obtained, the transaction generally
would require approval by the holders of a majority of the outstanding
shares entitled to vote, or as otherwise established by law.
The Company's Articles of Incorporation further provide that Article 9(k)
may not be amended, altered or repealed without the approval of the
holders of 80% of the Company's shareholders unless 75% of the Board of
Directors approves such a change, in which case approval by the holders of
66-2/3% of the Common Stock is required.
Classified Board of Directors; Removal of Directors. The Company's
Articles of Incorporation provide for the division of the Board of Directors
into three classes of directors serving staggered three-year terms. As a
result, approximately one-third of the members of the Board of Directors
are elected each year.
Pursuant to the Company's Articles of Incorporation, directors may be
removed without cause by the affirmative vote of the holders of a majority
of the shares entitled to vote in the election of directors at a meeting called
for that purpose at which 80% of the shares entitled to vote are
represented. Directors may be removed for cause by the affirmative vote of
the holders of a majority of the shares entitled to vote in the election of
directors at a meeting called for that purpose at which a majority of the
shares issued, outstanding and entitled to vote are represented. Under
South Carolina law, a director of the Company may not be removed from
the Board of Directors if the number of votes sufficient to elect such
director is voted against his removal.
The classified Board and director removal provisions could have the
effect of discouraging a third party from making a tender offer or otherwise
attempting to obtain control of the Company, even though such an attempt
might be beneficial to the Company and its shareholders. In addition, the
classified Board and director removal provisions could delay shareholders
who do not agree with the policies of the Board of Directors from
removing a majority of the Board for two years, unless they can obtain the
affirmative vote of the holders of a majority of the shares at a meeting at
which eighty percent (80%) of the shares are present in person or
represented by proxy, or they can show cause and obtain the affirmative
vote of the holders of a majority of the shares at a meeting at which a
majority is present or represented.
Liquidation Rights
In the event of liquidation of the Company, holders of the Company's
Common Stock are entitled to share pro rata the net assets remaining after
the payment of all amounts due creditors and such amounts, if any, as may
be due to holders of any Special Stock then outstanding.
Preemptive Rights
No holder of any of the Common Stock or Special Stock of the Company
is entitled, as of right, to purchase or subscribe for any unissued shares of
any class, or additional shares of any class, to be issued by reason of any
increase of the authorized capital stock of the Company of any class, or
bonds, certificates of indebtedness, debentures, or other securities
convertible into shares of the Company or carrying any right to purchase
shares of any class. Any such unissued shares, or other securities
convertible into shares or carrying any right to purchase shares, may be
issued and disposed of, to such persons, firms, corporations, or
associations and upon such terms as may be deemed advisable by the Board
of Directors.
Transfer Agent and Registrar
American Stock Transfer and Trust Company is the transfer agent and
registrar for the Common Stock.
USE OF PROCEEDS
Company will receive no cash proceeds from the granting of the Options.
The proceeds to the Company from sales of Common Stock upon exercise
of the Options granted pursuant to the 1995 Agents Plan will be used for
general corporate purposes, including investment in and advances to the
Company's subsidiaries.
LEGAL MATTERS
Certain legal matters in connection with the registration and potential
offering of the Shares have been passed upon for the Company by
John C. West, Jr., PA, 1111 Broad Street, Post Office Box 661, Camden,
South Carolina 29020. John C. West, Jr. is the sole owner of John C. West, Jr.,
PA and as of November 6, 1996, owns 13,300 shares of Common Stock. John C.
West, Jr. is the son of John C. West who is presently the Chairman of the
Company's Board of Directors.
EXPERTS
The financial statements and schedules of the Company as of December
31, 1995 and 1994 and for each of the years in the three-year period ended
December 31, 1995 have been incorporated by reference herein in reliance
upon the reports of Arthur Andersen LLP, independent public accountants,
and upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-2 (herein, together with all amendments and exhibits thereto,
referred to as the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act") with respect to the shares of its
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement. The statements contained in this Prospectus
concerning the contents of any contract or other document referred to are
not necessarily complete. Where such contract or other document is an
exhibit to the Registration Statement, each statement is qualified in all
respects by the provisions of such exhibit, to which reference is hereby
made for a full statement of the provisions thereof.
This Prospectus is accompanied by the Company's latest Annual Report
to shareholders.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following is a schedule of the estimated expenses to be incurred by
the Company in connection with the issuance and distribution of the
securities being registered hereby.
SEC Registration Fee $ 388.83
NASDAQ National Market Fee (1)
Transfer Agent and Registrar Fee None
Blue Sky Fees and Expenses $ 5,000.00(2)
Accounting Fees and Expenses $12,000.00
Legal Fees and Expenses $15,000.00
Printing Expenses $ 1,000.00(2)
Miscellaneous $ 500.00(2)
----------
Total $33,888.33
(1) Included in aggregate NASDAQ National Market fee of $33,000 paid
in connection with other Common Stock being registered.
(2)Estimated. Actual fees and expenses will depend upon the location of
the agents to whom options are granted.
Item 15. Indemnification of Directors and Officers
The South Carolina General Corporation Law provides for
indemnification of directors, officers, employees and agents, subject to
certain limitations (S.C. Code, Title 33, Article 5). Section Six of Article
Eight of the Company's by-laws provides that the Company shall indemnify
officers and directors of the Company and its subsidiaries to the extent
permitted by South Carolina law and may insure such persons against
liability arising out of or related to their employment by the Company in an
amount and according to such terms as the Board of Directors deems
prudent.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
Item 16. Exhibit
Exhibit
Number Description
- -------- -----------
4.1 1995 Stock Option Plan for Independent Agents in 1995
Notice of Special Meeting of Shareholders as Annex G(3)
5.1 Opinion of John C. West, Jr., PA
10.1..Employment Agreement, dated October 1, 1994, by and between The Seibels
Bruce Group, Inc. and John C. West, incorporated herein by reference to the
Annual Report on Form 10-K, Exhibit (10)(4)-1, for the year ended December 31,
1995.
10.2....Addendum to Employment Agreement, dated July 12, 1995, by and between
The Seibels Bruce Group, Inc. and John C. West, incorporated herein by reference
to the Annual Report on Form 10-K, Exhibit (10)(4)-2, for the year ended
December 31, 1995.
10.3..Employment Agreement, dated June 14, 1995, by and between The Seibels
Bruce Group, Inc. and Ernst N. Csiszar, incorporated herein by reference to the
Annual Report on Form 10-K, Exhibit (10)(4)-3, for the year ended December 31,
1995.
10.4...Employment Agreement, dated September 30, 1995, by and between The
Seibels Bruce Group, Inc. and John A. Weitzel, incorporated herein by
reference to the Annual Report on Form 10-K, Exhibit (10)(4)-4, for the year
ended December 31, 1995.
10.5..Separation Agreement and Mutual Release, dated October 14, 1994, by and
between The Seibels Bruce Group, Inc. and W. Thomas Reichard, incorporated
herein by reference to the Annual Report on Form 10-K, Exhibit (10)(3)-1, for
the year ended December 31, 1994.
10.6...Amended and Restated Employment Agreement, dated October 14, 1994, by
and between The Seibels Bruce Group, Inc. and Sterling E. Beale, incorporated
herein by reference to the Annual Report on Form 10-K, Exhibit (10)(3)-2, for
the year ended December 31, 1994.
10.7..Retirement Agreement, dated October 14, 1994, by and between The Seibels
Bruce Group, Inc. and Sterling E. Beale, incorporated herein by reference to the
Annual Report on Form 10-K, Exhibit (10)(3)-3, for the year ended December 31,
1994.
10.8.The Third Amended and Restated Promissory Note, dated as of December 22,
1993, by and between The Seibels Bruce Group, Inc., Abdullatif Ali Alissa Est.
and Saad A. Alissa, incorporated herein by reference to the Annual Report on
Form 10-K, Exhibit (10)(10)-1, for the year ended December 31, 1993.
10.9...Stock Purchase Agreement between registrant, Abdullatif Ali Alissa Est.
and Saad A. Alissa, dated December 22, 1993, incorporated herein by reference
to
the Annual Report on Form 10-K, Exhibit (2)(1)-1, for the year ended December
31, 1993.
10.10...Custody Agreement, dated as of December 16, 1993, by and between The
Seibels Bruce Group, Inc., its subsidiaries and The Prudential Bank and Trust
Company, incorporated herein by reference to the Annual Report on Form 10-K,
Exhibit (10)(10)-2, for the year ended December 31, 1993.
10.11..Consulting Agreement, dated as of December 30, 1993, by and between The
Seibels Bruce Group, Inc., its subsidiaries and Albert H. Cox, Jr, incorporated
herein by reference to the Annual Report on Form 10-K, Exhibit (10)(10)-3, for
the year ended December 31, 1993.
10.12...Investment Management Client Agreement, dated as of December 16, 1993,
by and between The Seibels Bruce Group, Inc. and Prudential Securities
Incorporated, incorporated herein by reference to the Annual Report on Form
10-K, Exhibit (10)(10)-4, for the year ended December 31, 1993.
10.13...Stock Purchase Agreement, dated as of July 30, 1993, by and between
National Teachers Life Insurance Company and South Carolina Insurance
Company, incorporated herein by reference to the Annual Report on Form 10-K,
Exhibit (10)(10)-5, for the year ended December 31, 1993.
10.14..Asset Purchase Agreement, dated as of July, 1993, by and between Premium
Service Corporation, Seibels, Bruce and Company and Norwest Financial
Resources, Inc., incorporated herein by reference to the Annual Report on Form
10-K, Exhibit (10)(10)-6, for the year ended December 31, 1993.
10.15..First Amendment to Asset Purchase Agreement, dated as of December 22,
1993, by and between Premium Service Corporation, Seibels, Bruce and Company
and Norwest Financial Resources, Inc., incorporated herein by reference to the
Annual Report on Form 10-K, Exhibit (10)(10)-7, for the year ended December 31,
1993.
10.16..Second Amendment to Asset Purchase Agreement, dated as of February,
1994, by and between Premium Service Corporation, Seibels, Bruce and Company
and Norwest Financial Resources, Inc., incorporated herein by reference to the
Annual Report on Form 10-K, Exhibit (10)(10)-8, for the year ended December 31,
1993.
10.17..Third Amendment to Asset Purchase Agreement, dated as of February 15,
1994, by and between Premium Service Corporation, Seibels, Bruce and Company
and Norwest Financial Resources, Inc., incorporated herein by reference to the
Annual Report on Form 10-K, Exhibit (10)(10)-9, for the year ended December 31,
1993.
10.18..Agency Agreement, dated as of June 3, 1993, by and between American
Reliable Insurance Company, Seibels, Bruce and Company and Agency Specialty of
Kentucky, Inc., incorporated herein by reference to the Annual Report on Form
10-K, Exhibit (10)(10)-10, for the year ended December 31, 1993.
10.19..The Seibels Bruce Group, Inc., Common Stock Warrant, dated as of
February 4, 1993, incorporated herein by reference to the Annual Report on Form
10-K, Exhibit (10)(9)-3, for the year ended December 31, 1992.
10.20..Agency Agreement, dated as of February 26, 1993, by and between Generali
- - U.S. Branch and Seibels, Bruce & Company, incorporated herein by reference to
the Annual Report on Form 10-K, Exhibit (10)(9)-8, for the year ended December
31, 1992.
10.21..Agreement for Data Processing Services dated as of October 1, 1981, by
and between Policy Management Systems Corporation and Seibels, Bruce & Company,
as amended September 1, 1990, incorporated herein by reference to the Annual
Report on Form 10-K, Exhibit (10)(7)-6, for the year ended December 31, 1990.
10.22..Agreement between Registrant and Jack S. Hupp, dated December 30, 1991,
incorporated herein by reference to the Annual Report on Form 10-K, Exhibit
(10)(5)-2, for the year ended December 31, 1991.
10.23..Amended and Restated Executive Compensation Agreement between
Registrant and Jack S. Hupp, dated December 30, 1991, incorporated herein by
reference to the Annual Report on Form 10-K, Exhibit (10)(5)-3, for the year
ended December 31, 1991.
10.24..The Seibels, Bruce & Company Employees' Profit Sharing and Savings Plan,
dated as of June 30, 1992, as amended January 4, 1993, incorporated herein by
reference to the Annual Report on Form 10-K, Exhibit (10)(9)-9, for the year
ended December 31,1992.
10.25..The Seibels Bruce Group, Inc., Stock Option Plan, dated May 20, 1987,
incorporated herein by reference to the Annual Report on Form 10-K, Exhibit
(10)(4)-3, for the year ended December 31, 1987.
10.26..Amendment No. 1, dated February 25, 1992, to The Seibels Bruce Group,
Inc., 1987 Stock Option Plan, incorporated herein by reference to the Annual
Report on Form
10-K, Exhibit (10)(5)-4, for the year ended December 31, 1991.
10.27..Minutes of the Compensation Committee of The Seibels Bruce Group, Inc.,
adopting an Incentive Compensation Program, as of January 19, 1987, incorporated
herein by reference to the Annual Report on Form 10-K, Exhibit (10)(8)-6, for
the year ended December 31, 1986.
10.28..Deferred Compensation Agreement between the Registrant and Sterling E.
Beale, dated March 8, 1983. Amended February 18, 1987, incorporated herein by
reference to the Annual Report of Form 10-K, Exhibit (10)(4)-4, for the year
ended December 31, 1987.
10.29...Separation Agreement, dated August 1, 1996, by and between the
Registrant and William W. Shealy.
10.30..First Amendment to Employment Agreement, dated September 25, 1996,
by and between the Registrant and John A. Weitzel.
13.1 Annual Report on Form 10-K/A-1 for the fiscal year ended
December 31, 1995, incorporated herein by reference to
submission 10-K05\A-1, filing date April 25, 1996, file
number 000-08804, accession number 0000276380-96-000009,
accepted date April 25, 1996.
13.2 1995 Annual Report to Shareholders
13.3 1996 Notice of Special Meeting of Shareholders and Proxy
Statement incorporated herein by reference to
submission DEF 14A, filing date May 10, 1996, file
number 000-08804, accession number 0000276380-96-000011,
accepted date May 9, 1996.
13.4 Quarterly Report on Form 10-Q for quarter ended
March 31, 1996 incorporated herein by reference to
submission 10-Q, filing date May 15, 1996, file
number 000-08804, accession number 0000276380-96-000010,
accepted date May 15, 1996.
13.5 Quarterly Report on Form 10-Q for quarter ended
June 30, 1996 incorporated herein by reference to
submission 10-Q, filing date August 14, 1996, file
number 000-08804, accession number 0000276380-96-000011,
accepted date August 14, 1996.
13.6 Reports on Form 8-K, incorporated herein by reference to
submission 8-K, filing date January 10, 1996, file
number 000-08804, accession number 0000276380-96-000002,
accepted date January 10, 1996; filing date
February 2, 1996, file number 000-08804, accession number
0000276380-96-000004, accepted date February 2, 1996;
filing date March 14, 1996, file number 000-08804,
accession number 0000276380-96-000005, accepted date
March 14, 1996; filing date April 8, 1996, file number
000-08804, accession number 0000276380-96-000005,
accepted date April 8, 1996.
23.1 Consent of Arther Andersen, LLP
24.1 Power of Attorney(4)
28.1 Schedule P of Annual Report on Form 10-K/A-1 for the
fiscal year ended December 31, 1995, incorporated
herein by reference to Form SE, dated April 1, 1996.
(3) Incorporated by reference
(4) Previously filed
Item 17. Undertakings
(a) The Company hereby undertakes:
1)To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
i)To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
ii)To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the information
set forth in the registration statement;
iii)To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
2)That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
3)To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
(e)The Company hereby undertakes to deliver or cause to be delivered with the
prospectus, to each person to whom the prospectus is sent or given, the
latest annual report to security holders that is incorporated by reference in
the prospectus and furnished pursuant to and meeting the requirements of
Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and,
where interim financial information required to be presented by Article 3 of
Regulation S-X are not set forth in the prospectus, to deliver, or cause to
be delivered to each person to whom the prospectus is sent or given, the
latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(h)Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registration pursuant to the foregoing provisions, or otherwise, the
registration has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indeminfication against such liabilites (other than the payment
by the registration 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.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-2 and has duly caused this
registration statement or amendment to be signed on its behalf by the under-
signed, thereunto authorized, in the City of Columbia, State of South Carolina,
on November 7, 1996.
THE SEIBELS BRUCE GROUP, INC.
By: /s/ Ernst N. Csiszar
--------------------
Ernst N. Csiszar
President, Chief Executive Officer, and Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
Signature Title Date
/s/ Ernst N. Csiszar President, Chief Executive 11/07/96
(Ernst N. Csiszar) Officer, and Director
/s/ John A. Weitzel(1) Chief Financial Officer and 11/07/96
(John A. Weitzel) Director
/s/ Mary M. Gardner(1) Controller (Principal 11/07/96
(Mary M. Gardner) Accounting Officer)
/s/ Priscilla C. Brooks(1) Corporate Secretary 11/07/96
(Priscilla C. Brooks)
/s/ John C. West(1) Chairman of the Board and 11/07/96
(John C. West) Director
/s/ William M. Barilka(1) Director 11/07/96
(William M. Barilka)
/s/ Albert H. Cox (1) Director 11/07/96
(Albert H. Cox, Jr.)
/s/ William B. Danzell(1) Director 11/07/96
(William B. Danzell)
/s/ Claude E. McCain(1) Director 11/07/96
(Claude E. McCain)
/s/ Kenneth W. Pavia(1) Director 11/07/96
(Kenneth W. Pavia)
/s/ John P. Seibels(1) Director 11/07/96
(John P. Seibels)
/s/ George R.P. Walker, Jr.(1) Director 11/07/96
(George R.P. Walker, Jr.)
(1)By: /s/ Ernst N. Csiszar
--------------------
Ernst N. Csiszar
as attorney-in-fact
EXHIBIT 5.1
John C. West,Jr., PA
Attorney at Law
1111 Broad Street
Camden, South Carolina 29020
November 5, 1996
The Seibels Bruce Group, Inc.
1501 Lady Street
P.O. Box 1
Columbia, South Carolina 29202
RE: Registration Statement For Offering of 500,000 Shares of Common Stock
Dear Sir:
We refer to your registration on Form S-2, No. 333-14125 (the "Registration
Statement"), under the Securities Act of 1933, as amended, of 500,000 shares
of common stock of The Seibels Bruce Group, Inc. (the "Company"), under the
Company's 1995 Stock Option Plan For Independent Agents, (the "1995 Agents
Plan"). We advise you that in our opinion, when such shares have been issued
and sold pursuant to the applicable provisions of the 1995 Agents Plan, and in
accordance with the Registration Statement, such shares will be duly authorized
validly issued, fully paid and non-assessable shares of the Company's common
stock.
We hereby consent to the filing of this Opinion as an Exhibit to the
Registration Statement.
Sincerely,
/s/ John C. West, Jr.
- ----------------
John C. West, Jr.
EXHIBIT 10.29
SEPARATION AGREEMENT
THIS AGREEMENT is made this 1st day of August, 1996, by and
between THE SEIBELS BRUCE GROUP, INC., a South Carolina
corporation (the "Company"), and WILLIAM WALTER SHEALY (the
"Employee"). In consideration of the mutual covenants and agreements
contained in this Agreement, the parties agree as follows:
1. Separation Date. The Employee shall terminate employment
with the Company on September 30, 1996 (the "Separation Date").
2. Winding Up Activities. In addition to any and all functions
presently performed by the Employee, Employee promises to undertake any
training of employees necessary or requested by the Company (the
"Winding Up Activities"). The Company will request such training by
delivering a list of required task to Employee whereby upon the completion
of a given task, the employee receiving the training will initial the list to
indicate satisfactory training. The Winding Up Activities shall be
completed when all task on the list have been initialed by the appropriate
employee.
3. Consideration. In consideration for completely performing
the Winding Up Activities by the Separation Date, the Company agrees to
the following:
a. Employee shall continue to receive compensation at his
current rate until December 31, 1996.
b. Company will continue to provide Employee with
medical insurance until he reaches the age of sixty-five
(65). Beginning October 1, 1996, the Company will pay
the entire monthly premium.
c. Company will provide Employee with life insurance at
the reduced retirement amount until he reaches the age of
sixty-five (65). Beginning October 1, 1996, the
Company will pay the entire monthly premium.
4. Breach of Duty. In the event the Winding Up Activities are
not completed in accordance with Paragraph 2, no consideration
whatsoever will be given to Employee after the time of the breach.
5. Release. Employee acknowledges that the separation
incentives that are provided under the terms of the Agreement represent
valuable consideration in addition to other forms of compensation or
benefits to which he presently is entitled. Employee fully understands the
binding nature of the Agreement, and affirms that his decision to enter into
the Agreement has been made voluntarily and upon consultation with and
advise of legal counsel.
Employee hereby fully waives, discharges, and releases any
and all claims of whatever nature, known or unknown, he may have
against The Seibels Bruce Group, Inc., its subsidiaries, affiliated and
related companies, their respective owners, representatives, officers,
directors, attorneys, agents, employees, successors and assigns (hereinafter
collectively referred to as "TSBG") as a result of actions or omissions
occurring through the Separation Date. Specifically included in this
waiver and release are any and all claims of alleged employment
discrimination, either as a result of Employee's separation of employment
from the Company or otherwise, under the Age Discrimination in
Employment Act of 1967, as amended, 29 U.S.C. s 621, et seq., Title VII
of the Civil Rights Act of 1964, as amended, 42 U.S.C. s 2000e, et seq.,
and any and all claims under any other federal, state or local statutory or
common law or regulation. Employee also agrees not to institute a lawsuit
against TSBG related to or arising out of any claim encompassed by this
Release.
6. Employee Acknowledgments. Employee understands and
agrees that the terms and conditions contained in the Seibels, Bruce &
Company Employee Handbook regarding Confidential Information survive
the termination of his employment with the Company.
Employee agrees not to encourage, support or solicit claims
against TSBG. Employee also agrees that he will not criticize, denigrate or
otherwise speak adversely regarding TSBG. Specifically, and by example,
Employee agrees not to oppose or otherwise comment upon or file or give
testimony related to any filing by TSBG with regulatory agencies unless
required to do so by law. In the event of a violation of this provision,
TSBG may present this Agreement to a court of competent jurisdiction for
purposes of obtaining injunctive, monetary and/or other appropriate relief.
7. Severability. In the event one or more of the provisions of
this Agreement shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such a determination shall not affect any
other provision of this Agreement, and this Agreement shall be construed
as if such invalid or illegal or unenforceable provisions had never been
contained herein.
8. Confidentiality of Agreement. Employee acknowledges that
the terms of this Agreement are strictly confidential and Employee agrees
not to disclose them at anytime to any person other than his attorney and
his immediate family without the prior written consent of the Company,
except as necessary in any legal proceedings to enforce the provisions of
this Agreement, to prepare and file income tax forms, or pursuant to court
order after notice to the Company.
9. Entire Agreement. This Agreement embodies the entire
agreement of the parties relating to the subject matter hereof. No
amendment or modification of this Agreement shall be valid or binding
upon the parties unless made in writing and signed by the parties.
10. Binding Effect. This Agreement shall be binding upon the
parties and their respective heirs, representatives, successors, transferees
and assigns.
11. Governing Law. This Agreement shall be governed by and
construed in accordance with laws of the State of South Carolina.
THE SEIBELS BRUCE GROUP, INC. EMPLOYEE
By: /s/ Ernst N. Csiszar /s/ William Walter Shealy
-------------------- -------------------------
Ernst N. Csiszar, President and CEO William Walter Shealy
Fax Number: (803) 748-2839
1501 Lady Street (PO Box 1)
Columbia, SC 29201(2)
WITNESSTH:
/s/ Priscilla Brooks
Priscilla Brooks, Corporate Secretary
EXHIBIT 10.30
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment, dated September 25, 1996 is made by and
between The Seibels Bruce Group, Inc. (the "Company") and John A.
Weitzel (the "Employee").
WHEREAS, Company and Employee executed an Employee
Agreement dated September 28, 1995 (the "Agreement");
NOW, THEREFORE, Company and Employee hereby agree
that Paragraph 2 of the Agreement is hereby amended so it reads in its
entirety as follows:
"2. Term: The Company hereby employs the Employee for
a term beginning September 30, 1995, through December
31, 1996, renewable for one year terms thereafter, and
subject to the conditions set forth below. Each party shall
have the right to terminate this Agreement at any time
during the term upon thirty (30) days written notice to
the other party."
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their duly authorized representatives.
THE SEIBELS BRUCE GROUP, INC. EMPLOYEE
By: /s/ Ernst N. Csiszar By: /s/ John A. Weitzel
Name: Ernst N. Csiszar Name: John A. Weitzel
Title: Chief Executive Officer Date: September 30, 1996
Date: September 30, 1996
EXHIBIT 13.2
THE SEIBELS BRUCE GROUP, INC.
1995 Annual Report
Shareholders' Information The Seibels Bruce Group, Inc.
- ---------------------------------------------------------------------
Corporate Offices Transfer Agent and Registrar
Post Office Box One American Stock Transfer & Trust Co.
1501 Lady Street 40 Wall Street
Columbia, South Carolina 29202 New York, New York 10005
Telephone (803) 748-2000 Telephone (718) 921-8293
Customers seeking assistance with their shareholders' account
and services may call American Stock Transfer & Trust Co.
at (718) 921-8293
Independent Public Accountants Financial Information Contact
- ----------------------------- --------------------------------
Arthur Andersen, L.L.P. John A. Weitzel, Chief Financial Officer
Columbia, South Carolina
The Seibels Bruce Group, Inc.
Post Office Box One
Columbia, South Carolina 29202
Telephone (803) 748-2450
Independent Actuaries Arthur Andersen, L.L.P.
Atlanta, Georgia
Market Makers (March 29)
--------------------------
Mayer & Schweitzer, Inc.
Common Stock Information: Schroder, Wertheim & Co.
NASDAQ Symbol: SBIG Interstate/Johnson Lane Co.
Over-the-Counter Market Nash Weiss/Div of Shatkin Inv.
(National Market Listings)
Robinson Humphrey Co. Inc.
Herzog, Heine, Geduld, Inc.
Fahnestock & Co., Inc.
Knight Securities L.P.
The Seibels Bruce Group, Inc.
Insurance Subsidiaries Other Subsidiaries
South Carolina Insurance Company Seibels, Bruce & Company
Catawba Insurance Company Seibels Bruce Specialty, Inc.
Kentucky Insurance Company
Consolidated American Insurance Company
PRESIDENT'S LETTER
When I first addressed shareholders at the Company's annual meeting in June
of 1995, the primary question concerned Seibels Bruce's capacity to survive.
The Company had been left in a crisis after a series of annual losses through
1994 and into the first quarter of 1995, the resignation of its then Chief
Executive Officer of four months, and the deterioration of its capital and
surplus position. I am pleased to report that Seibels Bruce restored oper-
ating profitability commencing with the secong quarter of 1995, and following
further operating profits for the third and fourth quarter, the company shows
a profit of $1,152,000 for fiscal year 1995. I think it is fair to say that
the question facing Seibels Bruce is no longer one of survival. We have
turned the corner and are now looking for profitable growth.
Our near-term objective for 1995 was the restoration of financial respectability
of the Company. Given the magnitude of the Company's problems, many of the
measures taken in 1995 were remedial in nature. We strengthened our capital
position. We decentralized ourselves into business units with profit and loss
responsibilities. We instituted rigorous cost controls. We started a review
and a redesign of our business processed to gain better operating efficiencies.
We reorganized ourselves into a team-based, participatory and performance-
based structure with an emphasis on providing value to our customers.
We are doing all we can to focus ourselves on our customers, our markets, our
competitors, and our people. We developed a vision of service excellence to
guide our efforts. We have a strategy that differentiates us from our
competitors based on the superior level of service that we can provide. We
have a business plan in place that emphasizes profitability, growth,
competitiveness, and -- as our key report card -- shareholder value. We think
we have the right focus: bold goals that evoke extraordinary efforts to build
value for our shareholders by providing value to our customers.
Management is focusing on every aspect of the business. We are reengineering
our work processes to deliver value. We asked for feedback from our
independent agent network, and we listened and acted. In 1996, we will
implement a new reward system which links pay to performance. Key managers
are putting a percentage of their salary at risk by way of taking restricted
stock instead. All employees will receive stock options. All bonus payments
will be linked to individual, team, unit and company-wide objectives. All
managers will be evaluated on the basis of improved financial performance and
customer satisfaction. Our managers are also held accountable for leading
change.
In line with the adage that "what gets measured, gets done", we are putting the
appropriate measures in place. We are cross-training our people and we are
putting the necessary systems into place. We are in the process of instituting
a stock option plan for our customers -- the independent agents -- that will
reward those agents that provide us with profitable business. To speed up the
radical changes that we need to achieve, we are bringing in new management
talent.
To summarize, we think 1995 was the year in which a new Seibels Bruce began
to emerge. While a tremendous amount of work remains to be done, our people
are beginning to see that teamwork, participation, dedication, and tenacity are
giving us forward momentum. They have a new attitude and morale is high.
They no longer accept things as they are. They challenge themselves to
improve. They challenge the status quo. They and our loyal agency force are
truly our greatest assets. I want to take this opportunity to thank them for
sticking with us.
I also would like to take a moment to thank someone very special, someone who
in this past year has carried many of the burdens of the Company's crisis.
John West, as Chairman of the Board, gave his everything when things got tough
in early 1995. He continues to be an inspiration to all of us at Seibels Bruce
and I personally look forward to an even closer working relationship with him.
Ernst N. Csiszar
President and Chief Executive Officer
ACRONYMNS
The following acronyms used in the text have the meaning set forth below unless
the context requires otherwise:
FASB. . . . . . . . . . . Financial Accounting Standards Board
GAAP. . . . . . . . . . . Generally Accepted Accounting Principles
IBNR. . . . . . . . . . . Incurred-But-Not-Reported
KIC . . . . . . . . . . . Kentucky Insurance Company
LAE . . . . . . . . . . . Loss Adjustment Expenses
MGA . . . . . . . . . . . Managing General Agent
NAIC. . . . . . . . . . . National Association of Insurance Commissioners
NCCI. . . . . . . . . . . National Council on Compensation Insurance
RBC . . . . . . . . . . . Risk Based Capital
SAP . . . . . . . . . . . Statutory Accounting Principles
SBIG. . . . . . . . . . . The Seibels Bruce Group, Inc. (and the "Company")
SBC . . . . . . . . . . . Seibels, Bruce and Company
SCIC. . . . . . . . . . . South Carolina Insurance Company
WYO . . . . . . . . . . . Write-Your-Own
PART 1
Item 1. Business
Company Profile
The Seibels Bruce Group, Inc. (the "Company") is the parent company of South
Carolina Insurance Company and Seibels Bruce and Company and their wholly-owned
subsidiaries. Founded in 1869, the Company performs servicing carrier activi-
ties for state and federal insurance facilities. MGA services are also per-
formed for non-affiliated insurance companies. SCIC consists of a group of
multi-line property and casualty insurance companies and associated companies
with headquarters in South Carolina and Kentucky. The underwriting activities
are primarily conducted in North Carolina, South Carolina, Kentucky, Georgia and
Tennessee by offering insurance products through independent insurance agents.
Effective in the second quarter of 1995, the Company voluntarily suspended
underwriting new and renewal business for which risk was not reinsured to an
unaffiliated party. This suspension will continue until both the Company and
the regulators are satisfied that its capital level is sufficient to undertake
such risk and the regulators approve the resumption of business.
Capitalization
The Company initiated a recapitalization plan in December 1993. Prior to the
plan, operating losses were experienced for several consecutive years as a
consequence of unfavorable underwriting experience,wind losses due to Hurricanes
Hugo and Andrew and losses developed from environmental and construction defect
exposures on the West Coast. Under this plan, the previously outstanding $23
million loan and the accrued interest thereon was purchased from the original
holder by new investors. These new investors then exchanged the note for a new
note with a principal balance of $10 million, bearing interest at 8.5%, due June
30, 1994 and secured by 100% of the stock of SCIC. The effect of this
transaction for 1993 was a reduction of the loss for the year of $9.2 million,
net of taxes ($1.23 per share).
In accordance with the recapitalization plan, on June 28, 1994, the new note was
then cancelled and exchanged for 7,000,000 newly issued shares of the Company's
common stock. A note for $400,000, representing accrued interest on the new
note, was then executed in favor of the new investors. The result of this
exchange, which was completed in the second quarter of 1994 was that $10 million
was added to the Company's shareholders' equity.
During the first quarter of 1995, the Company received net proceeds from a
Rights Offering (the "Offering") in the amount of $5.1 million. Pursuant to the
Offering, each stockholder of record received one Right for each five shares of
Common Stock held of record at the close of business on December 9, 1994. The
Right allowed the stockholders to purchase shares of Common Stock at a price of
$2.40 per share. The gross proceeds were generated from 2,217,152 shares being
exercised. On the date of receipt of the proceeds, the Company made a capital
contribution of $5 million to SCIC, its wholly-owned subsidiary.
During the second quarter of 1995, a major investor loaned the Company $2
million. The $2 million was then contributed to SCIC in order to increase its
statutory capital. The promissory note and the $400,000 note become due in
May, 1996. Additional steps taken to protect statutory capital included a
decision in the first quarter to cede all auto liability business written in
North Carolina to the Reinsurance Facility, and in the second quarter of 1995,
to non-renew all property business and temporarily suspend all new and renewal
activity where the Company retained any net underwriting risk.
During the fourth quarter of 1995, an investor signed a letter of intent to
acquire 6,250,000 of authorized but unissued shares of the Company at a cost of
$1.00 per share, the approximate market at the time of reaching agreement with
the Company. The $6,250,000 proceeds from the investment were deposited into
escrow in January, 1996. A shareholders meeting will be held during the second
quarter of 1996 to allow voting rights for the new investor in accordance with
South Carolina law, which requires approval for stock ownership above a 20%
interest in the Company. Upon such approval and the approval of the South
Carolina Department of Insurance to write new business, the funds will be
transferred from the escrow account and contributed to the statutory capital of
SCIC. In addition, the investor has been granted options to acquire 6,250,000
shares at higher prices over the next five years.
Also during the first quarter
of 1996, the Company issued 1,635,000 shares of
authorized but unissued shares to a different group of investors. The proceeds
of this sale of stock will be available to liquidate the notes payable that are
due May 1, 1996. In addition, subject to shareholder approval of increasing the
number of authorized shares, the Company has issued to this group stock options
expiring December 31, 2000 to acquire an additional 1,635,000 shares at the
higher of $2.50 per share or book value at the date of exercise.
Major Events
In the second quarter of 1994, the Company settled a dispute which was in pen-
ding arbitration. The settlement agreement resolved all issues arising from the
dispute as well as a commutation of the Company's reinsurance obligation. Under
the settlement, the Company paid $10.3 million to the other party and such party
agreed to pay up to $20 million in direct losses on claims against a subsidiary
which the Company had sold to it. Any loss payments in excess of $20 million
that are not collected through reinsurance will be shared equally between the
parties, and the Company will only share in those payments to the extent of 50%
of its insurance company's consolidated statutory surplus above $20 million. At
December 31, 1995, such statutory surplus was $10.9 million. This settlement had
a negative impact on earnings of $2.9 million during 1994, excluding a realized
investment loss of $0.8 million upon the sale of securities in order to generate
the cash necessary to make the payment.
In the third quarter of 1994, the Company's recorded workers' compensation
reserves in the amount of $22.4 million were commuted to the National Council on
Compensation Insurance, Inc., resulting in a reduction of incurred losses of
approximately $6.1 million. NCCI is the administrator and agent for the various
workers' compensation reinsurance pools from which the Company assumed busi-
ness. The cash necessary for this commutation was generated through the sale of
securities, which resulted in realized investment losses of $1.7 million in the
same quarter.
Effective in the fourth quarter of 1994, a substantial portion of the Company's
servicing carrier business, the South Carolina Reinsurance Facility, became
subject to a first time bid and qualification process for designation as a
servicing carrier. The bidding was open to all qualified insurers with the
successful bidders being awarded a five year servicing contract beginning in
October, 1994. The facility separated the business into three blocks with
"Block 1" being the largest. The Company was successful in winning the contract
for "Block 2," a block approximately 22% smaller than "Block 1," its former book
of business under the facility. Although "Block 2" is smaller and will be ser-
viced at a lower commission rate, the effect on net income in 1995 and subse-
quent years has been mitigated to some extent by ongoing reductions in opera-
ting costs and claims adjusting expenses.
New management was put in place in mid-1995 and a transitional operating plan
was implemented to change the core operations from those of a risk taker to
activities which generate fee income. These activities were designed to
stabilize the financial condition of the Company. During the last three quarters
of 1995, the Company operated profitably. Although there can be no certainty of
successful operations, the Company anticipates that continued favorable results
will permit the re-entry into risk business during mid-1996. When the Company
resumes underwriting insurance risks to be retained, it will be on a more modest
volume than in the past, and will generally focus on the personal lines that
have less exposure to long periods of time between earning the premiums and
seeing the ultimate development of losses.
Divestitures
In mid 1993, the Company sold Investors National Life Insurance Company, its
credit life and credit accident and health subsidiary. Under the sale agree-
ment, the Company retained substantial assets and the responsibility for poli-
cies in existence at the sales date. The Company has withdrawn from this busi-
ness and is currently running off the remaining book of business.
In early 1994, the Company sold substantially all of the receivables of Premium
Service Corporation, its premium financing subsidiary, and has withdrawn from
that business.
During the first quarter of 1995, the accounts receivable and other immaterial
assets of Forest Lake Travel Service, Inc. were sold. The Company has withdrawn
from this business as well.
During the first quarter of 1996, the Company entered into a contract to sell
Consolidated American Insurance Company, an inactive insurance company
subsidiary. The sale will generate a gain of approximately $0.9 million in
1996.
All of the sales of subsidiaries or their assets were made at small gains, while
the dissolutions resulted in increased liquidity for their respective parent
companies. The sales and dissolutions took place because of management's
emphasis on restructuring the Company's core operations. In the Company's
continuing focus on its primary business, none of these companies were con-
sidered to be an integral part of operations. The impact on 1995, 1994 and
1993 was not material and future years' operations are not anticipated to be
significantly affected.
Fee-generating Activities
The Company had provided services to the South Carolina and North Carolina
Reinsurance Facilities, two automobile residual market plans, and the Kentucky
Fair Plan, a homeowners' residual market. Additionally, the Company is a major
participant in the WYO federal flood facility of the National Flood Insurance
Program. All servicing functions are performed on a commission basis without
any underwriting risk to the Company. Effective in the fourth quarter of 1995,
the Company ceased to operate as a servicing carrier for the North Carolina
Reinsurance Facility. The auto business previously written in that state and
ceded to the Facility continues to be handled in a similar manner but with a
change in the Company's compensation. Instead of commission and service income,
the Company now receives a reinsurance commission, which is not significant for
1995 and is netted against other operating costs and expenses on the income
statement. The impact on overall profitability is not expected to be
significant. Ceded premiums written and commission and service income for the
facilities in 1995 and 1994 are as follows:
<TABLE>
1995 1994
Ceded Commission Ceded
Commission
Premiums and Service Premiums
and Service
Income
Income
------------------------------------------
(thousands of dollars)
<S> <C> <C> <C> <C>
South Carolina Reinsurance Facility $64,206 $27,795 $80,073 $39,121
National Flood Insurance Program 28,576 12,270 29,517 10,898
Kentucky Fair Plan 6,741 1,143 5,852 987
North Carolina Reinsurance Facility 3,016 1,470 6,513 2,201
</TABLE>
The ceded premium amounts above represent 94.5% and 92.8% of the Company's total
consolidated ceded premiums written during 1995 and 1994, respectively. The
commission and service income amounts above represent 86.1% and 87.7% of the
Company's total commission and service income as stated in the consolidated
financial statements for 1995 and 1994, respectively. Each of these profit
centers has operated profitably over the last three years.
All of the Company's commercial business was underwritten under an MGA agreement
with an unaffiliated insurance company. The Company serviced these policies
and claims on a commission basis without any underwriting risk. This agreement
became effective May 1, 1993. Commission and service income generated under
this contract was $6.7 million and 7.1 million during 1995 and 1994, respec-
tively, which represents 13.5% and 11.7%, respectively, of the Company's total
commission and service income as stated in the consolidated financial state-
ments. With the current premium volume and the corresponding expenses, the
Company did not make a profit under the current contract. The Company undertook
significant cost reductions in the last half of 1995 and plans further cost
reductions in 1996 to make this business profitable. Furthermore, an addi-
tional MGA agreement was reached with another unaffiliated company for personal
lines business, and other similar arrangements are planned for 1996 in order to
enhance revenues within the existing cost structure.
The Company also assists subagents in providing excess and surplus lines for
difficult or unusual risks. This business is placed with nonaffiliated insurers
on a commission basis. Under these arrangements, the Company has varying degrees
of underwriting and claims authority.
Property and Casualty Insurance Underwriting Segments
SCIC and its insurance subsidiaries comprise the Company's property and casualty
insurance group. Each company conducts a substantially similar multi-line
property and casualty business. One or more of the insurance companies is
currently licensed to do business in 46 states.
The Company's current A.M. Best rating is a group rating of NA-9("Not Assigned -
Company Request"). A.M. Best is an independent company which rates insurance
companies based on its judgement of factors related to the ability to meet
policyholder and other contractual obligations. A low rating would not directly
impact the Company's servicing carrier or MGA operations. The Company believes
the lack of an assigned rating has no significant impact on any future risk-
taking operations as this business can be maintained because of the quality of
its agency relationships, and these lines are generally not as sensitive to the
rating of the insuring company.
In 1994, the voluntarily retained property and casualty business written by the
Company was limited to personal lines business written in the states of Georgia,
Kentucky, North Carolina, South Carolina and Tennessee. This business included
four major lines of insurance:private passenger automobile, homeowners, dwelling
fire and watercraft inland marine. However, the lack of underwriting profit
potential from the personal property book of business along with the high cost
of catastrophe reinsurance has resulted in a decision to withdraw as a personal
property carrier in all operating states. The Company began the year long
process of non-renewing this business effective during the second quarter of
1995.
Claims Operations
The Company services and adjusts claims for its retained business, servicing
carrier functions and MGA services. Starting in 1994, the Company started
reducing its usage of outside adjusters and increased its usage of employee
adjustors for handling of claims. This shift has resulted in a significant
reduction in allocated LAE, beginning with the 1994 accident year. Through the
earlier involvement of the Company's claims personnel in the claim process, the
Company has recognized lower overall adjustment expenses. The Company has
continued this trend into 1995.
The Company, within the context of the weather related catastrophes of years
prior to 1993, has developed a comprehensive catastrophe plan designed to
maximize customer service in the event of a catastrophe. This plan has been
particularly useful with the widespread incidence of flood claims over the last
several years. During 1996, the Company will explore creating a new profit
center to market its claim expertise to unaffiliated customers for a fee.
Management, in conjunction with the Company's independent actuaries, reviews the
loss reserves to evaluate their adequacy. Such review is based upon past
experience and current circumstances and includes an analysis of reported
claims, an estimate of losses for IBNR claims, estimates for LAE, reductions for
salvage/subrogation reserves and assumed reinsurance losses. Management believes
the reserves 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.
For information regarding insurance reserves, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Investments and Investment Results
The Company's invested assets were distributed as follows at December 31, 1995
and 1994:
<TABLE>
1995 1994
Asset Values Percentage Asset Values Percentage
(thousands of (thousands of
dollars) dollars)
------------------------- -------------------------
<S> <C> <C> <C> <C>
U.S. Government and
agency obligations $31,416 70.9% $33,915 54.8%
States, municipalities, and
political subdivisions 993 2.2 1,121 1.8
Corporate bonds 1,168 2.6 2,403 3.9
Mortgage backed (government
guaranteed) securities - - 1,498 2.4
Redeemable preferred stocks 4 - 4 -
Total fixed maturities 33,581 75.7 38,941 62.9
Short-term investments 10,310 23.3 20,458 33.1
Equity securities 377 0.9 458 0.7
Mortgage loan on real estate - - 1,965 3.2
Other long-term investments 34 0.1 46 0.1
------- ------ ------- ------
Total invested assets $44,302 100.0% $61,868 100.0%
======= ====== ======= =======
</TABLE>
Asset values represent market values at December 31. The Company reorganized
the investment portfolio during 1994 to reduce the percentage concentration in
longer term maturities and increase the concentration in more liquid securities
such as cash and short-term investments. The Company believes that this mix
more accurately matches with the Company's liabilities at this time.
The following table sets forth the consolidated investment results for the three
years ended December 31, 1995:
<TABLE>
(amounts in thousands)
1995 1994 1993
-------------------------------------
<S> <C> <C> <C>
Total investments (1) $ 53,841 $ 90,175 $ 127,361
Net investment income 3,176 5,321 5,455
Average yield 5.90% 5.90% 4.28%
Net realized investment
gains (losses) $ 164 $ (6,327) $ 1,969
(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.
</TABLE>
Regulation
Insurance companies are subject to supervision and regulation in the
jurisdictions in which they transact business, and such supervision and
regulation relates 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;
impose limitations on the nature and amount of investments; regulate premium
rates; delineate the provisions which insurers must make for current losses and
future liabilities; require the deposit of securities for the benefit of policy-
holders; and 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 the financial condition of
insurance companies.
Most states have also 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. Three 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.
KIC is domiciled in Kentucky.
The insurance industry has received a considerable amount of publicity because
of rising insurance costs, a number of high profile insurance company insolven-
cies and a limited exemption from the provisions of federal anti-trust prohibi-
tions. Changes in the law are being proposed which would bring the insurance
industry under the regulation of the Federal government and eliminate current
exemptions from anti-trust prohibitions. It is not possible to predict whether,
in what form or in which jurisdictions any of these proposals might be adopted,
or the effect, if any, on the Company. The NAIC has developed and recommended
for adoption by the state insurance regulatory authorities various model laws
and regulations pertaining to, among other things, capital requirements for the
insurance industry members.
The 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 will be used by state insurance regulators as an early warning
tool to identify, for the purpose of initiating regulatory action, insurance
companies that potentially are inadequately capitalized. Compliance is
determined by ratio of the Company's regulatory total adjusted capital to its
authorized control level RBC (as defined by the NAIC). Companies which fall
below the authorized RBC level may be required to disclose plans to remedy the
situation. As of December 31, 1995, three of the four insurance subsidiaries
have ratios of total adjusted capital to RBC that are comfortably in excess of
the level which would prompt regulatory action. SCIC currently falls below the
required RBC level.
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 insurance laws,
rather than federal bankruptcy laws, would apply to the liquidation or
reorganization of the insurance companies. Examinations of SCIC, Consolidated
American and Catawba as of March 31, 1995 and of Kentucky Insurance Company as
of June 30, 1995 are currently in progress.
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 statutorily permitted payments from its subsidiaries and
affiliates.
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 thirty 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 "Extraordi-
nary Dividend" under the statutes and regulations. If the ability of the
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. Current restrictions are
such that SCIC would not be permitted to pay any dividends in 1996. In addi-
tion, no assurance can be given that South Carolina will not adopt statutory
provisions more restrictive than those currently in effect.
If insurance regulators determine that payment of a dividend or any other
payments to an affiliate would, because of the financial condition of the paying
insurance company or otherwise, be hazardous to such insurance company's
policyholders or creditors, the regulators may disapprove, prohibit, or mandate
return of such payments that would otherwise be permitted without prior
approval.
Required Participation in State Residual Market Plans and Insurance Guaranty
Funds
Most states in which the Company's property and casualty insurance group writes
business have collective pools, underwriting associations,reinsurance facilities
(the largest being the South and North Carolina Reinsurance Facilities),
assigned risk plans or other types of residual market plans ("plans"), by 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 direct voluntary business to the total
industry business of that type in that state. As the Company's share of the
voluntary market in a given state changes, tentative participations are assigned
for each policy year and are updated as actual data becomes available. The
required participation by the Company in all such plans is reflected in the
results of the Company as soon as reported by the plans. Estimates are
maintained for unreported data. Of particular significance are those plans
involving workers' compensation insurance, for which underwriting results have
normally been unfavorable. In early 1993, the Company withdrew from the workers'
compensation market in all states. During 1994, the Company settled all
obligations to the Workers' Compensation National Reinsurance Pool.
Most states have enacted insurance guaranty fund laws. Typically, these laws
provide that when an insurance company is declared insolvent,the other companies
writing the insurance in that jurisdiction are assessed to pay covered claims of
the insolvent company. The amount a company is assessed is generally determined
by the amount of premiums written in that state, subject to a maximum annual
assessment ranging from 1% to 2% of direct written premiums. During 1995, the
Company paid $116,000 in such assessments. The Company expects future
assessments to remain insignificant for as long as the premiums written by the
Company continues to decrease.
Competition and Other Factors
All of the areas of business in which the Company engages are highly competi-
tive. The principal methods of competing are service and pricing. Many com-
peting property and casualty companies have available more diversified lines of
insurance than the Company's property and casualty insurance group and have
substantially greater financial resources. The Company responds to this
competitive environment by constantly updating its policy offerings, improving
operating procedures and constantly reviewing expenses. In addition, effective
October 1, 1994, the Company received a smaller book of business from the South
Carolina Reinsurance Facility due to a competitive bidding process.
Employees
At December 31, 1995, the Company and its subsidiaries employed a total of 268
employees, which includes 4 part-time employees. Management's actions during
1995 reduced the number of employees by 139.
Item 2. Properties
The Columbia, South Carolina home office, containing approximately 148,000
square feet of occupied space, is owned by the Company and used primarily by its
property and casualty insurance operations. Some additional premises are leased
by the Company in locations in which they operate.
Management believes that these facilities are adequate for the current level of
operations.
Item 3. Legal Proceedings
Due to the nature of their business, certain subsidiaries are parties to various
other legal proceedings which are considered routine litigation incidental to
the insurance business.
Item 4. Submission of Matters to a Vote of Security Holders
None/Not Applicable.
Executive Officers
Name Age Position
John C. West 74 Chairman of the Board since September,
1994. Director of the Company since June,
1994. Currently, of counsel with the law
firm of Bethea, Jordan and Griffin in
Hilton Head Island, SC and professor at the
University of South Carolina. Former
Governor of South Carolina (1971-75) and
former Ambassador to the Kingdom of Saudi
Arabia (1977-81).
Ernst N. Csiszar 45 President, Chief Executive Officer and
Director of the Company since June, 1995.
Previously held position of visiting
professor at the School of Business,
University of South Carolina since 1988.
John A. Weitzel 50 Chief Financial Officer of the Company and
certain subsidiaries since September, 1995.
Director of the Company since October,
1995. Previously Chief Financial Officer of
Milwaukee Insurance Group, Inc. from April,
1985 to November, 1994.
Steven M. Armato 44 Group Vice President of Seibels, Bruce &
Company since December, 1995. Previously
held the position of Vice President from
April, 1986. Employed by Company since
April, 1981.
Michael A. Culbertson 47 Group Vice President of Seibels, Bruce &
Company since December, 1995. Previously
held positions of Senior Vice President of
Claims and Vice President of Claims since
June, 1995; Officer and Director of certain
Company subsidiaries. Employee of the
Company in various claims capacities since
December, 1974.
James J. Owens 48 Group Vice President of Seibels, Bruce &
Company since January, 1996. Previously
employed with Milwaukee Insurance Group
from June, 1980 to December, 1995.
Mary M. Gardner 31 Vice President and Controller since July,
1994; Officer and Director of certain
Company subsidiaries. From 1989 to 1994,
Assistant Controller of Mercury Insurance
Group, a group of property and casualty
insurance companies.
Priscilla C. Brooks 44 Vice President and Corporate Secretary
since June, 1995; Officer of certain
company subsidiaries. Corporate Secretary
since February, 1995. Assistant Corporate
Secretary since 1982 Employed with the
Company since 1973.
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 National Market,
trading symbol "SBIG". The following table sets forth the reported high and low
closing sales prices for such shares for each quarter during the two fiscal
years ended December 31, 1995.
<TABLE>
High Low
1995
<S> <C> <C>
First Quarter $ 3-1/16 $ 7/8
Second Quarter 1-7/16 3/4
Third Quarter 1-1/32 3/4
Fourth Quarter 2-3/16 7/16
1994
First Quarter $ 2-1/16 $ 1-1/4
Second Quarter 2 1-7/16
Third Quarter 3-1/8 1-3/4
Fourth Quarter 3 2-1/4
(b) Holders. As of March 1, 1996, there were approximately 2,589 holders of
record of the Company's 16,772,686 outstanding shares of common stock,
$1.00 par value. Not included in the outstanding shares is 6,250,000 shares
issued without voting rights pending the special shareholders' meeting in
the second quarter of 1996.
(c) Dividends. There were no dividends on the Company's common stock for 1995,
1994 or 1993. See Note 8 of Notes to Financial Statements included under
Item 8 for a description of restrictions on the Company's present and
future ability to pay dividends.
</TABLE>
Item 6. Selected Financial Data
The following selected financial data for each of the five years ended December
31, 1995 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.
<TABLE>
1995 1994 1993 1992 1991
(thousands of dollars, except per share amounts)
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION
Total investments $ 44,302 $ 61,868 $118,467 $156,934 $180,096
Total assets 224,005 255,935 324,695 461,136 473,235
Long-term debt - - 1,694 24,934 8,853
Shareholders' equity 10,187 650 13,902 14,219 46,669
Per share 0.61 0.04 1.85 1.90 6.23
RESULTS OF OPERATIONS
Revenues
Insurance
Property and casualty
premiums $ 10,384 $ 14,718 $ 55,331 $117,172 $124,487
Credit life premiums 890 1,801 3,207 4,247 4,898
Commission and service
income 49,572 60,669 41,625 35,943 35,396
Net investment and other
interest income 4,330 6,226 7,090 12,960 17,445
Realized gains (losses)
on investments 164 (6,327) 1,969 7,040 3,938
Other income 843 2,673 4,697 4,019 5,144
Total revenues $66,183 $ 79,760 $113,919 $181,381 $191,308
Income (loss) before
extraordinary item $1,152 $(19,074) $(10,249) $(32,666)$(16,843)
Per share 0.07 (1.72) (1.37) (4.36) (2.25)
Extraordinary item - gain from
extinguishment of debt, net
of income taxes - $ - $ 9,235 $ - $ -
Per share - - 1.23 - -
Net income (loss) $1,152 $(19,074) $(1,014) $(32,666) $(16,843)
Per share 0.07 (1.72) (0.14) (4.36) (2.25)
Cash dividends $ - $ - $ - $ - $ 2,696
Per share - - - - .36
PROPERTY AND CASUALTY STATUTORY
UNDERWRITING RATIOS
Losses and loss adjustment expenses
to premiums earned 124.4% 227.0% 105.3% 107.1% 93.9%
Ratio of net premiums written to
ending statutory policyholders'
surplus 0.56 N/A* 1.00 5.95 2.30
*1994 ratio results are negative
(See Item 7 and Notes to Financial Statements included under Item 8.)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The selected financial data and consolidated financial statements and the
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 incurred a loss from operations in each of the four years ending
December 31, 1994. A recapitalization plan was initiated in 1993. At that time,
bank debt was extinguished, resulting in an extraordinary gain, net of income
taxes, in the amount of $9.2 million. The note payable of $10.0 million was
cancelled in June of 1994 and exchanged for 7 million newly issued shares of the
Company's common stock. During the first quarter of 1995, a common stock rights
offering was successfully completed, and $5 million of additional capital was
raised and contributed to the insurance subsidiary. In addition, the Company
entered into a $2 million promissory note in the second quarter of 1995. The
proceeds of the note were also contributed to the capital of the insurance
subsidiary.
The Company has also revised its strategic direction. The new management of the
Company generated a transitional operating plan which focuses on the Company's
core operations (defined to be fee income producing activities) while reducing
the amount of underwriting risk to which the Company has historically been
exposed. The Company ceased to underwrite commercial lines of business in 1993,
and entered into a General Agency Agreement to market the business for an
unaffiliated issuing company.
During 1994, the Company elected to commute its workers compensation loss
reserves associated with participation in the National Council on Compensation
Insurance. In addition, a long standing dispute regarding the 1985 sale of a
subsidiary was settled during the year. These two transactions resulted in an
increase in earnings of $3.3 million. However, the transactions also generated
a cash outflow of $25.4 million and necessitated the unplanned sale of secur-
ities at a loss of $2.6 million.
The Company also engaged additional actuarial consultants at the conclusion of
1994. Based upon this actuarial input, loss and adjusting expense reserves were
increased significantly during the fourth quarter. Largely as a consequence of
this reserve strengthening, the Company incurred a net loss of $19.1 million for
the 1994 year. The portion of incurred losses and loss adjusting expenses that
related to claims occurring in prior years amounted to $17.0 million. Absent
this development on prior year reserves and the realized capital losses of $6.3
million, the Company would have been profitable for the 1994 year. The
significant reserve strengthening resulted in a statutory deficit for one of
the insurance company subsidiaries. The Company suspended underwriting new and
renewal personal lines of business in the second quarter of 1995, and does not
anticipate resuming such activities until sufficient capital has been raised to
support these risks, and strategic plans are in place to underwrite profitably.
Certain operations that were not considered to be an integral part of the
operations have been sold. These included the credit life and accident and
health operations in 1993,the premium financing operations in 1994, and a travel
agency in 1995. Each of these operations were sold at a profit. During the
first quarter of 1996, the Company agreed to sell Consolidated American Insur-
ance Company, an inactive subsidiary.
During 1995, the Company replaced its Chief Executive Officer and Chief
Financial Officer. The Company achieved its first year of operating profits of
the current decade, and significantly reduced the cash outflow from operations.
The new management undertook significant cost reductions, including a 35%
reduction in work force during 1995. The 1995 profit was largely a result of
this expense control and the lack of significant loss reserve development since
the 1994 reserve strengthening.
RESULTS OF OPERATIONS
The net income for 1995 was $1.2 million ($0.07 per share). The income came
from the servicing activities of the Company, while the loss from property and
casualty underwriting was significantly reduced. Both segments enjoyed reduced
operating costs. The net loss for 1994 was $19.1 million ($1.72 per share). The
principal factors influencing the loss were the increase in estimated losses and
adjusting expenses for claims occurring in prior years of $17.0 million, the
settlement of a long standing dispute at an additional cost of $2.9 million,
realized losses on security sales of $6.3 million, and were offset in part by
commuting outstanding liabilities with the National Council of Compensation
Insurance in an amount that was $6.1 million less than the outstanding re-
serves. The operating loss for 1993 was $10.2 million ($1.37 per share). An
extraordinary gain from the extinguishment of debt in the amount of $9.2 million
($1.23 per share) reduced the net loss for the year to $1.0 million ($.14 per
share).
Fee-generating Activities
Fee-generating activities are predominantly related to acting as a servicing
carrier for the South Carolina and North Carolina automobile reinsurance
facilities, and for the WYO National Flood Insurance Program. The Company bears
no underwriting risk for the business processed and administered as a servicing
carrier.
The Company began in 1993 to produce business in its MGA capacity for an
unaffiliated insurance carrier. The Company receives a commission for produ-
cing, underwriting, and servicing such business. In addition, the Company
began in 1994 to act as a servicing carrier for the Kentucky Assigned Risk Plan.
The following table reflects the major components of commission and service
revenue and pre-tax operating profit for 1995, 1994, and 1993:
<TABLE>
1995 1994 1993
(thousands of dollars)
------------------------------
<S> <C> <C> <C>
Commission and service income
Servicing carrier $ 42,678 $ 53,207 $ 35,810
MGA 6,734 7,094 5,092
Other 160 368 723
-----------------------------
Total $ 49,572 $ 60,669 $ 41,625
==============================
Pre-tax operating profit $ 5,641 $ 10,109 $ 4,321
============================
</TABLE>
The change in revenues and pre-tax operating profit in 1995 compared to 1994 is
primarily attributable to changes in the South Carolina Reinsurance Facility
("SCRF"). With respect to the Company's servicing carrier activities for the
SCRF, the South Carolina legislature passed a joint resolution requiring that
servicing carrier contracts, which previously had been awarded based on
application, be put out for bid. The Company, through this bid process, was
selected as one of three servicing carriers for the facility for a new five year
contract period from October 1, 1994 to September 30, 1999. In response to the
competitive aspect of this bid, the Company had to reduce its commission rates.
While the Company did not retain the ongoing block of business that it was
servicing, which was the largest of the three blocks, it was awarded the next
largest. The premium volume on the previously held block was $82 million; the
volume of the new block amounted to $64.2 million for the 1995 year. This
decrease in volume, in combination with lower servicing rates, resulted in $11.3
million less commission earned in 1995 than in 1994.
The Company serviced $28.6 million of flood insurance premiums through the WYO
program in 1995 ($29.5 million in 1994). It is among the ten largest companies
acting in that capacity. Approximately 45% of the Company's volume in this
program comes from Florida. Since the Company left Florida's voluntary
marketplace in 1993, the percentage of premium volume generated in that state in
1995 and 1994 has been reduced approximately 21% and 14%, respectively, due to
competition from other WYO companies. While this premium decrease has not
significantly influenced income in 1995, the commission income earned on claims
was positively affected in 1995 due to flood claims resulting from Hurricane
Opal. Commission income related to claims increased $1.1 million when compared
to 1994.
The decrease in operating profit of $4.5 million in 1995 over 1994 is due to the
decrease in revenues previously mentioned, partially offset by expenses related
to servicing the contracts. The increase in operating profit of $5.8 million in
1994 over 1993 is primarily attributable to two factors: 1) a reduction in
allocated loss adjustment expenses associated with the South Carolina Reinsur-
ance Facility (the "Facility"), and 2) an increase in the component of the
Facility fee based upon claim payments, which rose substantially during 1994.
Property and Casualty Underwriting
In 1993, the Company took actions to significantly reduce premium writings, due
in part to the impact of Hurricane Andrew. Voluntary underwriting activities
were being conducted only in the five states of South Carolina, North Carolina,
Georgia, Kentucky, and Tennessee through the second quarter of 1995. At that
time, the Company began the year long process of non-renewing the business, with
the exclusion of North and South Carolina automobile liability business which is
100% ceded to the respective reinsurance facilities. The Company's commercial
business in the five states, which had been produced for its own risk, is now
being produced under an MGA arrangement for the risk of an unaffiliated insur-
ance carrier. The Company also withdrew from the workers' compensation market
in all states.
A.M. Best, the industry's leading rating authority, last assigned the Company a
group rating of NA-9 ("Not Assigned-Company Request"). A.M. Best is an
independent company which rates insurance companies based on their judgement of
factors related to the ability to meet policyholder and other contractual
obligations. The rating is not directed toward the protection of investors. A
low rating would not directly affect the Company's servicing carrier or MGA
operations. The Company believes the lack of a rating does not have a material
impact on its personal lines business as this business can be maintained because
of the quality of its agency relationships and because these lines are generally
not as sensitive to the rating of the insuring company as for commercial line
business.
Underwriting Results
The Company ceased to underwrite commercial lines in 1993 and has withdrawn from
retaining any underwriting risk until sufficient capital has been raised to
support such risks. The following table presents net premiums earned and loss
ratios for the last three years:
<TABLE>
1995 1994 1993
--------------- --------------- ----------------
Premiums Loss Premiums Loss Premiums Loss
Earned Ratio Earned Ratio Earned Ratio
(thousands of dollars)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Automobile lines $ 6,962 72.4% $12,655 119.3%$ 22,336 71.1%
All other lines 3,422 230.2% 2,063 887.4 32,995 128.5
----------------------------------------------------
Totals $ 10,384 124.4% $14,718 227.0% $55,331 105.3%
====================================================
</TABLE>
Several key ratios are used in the industry to measure underwriting results. The
pure loss ratio is the ratio of losses incurred to premiums earned. The loss
adjustment expense ratio is the ratio of loss adjustment expenses incurred to
premiums earned. The sum of these two ratios is called the loss ratio.
In 1993, $9.6 million of premiums written were assumed as reinsurance or pool
participations, substantially all resulting from various residual market pools.
The 1995 and 1994 amounts of $0.5 million and $2.2 million, respectively, were
not significant due to withdrawing from the NCCI pool. Of $108.6 million of
ceded premiums in 1995 ($131.5 million in 1994 and $145.2 million in 1993),
$102.5 million ($122.0 million in 1994 and $120.1 million in 1993) was related
to premiums written as fee-generating business.
The following is a breakdown of percentages of net premiums written in each of
the Company's principal states for 1995, 1994, and 1993:
<TABLE>
% of Total Net Premiums Written
1995 1994 1993
--------------------------------
<S> <C> <C> <C>
California 0.1% 0.4% 0.3%
Florida 0.1 2.2 (14.9)
Georgia 1.3 1.6 11.0
Kentucky 4.1 1.9 6.4
Louisiana 0.3 0.0 0.4
North Carolina 39.3 53.4 52.8
South Carolina 57.1 38.6 34.0
Tennessee (2.9) 1.6 6.9
Virginia 0.5 0.9 0.9
All other 0.1 (0.6) 2.2
-----------------------------------
Total 100.0% 100.0% 100.0%
===================================
</TABLE>
The percentages for Tennessee in 1995 and for all other states in 1994 are
negative due to the company's withdrawal from various states during the years
presented, resulting in return premium volume. The percentage for Florida in
1993 is negative because the Company withdrew from that state by doing mid-term
cancellations of policies in force, resulting in negative premiums written for
the year.
Reserve deficiencies from prior years adversely affected 1995 by $3.4 million,
1994 by $17.0 million, and 1993 by $10.5 million. Such adverse reserve
development is fully discussed following the tabular ten-year period analysis
presented later in the reserves section.
Results for 1993 were impacted by losses of $4.2 million from the first quarter
"Winter Storm of the Century," as well as a $1.0 million reduction due to a rate
rollback in the state of North Carolina. Additionally in 1993, the Company began
its withdrawal from the workers' compensation market in all states. The workers'
compensation business had already been substantially downsized. As a result of
participation in the National Workers Compensation Reinsurance Pool, the Company
had recorded substantial losses for its allocable share of the business
placed in this residual market. The total loss to the Company relative to this
residual market was $2.8 million in 1993. During 1994, this residual market
generated a profit of $4.9 million, largely due to a favorable impact of
$6.1 million upon the commutation of outstanding losses.
In 1993, the Company commuted its $43.0 million casualty aggregate excess of
loss reinsurance agreement which it had entered into in 1989. The Company
reduced its reinsurance recoverable on ceded losses and loss adjustment expenses
by $43 million, and received $42.9 million in U.S. Treasury Strips. The commu-
tation had no material effect on underwriting results, or on net income.
Through various types of reinsurance, the Company reduces its net liability on
individual risks. Prior to suspending the underwriting of net retained risk, a
significant portion of the Company's covered risks were located in areas that
are vulnerable to major windstorms. These risks are mitigated in part by using
selective underwriting procedures and purchasing catastrophe property reinsur-
ance protection to contain major losses. The Company's decision to non-renew all
personal lines of business, excluding the automobile liability fee-generating
business, should adequately protect the Company in the event of a catastrophic
event.
Reserves
Loss reserves are estimates at a given point in time of the amount 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 estimated amounts to be received
through salvage and subrogation. The resulting liabilities represent the
Company's estimate of the ultimate net cost of all unpaid losses and LAE
incurred through December 31 of each year. These estimates are subject to the
effects of changing trends in future claims frequency and/or severity. These
estimates are continually reviewed and, as experience develops and new informa-
tion 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 adjusted 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.
In 1993, the Company adopted FASB Statement No. 113, which significantly
redefines reinsurance accounting rules and provides stringent requirements with
respect to risk transfer and recognition of gains. In addition, the Statement
requires ceded claims liabilities and ceded unearned premiums be reported as
ceded reinsurance assets, rather than as a reduction to the respective liabil-
ity. For SAP purposes, the ceded reinsurance reserves are still used to reduce
the liability. There were no changes in the recognition of net losses incurred
as a result of adopting FASB Statement No. 113. The only effect on the Company's
GAAP financial statements was the reflection of the gross liability rather than
the net liability for reserves. The Company does not have surplus relief rein-
surance arrangements, multiple-year retrospectively-rated reinsurance, or
assumption reinsurance transfers.
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 per the balance sheet:
<TABLE>
1995 1994 1993
(thousands of dollars)
--------------------------------
<S> <C> <C> <C>
Liability for losses and LAE at
beginning of year:
Gross liability per balance sheet $ 166,698 $ 194,682 $ 257,603
Ceded reinsurance recoverable
reclassified as an asset (88,731) (76,221) (140,969)
----------------------------
Net liability 77,967 118,461 116,634
----------------------------
Provision for losses and LAE for
claims occurring in the current year 9,546 16,451 47,776
Increase in estimated losses and LAE
for claims occurring in prior years 3,375 16,957 10,509
---------------------------
12,921 33,408
58,285
Losses and LAE payments for claims ---------------------------
occurring during:
Current year 7,014 10,291 26,499
Prior years 22,843 63,611 29,959
--------------------------
- -
29,857 73,902
56,458
--------------------------
- -
Liability for losses and LAE at end of year:
Net liability 61,031 77,967 118,461
Ceded reinsurance recoverable
reclassified as an asset 84,492 88,731 76,221
---------------------------
- --
Gross liability per balance sheet $145,523 $166,698 $194,682
============================
</TABLE>
As reflected in the preceding table, each year was affected by reserves from
prior years having been deficient in those earlier periods. The impact of this
adverse development was $3.4 million in 1995, $17.0 million in 1994, and $10.5
million in 1993. Adverse reserve development will be fully discussed following
the tabular ten-year period analysis presented later in this section.
Reserve deficiencies are caused primarily by the difficulties inherent in
estimating the liability for claims on the casualty lines of business, where the
full extent of the damages can often be sizable, but not accurately determinable
at the date of estimation. This situation is further complicated by the fact
that the existence of a claim may not be reported to the Company for a number of
years.
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:
<TABLE>
December 31,
1995
1994
(thousands of dollars)
-------------------
- ----
<S> <C> <C>
Net liability on a SAP basis,
as filed in annual statement $ 61,812 $ 79,854
Assumed reinsurance liabilities recorded net - (1,147)
Estimated salvage and subrogation recoveries
recorded on a cash-basis for SAP and on an
accrual basis for GAAP (781) (740)
-----------------
- --
Net liability on a GAAP basis, at year-end $ 61,031 $ 77,967
Ceded reinsurance recoverable 84,492 88,731
------
- --------------
Gross liability reported on a GAAP basis,
at year-end $145,523 $ 166,698
====================
</TABLE>
The following table reflects the loss and LAE development for 1995 and 1994 on a
GAAP basis:
<TABLE>
Unpaid Losses Re-estimated as Cumulative
and LAE of one year later
(deficiency)
---------------------------------------------
(thousands of dollars)
<S> <C> <C> <C>
1995:
Gross liability $ 145,523
Less: Reinsurance recoverable 84,492
--------
Net liability $ 61,031
========
1994:
Gross liability $ 166,698 $ 180,859 $(14,161)
Less: Reinsurance recoverable 88,731 99,517 (10,786)
-------- --------- ---------
Net liability $ 77,967 $ 81,342 $ (3,375)
======== =========
========
</TABLE>
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:
<TABLE>
Year Ended December 31,
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
1995
------------------------------------------------------
(millions of
dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and LAE (SAP) 169 162 145 129 122 116 112 118 120 80 62
Cumulative liability paid through:
One year later 101 94 82 104 78 77 63 30 63 24
Two years later 158 142 150 141 121 116 50 84 82
Three years later 193 194 173 166 145 93 91 101
Four years later 235 211 191 183 115 125 104
Five years later 247 224 203 151 139 136
Six years later 257 233 174 170 149
Seven years later 264 208 191 178
Eight years later 241 223 198
Nine years later 255 230
Ten years later 262
Liability re-estimated as of:
One year later 198 181 158 174 135 136 119 129 137 83
Two years later 218 192 197 177 150 147 124 139 140
Three years later 226 229 200 188 156 151 133 149
Four years later 263 233 210 185 159 161 145
Five years later 266 240 204 185 168 173
Six years later 270 235 204 195 182
Seven years later 266 235 213 208
Eight years later 265 243 227
Nine years later 274 256
Ten years later 287
Cumulative (deficiency) (118) (94) (82) (79) (60) (57) (33) (31) (20) (3)
===================================================
</TABLE>
The preceding table presents the development of balance sheet liabilities on a
SAP basis for 1985 through 1994. 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 preceding 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.
Additionally, a ceded reinsurance commutation during 1993 for $43 million re-
duced the gross asset for reinsurance recoverable on losses and loss adjustment
expenses. Since investments were increased $42.9 million, total assets were
basically unchanged. Under the gross method of reporting the liability for
losses and LAE, the commutation had no effect on liabilities. The 1993 expense
for losses and LAE was also unaffected, because the reduction in the asset for
reinsurance recoverable served to increase the expense, while the securities
received served to decrease the expense. For these same reasons, the re-
estimated liability shown on the ten-year development table was also not
affected. The 1993 impact on the cumulative liability paid on the ten-year
development table, which was reduced by the value of the securities received,
was as follows (in millions of dollars):
<TABLE>
Cumulative Add Back Cumulative
Liability Commutation Liability
Paid As Reduction Paid As
Reported To Paid Adjusted
---------------------------------------
<S> <C> <C> <C>
1983: 10 years later 185 17 202
1984: 9 years later 239 24 263
1985: 8 years later 241 28 269
1986: 7 years later 208 31 239
1987: 6 years later 174 35 209
1988: 5 years later 151 40 191
1989: 4 years later 115 43 158
1990: 3 years later 93 43 136
1991: 2 years later 50 43 93
1992: 1 year later 30 43 73
</TABLE>
The next portion of the table shows the re-estimated amount of the liability
based on experience as of the end of each succeeding year. The estimate is
increased or decreased as more information becomes known about the claims for
the year being reported.
The "cumulative (deficiency)" represents the aggregate change in the estimates
over all subsequent years. The effects on income of the past three years of
changes in estimates of the liabilities for losses and LAE on a GAAP basis are
shown in the reconciliation table.
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 pre-
sent 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. Accor-
dingly, it may not be appropriate to extrapolate future redundancies or defi-
ciencies based on this table.
After the Company experienced adverse loss reserve development in 1990 and 1991
on its southeastern business, it was determined a significant reserve addition
was necessary to bring current and prior year reserves to a level to avoid or
minimize recurrence of adverse development. Accordingly, in the fourth quarter
of 1991 the Company added $18.4 million to its reserves. The addition was
determined through a comprehensive actuarial review of the Company's direct and
net business.
The adverse loss reserve development in 1992 through 1995 is primarily
attributable to business other than the Company's core southeastern business.
Business the Company is required to accept through various mandated pools and
associations contributed $2.9 million in 1993 ($1.7 million in 1992). This
business relates primarily to the National Workers' Compensation Reinsurance
Pool. The Company started limiting the burden from this pool by restricting
direct workers' compensation premiums beginning in 1990, and in late 1992 made
the decision to discontinue writing any new or renewal workers' compensation
business. During 1994, liabilities associated with this Pool were commuted,
eliminating exposure to further development for the Pool, and producing a $6.1
million reduction in the adverse development for 1994.
The majority of the adverse reserve development in 1989 was related to accident
years 1982-1985 and the business produced by the former West Coast operation.
The Company purchased that operation in 1981. The problem West Coast lines were
primarily commercial automobile liability and other liability, including a
substantial amount of contractors' and subcontractors' liability coverages.
These claims turned out to have greater severity and much longer development
periods than the Company had previously experienced. It was not until 1989 that
the full extent of the problems started to become clear. The Company added $30
million to its reserves for that business in 1989, and until 1992 had no further
adverse development. As of December 31, 1995, the Company has $19.4 million of
reserves established for this business.
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. At December 31, 1993, the
reserves on these claims was $23.4 million. On June 7, 1994, the Company settled
a dispute relative to approximately 400 of these claims. Any future liability on
them is limited to 50% of the loss and reimbursement of the Company's 50% does
not begin until the other company pays out subsequent to June 7, 1994 a total of
$20 million in losses. The settlement also has policyholder surplus safeguards
to the benefit of the Company built in to it. Future obligations, if any, are
not likely to become payable for several years. Management has evaluated the
estimated ultimate liability of this business and has concluded that the
development of this settlement should not have a material impact on the company.
Of the remaining environmental, pollution and toxic tort claims, the following
activity took place during 1995:
<TABLE>
<S> <C>
Pending, December 31, 1994 89
New claims received 18
Claims settled (22)
----
Pending, December 31, 1995 85
====
</TABLE>
The policies corresponding to these claims were written on a direct basis. The
Company has excess of loss reinsurance through 1980 of $100,000, and $500,000
after that date. The claims are reserved as follows at December 31, 1995 ($ in
thousands):
<TABLE>
<S> <C>
Case reserves $ 2,229
IBNR reserves 8,675
LAE reserves 3,453
-------
Total $14,357
=======
</TABLE>
The above claims involve 11 Superfund sites, 5 asbestos or toxic tort claims, 10
underground storage tanks and 59 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 the 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, and 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 limited by policy limits.
Because only 85 claims remain open as of December 31, 1995, the exposure
to significant additional development is less than when the claims were less
mature. In addition, the likelihood of new claims being asserted for
construction liability is lessened by the expiration of statutes of
limitations since the last policy expired over ten years ago.
The Company has consistently strived for reserve adequacy. Prior to 1992,
thorough actuarial reviews were performed only at year-end. In 1992, an interim
review was done. Additionally, the Company refined its estimate of the IBNR
component of loss reserves to help ensure the timely recognition of current year
losses and the adequacy of the IBNR for prior years' losses. At the end of 1994,
the new management engaged an additional consultant to review the adequacy of
loss reserves. This review resulted in management recording additional reserve
strengthening at December 31, 1994. The 1995 results along with the results of
reviews performed by independent actuaries at June 30, 1995 and December 31,
1995 bear out management's belief that the reserves are sufficient to prevent
prior years' losses from adversely affecting future periods; however, estab-
lishing reserves is an estimation process and adverse developments in future
years may occur and would be recorded in the year so determined.
Investments and Realized Gains
The following table shows net investment income, realized gains, and the amount
of the investment portfolio at the end of the year for 1995, 1994, and 1993:
<TABLE>
1995 1994 1993
(thousands of dollars)
--------------------------
<S> <C> <C> <C>
Net investment income $ 3,176 $ 5,321 $ 5,455
Realized gains (losses) 164 (6,327) 1,969
--------------------------
Total investments 44,302 61,868 118,467
==========================
</TABLE>
At December 31, 1995, 23.3% of total investments were committed to short term
investments, compared to 33.0% at the end of 1994. Investments in U.S.
Government bonds were 93.6% of the fixed maturities at the end of 1995,and 87.1%
at the end of 1994. The Company has no "junk bonds" in its portfolio.
In May 1993, FASB issued Statement No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Statement No. 115 classified securities into
three categories: held-to-maturity, trading, and available-for-sale. The
Company's securities are currently classified as, and will continue to be
classified as, available-for-sale. Statement No. 115 requires available-for-sale
securities to be reported at estimated market value and the unrealized gains and
losses be reported in a separate component of shareholders' equity. The Company
adopted Statement No. 115 effective January 1, 1994.
Given the negative cash flow from operations, all fixed maturities are con-
sidered available-for-sale. Accordingly, they are carried at market value as
of December 31, 1995 and 1994. The market values of the fixed maturity invest-
ments were $0.4 million above book value at the end of 1995 compared to $2.4
million below book value at the end of 1994. The weighted average yield of the
fixed maturity investments was 5.9% for both 1995 and 1994.
During 1994, the Company was forced to sell bonds to meet cash requirements
while interest rates were rising. This action resulted in significant realized
losses. A declining interest rate environment in 1993 resulted in realized
gains related to fixed maturity and equity investments. The 1993 gains were
taken primarily in the bond portfolio to shorten maturities, maximize liquidity,
and increase
surplus.
Other Operations
Investors National Life Insurance Company of South Carolina was formed in 1993
to assume the run-off of the business written through Investors National Life
Insurance Company, which, prior to its sale late in 1993, had provided credit
life and credit accident and health insurance through banks, savings and loan
institutions and automobile dealers. The pre-tax (loss) income of Investors
National was $4,000,$(677,000)and $44,000 in 1995, 1994 and 1993, respectively.
The loss in 1994 was due primarily to realized investment losses, compared to
gains in 1995 and 1993.
In February 1994, Policy Finance Company was formed to handle the administration
of the assets retained in the sale of Premium Service Corporation. Pre-tax
income of PFC was $74,000 in 1995, $538,000 in 1994, and $470,000 in 1993. The
Company has no plans to continue its own premium financing activity.
Effective January 1, 1995, Forest Lake Travel Service, a subsidiary travel
agency, was sold. FLT's pre-tax income was $95,000 in 1994 and $420,000 in
1993. The sale generated an insignificant gain in the first quarter of 1995.
All of the above operations were sold because of management's emphasis on
restructuring the Company's core business. All of these sales were made at a
gain. Future years' operations are not anticipated to be significantly impacted
by these sales.
Income Taxes
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
the provision of the enacted tax laws.
The 1995 and 1994 provision for income taxes on operations of insignificant
amounts resulted from certain life insurance taxable income and state income
taxes that cannot be offset by tax operating losses.
In 1993, the Company recognized an income tax benefit from operations of $4.8
million and a $5.6 million income tax expense on the extraordinary gain from
debt extinguishment. The net tax expense of $0.8 million includes the tax
effect of certain life insurance taxable income and state income tax expense
that cannot be offset by tax loss carryovers.
The Company has unused tax net operating loss carryforwards and capital loss
carryforwards of $97.9 million for income tax purposes. However, due to a
"change in ownership" condition that occurred in 1995, the Company's use of the
net operating loss carryforwards are subject to limitation in future years to an
amount estimated to be in the range of approximately $2.5 million to $3.0
million per year.
Based on its recent earning history, the Company has determined that a valuation
allowance of $19.9 million should be established against the net deferred tax
asset at December 31, 1995.
CAPITAL RESOURCES AND LIQUIDITY
Liquidity relates to the Company's ability to produce sufficient cash to fulfill
contractual obligations, primarily to policyholders. Sources of liquidity
include premium collections, service fee income, investment income and sales and
maturities of investments.
As the Company deliberately downsizes its exposure to underwriting risk, premium
collections decline at a much faster pace than the decline in claim payments.
Consequently, operations have used net cash in operating activities of $21.7
million in 1995, $44.6 million in 1994, and $43.6 million in 1993. During 1994,
cash disbursements included $25.4 million for the non-recurring commutation of
NCCI liabilities and a dispute settlement regarding a previously sold subsidi-
ary. The 1993 cash used in operating activities would have been $43 million
greater than the actual cash used had it not been for a non-recurring commu-
tation of reinsurance ceded which produced a cash receipt in the amount of the
reinsurance recoverable.
Cash flows from financing activities in 1995 includes $5.3 million the Company
raised from a stock rights offering and $2.0 million provided by an investor in
exchange for a promissory note. The 1994 cash used in operating activities
necessitated unplanned liquidation of long term bonds. Because this occurred
during a period of declining bond values, the Company incurred $6.3 million of
realized losses on the sale of these securities. While operations for 1996 are
anticipated to use cash, the amount projected is less than the $16.6 million of
cash and temporary investments held at December 31, 1995. Hence, no unplanned
sales of securities are anticipated during 1996.
There have been no shareholder dividends declared during the last three years,
and there is not a likelihood that any will be considered during 1996. Long-
term debt outstanding has been reduced to an insignificant amount as a conse-
quence of the exchange of debt for common shares during 1994.
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. The National
Association of Insurance Commissioners has adopted risk based capital
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 will be 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 ratio of the companies'
regulatory total adjusted capital to its authorized control level RBC (as
defined by the NAIC). Three insurance subsidiaries of the Company have
December 31, 1995 ratios of total adjusted capital to RBC that are comfortably
in excess of the level which would prompt regulatory action.
One of the Company's insurance subsidiaries fell below the minimum required
statutory surplus at December 31,1994. During the first half of 1995, capital
contributions of $7.4 million were completed which strengthened the statutory
surplus of the subsidiary. As of December 31, 1995, the subsidiary has statu-
tory surplus in excess of the minimum required amount, but less than the
authorized control level of RBC. This shortfall is being addressed by various
means, including a planned capital contribution of over $6 million in the second
quarter of 1996.
Item 8. Financial Statements and Supplementary Data
(continued on following page)
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, 1995 and 1994, 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, 1995. 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 financial position of The Seibels Bruce Group, Inc.
and subsidiaries, as of December 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As explained in Note 2 to the financial statements, effective January 1, 1994,
the Company changed its method of accounting for investments in debt securities.
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
as of December 31, 1995 and for each of the three years in the period ended
December 31, 1995 are presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial state-
ments. These schedules have been subjected to the auditing procedures applied
in our 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 29, 1996
<TABLE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1995
1994
(thousands of dollars)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale,
at market (cost of $33,171 at 1995
and $41,321 at 1994) $33,581 $38,941
Equity securities available-for-sale,
at market (cost of $222 at 1995 and
$540 at 1994) 377 458
Short-term investments, including temporary
investments of $10,235 ($20,243 at 1994) 10,310 20,458
Mortgage loan on real estate, at estimated
realizable value (cost of $2,949 at 1994) - 1,965
Other long-term investments 34 46
Total investments 44,302 61,868
Cash, other than invested cash 6,339 -
Accrued investment income 697 809
Premiums and agents' balances receivable, net 7,005 13,028
Reinsurance recoverable on paid losses
and loss adjustment expenses 27,423 30,277
Reinsurance recoverable on unpaid losses
and loss adjustment expenses 84,492 88,731
Property and equipment, net 5,396 6,270
Prepaid reinsurance premiums - ceded business 43,469 48,483
Deferred policy acquisition cost 293 899
Other assets 4,589 5,570
------
- --------------
Total assets $ 224,005 $ 255,935
====================
LIABILITIES
Losses and claims:
Reported and estimated losses and claims
- retained business $ 47,445 $ 63,074
ceded business 74,918 74,141
Adjustment expenses - retained business 13,586 14,893
ceded business 9,574 14,590
Unearned premiums:
Property and casualty - retained business 1,900 6,238
ceded business 43,469 48,483
Credit Life 758 1,570
Balances due other insurance companies 12,438 19,119
Notes payable 2,476 439
Other liabilities and deferred items 7,254 12,738
---------
- -----------
Total liabilities $ 213,818 $ 255,285
---------
- -----------
COMMITMENTS AND CONTINGENCIES (Notes 12 and 13)
SHAREHOLDERS' EQUITY
Special stock, no par value, authorized
5,000,000 shares, none issued or outstanding - -
Common stock, $1 par value, authorized
25,000,000 shares, issued and outstanding
16,772,686 shares 14,500,534 shares at 1994) 16,773 14,501
Additional paid-in capital 34,080 30,983
Unrealized gain (loss) on investments 401 (2,615)
Accumulated deficit (41,067) (42,219)
--------
- ------------
Total shareholders' equity 10,187 650
-------
- --------------
Total liabilities and shareholders' equity $224,005 $255,935
======================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<TABLE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December
31,
1995 1994
1993
(thousand of dollars except per share amounts)
----------------------------------------------
<S> <C> <C> <C>
Premiums:
Property and casualty premiums earned $10,384 $ 14,718 $ 55,331
Credit life premiums earned 890 1,801 3,207
Commission and service income 49,572 60,669 41,625
Net investment income 3,176 5,321 5,455
Other interest income 1,154 905 1,635
Realized (losses) gains on investments 164 (6,327) 1,969
Other income 843 2,673 4,697
--------------------------
- -
Total revenue 66,183 79,760 113,919
--------------------------
- -
Expenses:
Property and casualty:
Losses and loss adjustment expenses 12,921 33,408 58,285
Policy acquisition costs 3,794 5,538 17,628
Credit life benefits 545 770 1,374
Interest expense 308 321 2,527
Other operating costs and expenses 47,465 58,768 49,116
-------------------
- -------
Total expenses 65,033 98,805 128,930
--------------------
- -------
Income (loss) before income taxes and
extraordinary item 1,150 (19,045) (15,011)
Provision (benefit) for income taxes (2) 29 ( 4,762)
----------------------------
Income (loss) before extraordinary item 1,152 (19,074) (10,249)
Extraordinary item - gain from extinguishment
of debt, net of income taxes - - 9,235
---------------------------
Net income (loss) $ 1,152 $ (19,074)$ (1,014)
==========================
Per share:
Income (loss) before extraordinary item $0.07 $(1.72) $ (1.37)
Extraordinary item - - 1.23
---------------------------
- -
Net income (loss) $0.07 $ (1.72) $ (0.14)
============================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<TABLE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Year
Ended December 31,
1995 1994
1993
(thousands of dollars)
---------------------------
- -
<S> <C> <C> <C>
Common stock outstanding:
Beginning of year $ 14,501 $ 7,501 $ 7,501
Stock issued in connection with rights
offering 2,217 - -
Stock issued to employee benefit plans 20 - -
Stock issued as non-employee
director compensation 35 - -
Stock issued in exchange for cancellation
of note payable - 7,000 -
--------------------------
- --
End of year $ 16,773 $ 14,501 $ 7,501
===========================
Additional paid-in capital:
Beginning of year $ 30,983 $ 27,983 $ 27,983
Stock issued in connection with rights
offering 3,104 - -
Stock issued to employee benefit plans (3) - -
Stock issued as non-employee
director compensation (4) - -
Stock issued in exchange for cancellation
of note payable - 3,000 -
--------------------------
- -
End of year $ 34,080 $ 30,983 $ 27,983
===========================
Unrealized gain (loss) on securities:
Beginning of year $ (2,615)$ 1,563 $ 866
Cumulative effect of change in accounting -
adoption of FASB 115 - 841 -
Change in unrealized gains on
securities 3,016 (5,019) 697
--------------------------
- ---
End of year $ 401 $ (2,615) $ 1,563
=============================
Accumulated deficit:
Beginning of year $(42,219) $(23,145) $(22,131)
Net income (loss) 1,152 (19,074) (1,014)
--------------------------
- --
End of year $(41,067) $(42,219) $(23,145)
============================
Total shareholders' equity $ 10,187 $ 650 $ 13,902
==========================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<TABLE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) In Cash And Temporary Cash Investments
Year Ended December
31,
1995 1994 1993
(thousands of
dollars)
-----------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,152 $(19,074) $ (1,014)
Adjustments to reconcile net loss to net --------------------------
cash used in operating activities:
Depreciation 925 739 638
Realized (gains) losses on investments (164) 6,327 (1,969)
Extraordinary gain from extinguishment of debt,
gross of income taxes - - (14,793)
Change in assets and liabilities:
Accrued investment income 112 278 354
Premium and agents' balances
receivable, net 6,023 690 13,292
Premium notes receivable - 11,120 (384)
Reinsurance recoverable on losses and
loss adjustment expenses 7,093 (8,943) 59,882
Prepaid reinsurance premiums -
ceded business 5,014 6,443 6,342
Deferred policy acquisition costs 606 2,943 11,943
Unpaid losses and loss adjustment
expenses (21,175) (26,837) (62,921)
Unearned premiums (10,164) (8,719) (46,071)
Balances due other insurance companies (6,681) (8,657) 2,118
Current income taxes payable 42 (571) 784
Funds held by reinsurers - 97 1,557
Outstanding drafts and bank overdraft (3,891) (3,336) (10,338)
Other - net (603) 2,892 (3,007)
---------------------------
- --
Total adjustments ( 22,863) (25,534) (42,573)
---------------------------
- --
Net cash used in operating activities ( 21,711) (44,608) (43,587)
---------------------------
- --
Cash flows from investing activities:
Proceeds from investments sold 10,804 143,609 63,794
Proceeds from investments matured 2,030 45 11,060
Cost of investments acquired (4,201) (88,041) (93,565)
Change in short-term investments - net 140 716 589
Proceeds from mortgage loan receivable
collected 1,965 - -
Proceeds from property and equipment sold 57 655 667
Purchases of property and equipment (92) (2,418) (42)
--------------------
- ---------
Net cash provided by (used in) investing
activities 10,703 54,566 (17,497)
--------------------
- ----------
Cash flows from financing activities:
Stock issued to employee benefit plans 18 - -
Proceeds from stock rights offering 5,321 - -
Proceeds from (repayment of) notes payable 2,000 (1,934) (219)
--------------------
- ---------
Net cash used in financing activities 7,339 (1,934) (219)
--------------------
- ---------
Net increase (decrease) in cash and temporary
cash investments (3,669) 8,024 (61,303)
Cash and temporary cash investments,
January 1 20,243 12,219 73,522
--------------------
- ---------
Cash and temporary cash investments,
December 31 $ 16,574 $ 20,243 $ 12,219
============================
Supplemental Cash Flow Information:
Interest paid $ 96 $ 210 $ 246
Income taxes paid (received) (44) 600 4
Noncash Investing Activities:
Notes payable exchanged for common stock $ - $ 10,000 $ -
Notes payable exchanged for accrued
interest 37 439 -
Extinguishment of debt through cancellation
of debt in exchange for new debt - - $ 14,794
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Operations, Principles of Consolidation and Presentation
The Seibels Bruce Group, Inc. (the "Company") is the parent company of South
Carolina Insurance Company ("SCIC") and Seibels Bruce and Company ("SBC").
SCIC and its property and casualty insurance subsidiaries provide servicing
carrier activities for several state and federal insurance facilities, and SBC
provides MGA services to an unrelated insurance company. Prior to mid 1995,
SCIC and its property and casualty subsidiaries also underwrote business for
its own account primarily in the auto physical damage, private passenger auto
liability and fire and allied lines in the Southeast.
For the fiscal years ended December 31, 1994 and 1993, the Company reported
significant operating losses and net cash used in operating activities. In
addition, the amended regulatory filings by the insurance subsidiaries at
December 31, 1994 indicated a consolidated statutory capital and surplus which
was substantially below the minimum required by the South Carolina Department of
Insurance.
During 1995, new management has taken measures to improve the Company's finan=
cial condition and results of operations including raising capital through 1) a
rights offering completed in January 1995 and 2) borrowing from the major
investor (See Note 5). The proceeds from both transactions were contributed to
SCIC as statutory surplus. Continued capital transactions that have closed sub-
sequent to December 31, 1995 include 1) in January 1996, a group of investors
acquired 6,250,000 shares of common stock, subject to certain approvals
(see Note 15 and 2) on March 29, 1996, a group of investors purchased 1,635,000
shares of common stock (see Note 15). Additional actions taken by management
include insurance suspension of retaining insurance risk on contracts written,
effective in the second quarter of 1995.
During the fiscal year ended December 31, 1995, the Company reported a reduction
in net cash used in operating activities. In addition, the regulatory filings
by SCIC at December 31, 1995 indicate that consolidated statutory capital and
surplus exceed the statutory minimums.
The Company has developed and begun implementation of a business and operating
plan which incorporates activities to produce siginificant cost reductions,
attract additional capital, and sell Consolidated American Insurance Company (a
dormant insurance subsidiary). The plan indicates a continuation of adequate
statutory capital and surplus.
The accompanying consolidated financial statements have been prepared in con-
formity 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 periods have been changed to conform to current classi-
fications.
Use of Estimates in the 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 con-
tingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates, although, in the opinion of man-
agement, such differences would not be significant.
Cash and Temporary Cash Investments
For purposes of the Statements of Cash Flows, the Company considers both cash
and temporary cash investments within the caption "Cash and temporary cash
investments" to be those highly liquid investments purchased with an initial
maturity of three months or less. At December 31, 1994, the Company had book
cash overdrafts of $3.9 million, which are classified as "other liabilities" in
the accompanying balance sheet. At December 31, 1995, the Compnay had no
book cash overdrafts.
Fair Value of Financial Instruments
The fair value of fixed maturities, equity securities, short-term investments,
mortgage loans on real estate, other long-term investments, cash and accrued
investment income was $55.0 million and $62.7 million at December 31, 1995
and 1994, respectively. The fair values of cash and short-term investments
approximate carrying value because of the short maturity of those instruments.
Fixed maturities and equity securities fair values were determined in accordance
with methods prescribed by the National Association of Insurance Commissioners,
which do not differ materially from nationally quoted market prices. The fair
value of certain municipal bonds is assumed to be equal to amortized cost where
no market quotations exist. The fair value of mortgage loans on real estate is
at net realizable value. Premium and agents' balances receivable are carried at
their historical costs which approximate fair value as a result of timely
evaluation of recoverability and allowance for uncollectible amounts.
The fair value of debt was $2.5 million and $0.4 million at December 31, 1995
and 1994, respectively. The fair value of debt is estimated to be its carrying
value based on the current rates offered for debt having the same or similar
terms, and remaining maturities.
Property and Casualty Premiums
Property and casualty premiums are reflected in income when earned as computed
on a monthly pro-rata method. Written premiums and earned premiums have been
reduced by reinsurance placed with other companies, including substantial
amounts related to business produced as a servicing carrier. A reconciliation
of direct to net premiums, on both a written and an earned basis is as follows
(See Note 12):
<TABLE>
1995 1994 1993
(thousands of dollars)
---------------------------------------------------------------
Written Earned Written Earned Written Earned
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $ 114,184 $ 122,912 $ 140,683 $ 146,481 $ 153,073 $ 196,386
Assumed 422 1,232 5,332 2,275 9,572 10,503
Ceded (108,560) (113,760) (131,478) (134,038) (145,216) (151,558)
-------------------------------------------------------------------
Net $ 6,046 $ 10,384 $ 14,537 $ 14,718 $ 17,429 $ 55,331
===================================================================
</TABLE>
The amounts of premiums pertaining to catastrophe reinsurance that were ceded
from earned premiums during 1995, 1994 and 1993 were $0.8 million, $1.7
million and $4.4 million, respectively.
Credit life premiums are reflected in income when earned as computed on a
monthly pro-rata method for level term premiums and on a sum-of-the-digits
method for decreasing term premiums.
Commission and Service Income
Commission and service income is predominantly derived from servicing carrier
activities. The commission income related to producing and underwriting the
business is recognized in the period in which the business is written.
Beginning in 1993, a portion of commission income is also derived from business
produced by the Company as a Managing General Agent. The Company receives
commissions for producing and underwriting the business as well as servicing
such business. These revenues are 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 are expensed. The Company has considered anticipated
investment income in determining premium deficiency.
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 formula and 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 adjustment expenses to paid losses.
(4) The deduction of estimated amounts recoverable from salvage and subro-
gation.
(5) Estimated losses as reported by ceding reinsurers.
Management, in conjunction with the Company's consulting actuaries, performs a
complete review of the above components of the Company's loss reserves to eval-
uate 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
Income (loss) per share is based on the weighted average number of shares
outstanding. Such weighted average outstanding shares are 16,722,107 in 1995
(11,067,565 in 1994 and 7,500,534 in 1993). Outstanding stock options and
warrants are common stock equivalents but have no dilutive effect on income
(loss) per share.
Allowance for Uncollectible Accounts
Allowance for uncollectible accounts for agents' balances receivable, other
receivables, and premium notes receivable were $70,000, $79,000, and $75,000 at
December 31, 1995 and $70,000, $151,000, and $245,000 at December 31, 1994,
respectively. There are no significant credit concentrations related to
premiums receivable, agents' balances, and premium notes receivable.
Property and Equipment
Property and equipment 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.
Other Interest Income and Other Income
Other interest income for 1993 includes $1.0 million on an excess of loss
reinsurance agreement which was commuted in 1993. Other interest income also
includes interest received on reinsurance balances withheld, agents' balances
receivable, and balances due from the South Carolina Reinsurance Facility.
Other income for 1995 includes a gain from the settlement of a case previously
in litigation. Other income for 1994 includes a $0.6 million gain on the sale
of a subsidiary. Other income for 1993 includes $0.7 million from the sale of
real estate.
Recent Accounting Pronouncements
On October 23, 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. SFAS No. 123 allows companies to retain the current approach set
forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," for recognizing stock-based compensation expense in the
basic financial statements. However, companies are encouraged to adopt a new
accounting method based on the estimated fair value of employee stock options.
Companies that do not follow the new fair value based method will be required to
provide expanded disclosures in the footnotes. SFAS No. 123 is effective for
fiscal years ended December 31, 1996, and the Company intends to provide such
information in expanded disclosures in the footnotes.
NOTE 2 INVESTMENTS
In May 1993, FASB issued Statement No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Statement No. 115 classifies securities into
three categories: held-to-maturity, trading and available-for-sale. The
Company's securities are classified as available-for-sale. Statement No. 115
requires available-for-sale securities to be reported at fair value and un-
realized gains and losses reported in a separate component of shareholders'
equity. The Company adopted Statement No. 115 effective January 1, 1994.
(a) Investments in fixed maturities, notes, preferred stocks and common stocks
are carried at market at December 31, 1995 and 1994. Short-term invest-
ments are carried at cost, which approximates market value.
(b) Unrealized gains and losses on marketable equity securities are credited or
charged directly to shareholders' equity. Realized gains and losses on
investments included in the results of operations are determined using the
"identified certificate" cost method. Realized gains (losses) and the
change in unrealized gains (losses) on investments are summarized as
follows:
<TABLE>
Fixed Equity
Maturities Securities Other Total
(thousands of dollars)
----------------------------------------
<S> <C> <C> <C> <C>
Realized
1995 $ 240 $ (76) $ - $ 164
1994 (7,019) 930 (238) (6,327)
1993 2,025 1 (57) 1,969
Change in unrealized
1995 $ 2,790 $ 237 $ (11) $ 3,016
1994 (3,222) (1,657) (140) (5,019)
1993 (14) 725 (14) 697
</TABLE>
Net amortization of bond discount and premium charged to income for the years
ended December 31, 1995, 1994 and 1993 are $3,000, $154,000 and $53,000,
respectively.
Unrealized gains and losses reflected in equity are as follows:
<TABLE>
1995 1994 1993
(thousands of dollars)
------------------------------
<S> <C> <C> <C>
Gross unrealized gains $ 577 $ 136 $ 1,716
Gross unrealized losses (176) (2,751) (153)
Net unrealized gains (losses)
before taxes 401 (2,615) 1,563
---------------------------
Net unrealized gain (loss) $ 401 $(2,615) $ 1,563
============================
</TABLE>
Proceeds from sales of investments in fixed maturities and related realized
gains and losses were as follows:
<TABLE>
1995 1994 1993
(thousands of dollars)
-------------------------------
<S> <C> <C> <C>
Proceeds from sales $ 10,556 $ 134,318 $ 63,669
Gross realized gains 267 498 2,039
Gross realized losses (27) (7,517) (14)
</TABLE>
Proceeds from sales of investments in equity securities and related realized
gains and losses were as follows:
<TABLE>
1995 1994 1993
(thousands of dollars)
--------------------------------
<S> <C> <C> <C>
Proceeds from sales $ 248 $ 9,291 $ 125
Gross realized gains - 1,555 1
Gross realized losses ( 76) (625) -
</TABLE>
(c) Investments which exceed 10% of shareholders' equity, excluding investments
in U.S. Government and government agencies and authorities, at December
31, 1995, are as follows:
Carrying Value
(thousands of dollars)
Corporate bonds:
IBM Credit Corp, 9.675%, Due 07/01/2008 $ 1,168
Short-term investments:
Cash Accumulation Trust - National Money Market Fund 6,365
First Union Bank - Repurchase Agreement Fund 3,538
There were no bonds which were non-income producing for the twelve months ended
December 31, 1995.
Fixed maturity investments with an amortized cost of $21.9 million at December
31, 1995 and 1994 were on deposit with regulatory authorities.
(d) The amortized cost and estimated market values of investments in fixed
maturities and equity securities by categories of securities are as follows:
<TABLE>
December 31, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------
(thousands of dollars)
<S> <C> <C> <C> <C>
U.S. Government and government
agencies and authorities $ 31,068 $ 348 $ - $ 31,416
States, municipalities and
political subdivisions 931 62 - 993
All other corporate 1,168 - - 1,168
Redeemable preferred stocks 4 - - 4
--------------------------------------------
Total fixed maturities 33,171 410 - 33,581
--------------------------------------------
Non-redeemable preferred stocks 166 - (7) 159
Common stocks 56 167 (5) 218
--------------------------------------------
Total equity securities 222 167 (12) 377
--------------------------------------------
Other long-term investments 198 - (164) 34
--------------------------------------------
Total $ 33,591 $ 577 $ (176) $ 33,992
===========================================
</TABLE>
<TABLE>
December 31, 1994
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------
(thousands of dollars)
<S> <C> <C> <C> <C>
U.S. Government and government
agencies and authorities $ 36,368 $ 2 $( 2,455) $ 33,915
States, municipalities and
political subdivisions 1,093 28 - 1,121
All other corporate 2,358 45 - 2,403
Mortgage-backed (government
guaranteed) securities 1,498 - - 1,498
Redeemable preferred stocks 4 - - 4
------------------------------------------
Total fixed maturities 41,321 75 (2,455) 38,941
------------------------------------------
Non-redeemable preferred stocks 281 - (66) 215
Common stocks 259 61 (77) 243
------------------------------------------
Total equity securities 540 61 (143) 458
------------------------------------------
Other long-term investments 199 - (153) 46
------------------------------------------
Total $ 42,060 $ 136 $ (2,751) $ 39,445
===========================================
</TABLE>
(e) Actual maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without penal-
ties. The amortized cost and estimated market value of fixed maturities
at December 31, by contractual maturity, are as follows:
<TABLE>
December 31,
1995
Estimated
Amortized
Market
Cost
Value
---------------
- -----
(thousands of
dollars)
<S> <C> <C>
Due in one year or less $ 3,098 $ 3,102
Due after one year through five years 16,324 16,436
Due after five years through ten years 12,252 12,520
Due after ten years 1,493 1,519
Redeemable preferred stocks 4 4
---------
- ---------
Total $33,171 $33,581
==================
</TABLE>
<TABLE>
(f) Investment income consists of the following:
1995 1994 1993
(thousands of
dollars)
-----------------------------
<S> <C> <C> <C>
Fixed maturities $ 2,023 $ 4,348 $ 4,323
Equity securities 15 266 96
Short-term investments 1,138 626 959
Mortgage loan 23 255 273
Other 42 - -
---------------------------
Total investment income 3,241 5,495 5,651
Investment expenses (65) (174) (196)
----------------------------
Net investment income $ 3,176 $ 5,321 $ 5,455
============================
</TABLE>
NOTE 3 PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
Description Life-years 1995 1994
(thousands of
dollars)
------------------
- ----
<S> <C> <C> <C>
Land - $ 1,153 $ 1,153
Buildings 10-40 4,323 4,585
Data processing equipment 3- 7 4,218 4,135
Furniture and equipment 3-10 7,387 7,507
------------------
- -
17,081
17,380
Accumulated depreciation (11,685) (11,110)
-------------------
- -
$ 5,396 $ 6,270
===================
</TABLE>
Depreciation expense charged to operations was $0.9 million in 1995 ($0.7
million in 1994 and $0.6 million in 1993).
NOTE 4 DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs incurred and amortized to income on property and
casualty business are as follows:
<TABLE>
1995 1994
(thousands of dollars)
----------------------
<S> <C> <C>
Deferred at beginning of year $ - $ 1,300
Costs incurred and deferred during year:
Commissions and brokerage 1,287 2,542
Taxes, licenses and fees 486 544
Other 1,415 1,152
-----------------
Total 3,188 4,238
-----------------
Amortization charged to income during year (3,188) (5,538)
-----------------
Deferred at end of year $ - $ -
===================
</TABLE>
Deferred policy acquisition costs attributable to the credit life operation were
$293,000 at December 31, 1995 and $899,000 at December 31, 1994. 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 NOTES PAYABLE
Notes payable at December 31, 1995 and 1994, are summarized as follows:
<TABLE>
1995 1994
(thousands of dollars)
----------------------
<S> <C> <C>
Note payable (Due 5/1/96, interest accrues
at a rate equal to NationsBank's Prime Rate
(8.5%) plus 2%, compounded daily) $ 2,000 $ -
Interest note payable, due 5/1/96,
interest at 8.5%, 476 439
---------------------
Notes payable $ 2,476 $ 439
=====================
</TABLE>
A major investor of the Company holds both notes. The $2 million note is
secured to the extent of outstanding principal by (i) a first lien and security
interest on all furniture, fixtures and equipment (current book value of $0.7
million) of SBC, and (ii) an assignment by SCIC, upon the sale of such real
property owned by it, of the excess of the net proceeds of that sale over book
value of such real property. The lien, security interest and assignment are
subject to the prior written approval of the South Carolina Department of
Insurance. Principal and accrued interest on the interest note payable is due
May 1, 1996 (See Note 15).
NOTE 6 INCOME TAXES
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
the provisions of the enacted tax laws.
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.
A reconciliation of the differences between income taxes (benefit) on income
(loss) before extraordinary items computed at the federal statutory income tax
rate and tax expense (benefit) from operations is as follows:
<TABLE>
1995 1994 1993
(thousands of dollars)
----------------------------
<S> <C> <C> <C>
Federal income tax (benefit),
at statutory rates $ 391 $(6,475) $(5,104)
Increase (decrease) in taxes due to:
Tax exempt interest (22) (92) (49)
Dividends received deduction (4) (82) (19)
"Fresh start" adjustment for loss reserve
discounting for tax purposes - - (251)
Limitation of net operating loss
carryforward due to change in control 18,007 - -
Changes in valuation allowance:
- Utilization of net operating loss (329) 6,695 777
- Reduction due to limitation of net
operating loss (18,007) - -
Other (38) (17) (116)
---------------------------
Tax expense (benefit) from operations $ (2) 29 $(4,762)
===========================
</TABLE>
The provision (benefit) for income taxes on loss from operations consists
entirely of current income taxes. The change in deferred amounts has been
offset by the valuation allowance.
Deferred tax liabilities and assets at December 31, 1995 and 1994, are
comprised of the following:
<TABLE>
1995 1994
Tax Effect Tax Effect
(thousands of dollars)
-------------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred acquisition costs $ 146 $ 302
Property and equipment 95 99
Net unrealized investment gains 136 -
Other - 38
-----------------------
Total deferred tax liabilities 377 439
-----------------------
Deferred tax assets:
Net operating loss carryforwards (15,300) (32,062)
Insurance reserves (4,115) (4,963)
Net unrealized investment losses - (837)
Bad debts (449) (718)
Other (376) (948)
-----------------------
Total deferred tax assets (20,240) (39,528)
-----------------------
Valuation allowance 19,863 39,089
-----------------------
Net deferred tax liabilities $ - $ -
=======================
</TABLE>
The Company has determined, based on its recent earnings history, that a
valuation allowance of $19.9 million should be established against the
deferred tax asset at December 31, 1995. The Company's valuation allowance
decreased by $19.2 million during 1995 due to utilization of net operating loss,
reduction due to limitation of net operating loss and due to unrealized
investment gains.
The Company has unused tax net operating loss carryforwards and capital loss
carryforwards of $97.9 million for income tax purposes. However, due to a
"change in ownership" condition that occurred in 1995, the Company's use of
the net operating loss carryforwards are subject to limitation in future years
to an amount estimated to be in the range of approximately $2.5 million to $3.0
million per year. If not utilized against taxable income in future years, the
tax carryforwards will expire as follows:
<TABLE>
Year of Expiration Net Operating Loss Capital Loss
thousands of dollars)
-------------------------------------
<S> <C> <C>
1999 $ - $ 5,002
2000 - 825
2004 15,971 -
2006 20,411 -
2007 31,931 -
2009 19,342 -
2010 4,480 -
-----------------------
$ 92,135 $5,827
=======================
</TABLE>
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 environ-
mental, pollution and toxic tort claims. The majority of 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,
and any future liability on them is limited to 50% of the loss. Reimbursement
of the Company's 50% does not begin until the other company pays out a post
June 7, 1994 total of $20 million. The settlement also has policyholder
surplus safeguards inuring to the benefit of the Company built in to it.
Future obligations, if any, are not likely to become payable for several years.
Management has evaluated the estimated ultimate liability of this business and
has concluded that the future development of the losses subject to this
settlement should not have a material impact on the Company.
The policies corresponding to the remaining claims were written on a direct
basis. The Company has 100% excess of loss reinsurance through 1980 of
$100,000, and $500,000 after that date. At December 31, 1995, the claims are
reserved as follows
<TABLE>
(thousands of dollars):
<S> <C>
Case reserves $ 2,229
IBNR reserves 8,675
LAE reserves 3,453
--------
Total $14,357
========
</TABLE>
The above claims involve 11 Superfund sites, 5 asbestos or toxic tort claims, 10
underground storage tanks and 59 miscellaneous clean-up sites.
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 the 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, and management can
reasonably estimate its liability. In addition, liabilities have been
established to cover additional exposures on both known and unasserted claims.
Estimates of the liabilities are reviewed and updated continually. The
potential development of losses is limited by policy limits.
For this direct business there are usually several different insurers partici-
pating 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.
For the direct retained and assumed reinsurance without LAE claim limits, the
Company is only one of a group of insurers. Each member of the group partici-
pates in the handling and monitoring of the claim and the group selects one
attorney to defend the case. Legal fees are prorated among the group based on
each member's number of years of coverage. For assumed reinsurance with LAE
limits, claims represent upper level excess policies assumed from the London
market. As such, the primary insurers handle claim settlements and the Company
pays its portion of the claim and LAE, up to its retention amounts, based on the
settlement amounts determined by the primary insurers.
Because only 85 claims remain open as of December 31, 1995, 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.
Losses are recognized as incurred and as estimated by the procedure previously
described. Losses and LAE incurred have been reduced by recoveries made and to
be made from reinsurers, which also includes substantial amounts related to
business produced as a servicing carrier, as follows:
<TABLE>
1995 1994 1993
(thousands of dollars)
----------------------------
<S> <C> <C> <C>
Losses incurred $150,339 $145,930 $147,307
Loss adjustment expenses 5,379 19,429 15,954
---------------------------
$155,718 $ 165,359 $163,261
===========================
</TABLE>
The following table summarizes net property and casualty losses and LAE
incurred:
<TABLE>
1995 1994 1993
(thousands of dollars)
-----------------------------
<S> <C> <C> <C>
Estimated losses and LAE incurred $ 168,639 $202,053 $221,546
Estimated reinsurance loss recoveries
on incurred losses (155,718) (165,359) (163,261)
NCCI commutation (1) - (6,138) -
American Star commutation (2) - 2,852 -
-----------------------------
$ 12,921 $ 33,408 $ 58,285
==============================
</TABLE>
(1) Until March 31, 1994, the Company participated in the National Workers'
Compensation Reinsurance Pool ("NCCI"), which is a national reinsurance fund for
policies allocated to insurers under various states' workers' compensation
assigned risk laws for companies that cannot otherwise obtain coverage. On
September 30, 1994, the Company satisfied its obligation with respect to all
outstanding and future claims associated with the Company's participation for a
cash payment of $16.2 million. The redundancy in the losses and claim reserves,
as a result of its settlement, of $6.1 million reduced 1994 loss and LAE
incurred.
(2) In June, 1994, the Company made a cash payment in the amount of $10.3
million for a settlement of pending arbitration relating to indemnification of
American Star for certain loss and LAE reserves. Recorded reserves amounted to
$7.4 million before the settlement. This transaction increased loss and LAE
incurred by $2.9 million.
Activity in the liability for unpaid losses and LAE is summarized as follows:
<TABLE>
1995 1994 1993
(thousands of dollars)
-----------------------------
<S> <C> <C> <C>
Liability for losses and LAE at
beginning of year:
Gross liability per balance sheet $ 166,698 $ 194,682 $ 257,603
Ceded reinsurance recoverable (88,731) (76,221) (140,969)
-------------------------------
Net liability 77,967 118,461 116,634
-------------------------------
Provision for losses and LAE for
claims occurring in the current year 9,546 16,451 47,776
Increase in estimated losses and LAE
for claims occurring in prior years 3,375 16,957 10,509
-------------------------------
12,921 33,408 58,285
Losses and LAE payments for claims
occurring during:
Current year 7,014 10,291 26,499
Prior years 22,843 63,611 29,959
29,857 73,902 56,458
Liability for losses and LAE at end of year:
Net liability 61,031 77,967 118,461
Ceded reinsurance recoverable 84,492 88,731 76,221
------------------------------
Gross liability per balance sheet $ 145,523 $ 166,698 $ 194,682
===============================
</TABLE>
Changes in estimates for the claims incurred in prior years increased the
provision for losses and LAE (net reinsurance recoveries) by $3.4 million
in 1995, $17.0 million in 1994, and $10.5 million in 1993. In each year, the
principal cause for the changes in estimates related to environmental and
construction defect claims incurred during 1982 through 1985. Both the
severity of the claims and the number of late reported claims were much
greater than originally estimated. During 1994, an additional amount was
added to the estimates of losses for workers compensation claims incurred
in 1993 and prior, principally in Florida. Also in 1994, the increase
in estimated losses was offset partially by a settlement of all outstanding
claims through the National Workers' Compensation Pool at $6.1 million less
than the estimates at the beginning of that year. During 1993, the increase
in estimated losses included $2.9 million of upward revisions in the estimated
losses for business the Company was required to accept through various
mandated pools and associations.
NOTE 8 DIVIDEND RESTRICTIONS
The ability of SBIG to declare and pay cash dividends, as well as to pay any
debt service, is dependent upon the ability of SCIC to declare and pay dividends
to SBIG. SCIC is regulated as to its payment of dividends by the South Carolina
Insurance Holding Company Regulatory Act (the "Act").
The Act provides that, without prior approval of the South Carolina Insurance
Commissioner, dividends within any twelve-month period may not exceed the
greater of (i) 10% of SCIC's surplus as regards policyholders as of
December 31 of the prior year or (ii) SCIC's statutory net income, not
including realized gains, for the prior calendar year. Notwithstanding the
foregoing, SCIC may not pay any dividend without the prior approval of the
Insurance Commissioner of the State of South Carolina.
NOTE 9 STATUTORY REPORTING
The Company's insurance subsidiaries' assets, liabilities and results of oper-
ations have been reported on the basis of GAAP, which varies from statutory
accounting practices ("SAP") prescribed or permitted by insurance regulatory
authorities. The principal differences between SAP and GAAP, are that under
SAP: (i) certain assets that are not admitted assets are eliminated from the
balance sheet; (ii) acquisition costs for policies are expensed as incurred,
while they are deferred and amortized over the estimated life of the policies
under GAAP; (iii) no provision is made for deferred income taxes; (iv) the
timing of establishing certain reserves is different than under GAAP; and (v)
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 policy-
holders" in property and casualty reporting).
A reconciliation between GAAP net income (loss) and statutory net income
(loss) ofthe property and casualty insurance subsidiaries is as follows:
<TABLE>
Year Ended December 31,
1995 1994 1993
(thousands of dollars)
------------------------------
<S> <C> <C> <C>
GAAP income (loss) before extraordinary item $ 1,152 $ (19,074)$ (10,249)
Increase (decrease) due to:
Deferred policy acquisition costs 606 2,943 11,942
Salvage/subrogation recoverable and reserves (41) 1,225 677
Deferred reinsurance benefits - (155) (1,324)
Timing difference on contingency accrual - - 2,424
Parent Company GAAP-only items and other
non-statutory subsidiaries 1,820 181 1,377
Mortgage loan loss recognition (987) - -
Intercompany dividends - 2,500 -
Intercompany dividend offset by
increase in statutory surplus (13,202) - -
Adjustments to premium and loss reserves (255) (1,833) -
Other 99 606 (154)
---------------------------
Statutory net income (loss)-(1994 as amended) (10,808) (13,607) 4,693
Allocation of SBC expenses (1,574) - -
---------------------------
Statutory net income (loss)-(1995 as adjusted) $(12,382) $ (13,607) $ 4,693
===========================
</TABLE>
The 1995 statutory net loss includes the dividend of one of SCIC's subsidiaries
to its parent company. The $13.2 million loss is directly offset by an increase
in statutory surplus for the change in the unrealized gain from the investment
in the company. Additionally, the 1995 reported statutory net loss does not
include an error in allocation of expenses of $1.6 million between SCIC and
SBC. While this error has no effect on GAAP results, SCIC's net statutory
loss is understated by this amount, and statutory surplus is overstated by
this amount.
A reconciliation between GAAP shareholders' equity and statutory capital and
surplus is as follows:
<TABLE>
Year Ended December 31,
1995 1994 1993
(thousands of dollars)
-------------------------------
<S> <C> <C> <C>
GAAP shareholders' equity $ 10,187 $ 650 $ 13,902
Increase (decrease) due to:
Deferred policy acquisition costs (293) (899) (3,842)
Parent company capital less than contribution
to statutory surplus 2,400 - 10,000
Non-statutory companies' shareholders'
equity 1,436 - -
Adjustments to premiums and loss reserves (554) (1874) -
Other (2,301) 508 (2,708)
------------------------------
Statutory surplus (1994 as amended) 10,875 (1,615) 17,352
Allocation of SBC expenses (1,574) - -
-------------------------------
Statutory surplus (1995 as adjusted) $ 9,301 $(1,615) $ 17,352
===============================
</TABLE>
Net income and shareholders' equity of the credit life insurance subsidiary as
determined in accordance with statutory accounting practices are as follows:
<TABLE>
Year Ended December 31,
1995 1994 1993
(thousands of dollars)
----------------------------------
<S> <C> <C> <C>
Net income $ 276 $ 750 $ 467
Shareholders' equity ("surplus as
regards policyholders") $ 4,334 $ 4,036 $ 6,311
</TABLE>
NOTE 10 BENEFIT PLANS
(a) The Seibels Bruce & Company Employees' Profit Sharing and Savings Plan
contains both profit-sharing and 401(k) plan elements.
The profit-sharing element of the plan covers all full-time employees. There
were no contributions to this element of the plan during the last three years.
The profit-sharing account currently holds 214,587 shares of SBIG stock.
Under the 401(k) element of the plan, employees may elect to have a portion of
their salary withheld on a pre-tax basis for investment in the plan, subject to
limitations imposed by IRS regulations. From January 1, 1993 through June 30,
1994, the employer matched 25% of the employee contributions, limited to a
maximum of 1.5% of the employee's eligible compensation. From July 1, 1994
through June 30, 1995, the employer resumed matching 50% of the employee con-
tributions, limited to a maximum of 3% of the employee's eligible compensation.
The employer discontinued matching effective July 1, 1995. The employer matched
portion is invested in accordance with the investment options selected by the
participant. The employer contribution to the plan on behalf of participating
employees was $87,000 in 1995 ($270,000 in 1994 and $82,000 in 1993).
(b) The Company currently has three plans under which SBIG stock options,
incentive stock and restricted stock may be granted to employees of the Company,
non-employee directors of the Company, consultants and active independent agents
representing the Company. All three plans and grants made under the plans are
subject to shareholder approval at the 1996 annual shareholders' meeting.
The 1996 Stock Option Plan (the "1996 Plan") for Employees supersedes the 1987
Stock Option Plan (the "1987 Plan") and became effective November 1, 1995,
subject to shareholder approval. The 1996 Plan reserves 5 million shares of
Company stock which may be issued as stock options, incentive stock and re-
stricted stock to employees and consultants to the Company. The following
table shows stock option activity under the 1987 and 1996 plans for the three
years ended December 31, 1995. There were no grants of incentive stock
or restricted stock under the 1996 Plan during 1995. The activity with a "*"
denoted indicates grants under the 1996 plan pending shareholder approval.
<TABLE>
1995 1994 1993
<S> <C> <C> <C>
Shares under options outstanding at
beginning of year 51,150 64,175 150,950
Granted under 1987 Plan 300,000 - -
Granted under 1996 Plan* 555,000 - -
Exercised during year (20,000) - -
Canceled or expired during year (24,975) (13,025) (86,775)
------------------------------
Shares under options outstanding at
end of year 861,175 51,150 64,175
------------------------------
Shares exercisable, end of year 561,175 51,150 64,175
==============================
</TABLE>
The range of option prices for options outstanding and exercisable at the end of
1995 is $0.8125 - $11.25. All grants made under the Plans have exercise
prices no lower than the market price at the date of grant. At December 31,
1995, 4,118,825 shares of the Company's stock have been reserved for future
grant, pending shareholder approval at the annual meeting in 1996.
The 1995 Stock Option Plan for Non-employee Directors became effective June 15,
1995, subject to shareholder approval at the 1996 annual shareholders' meeting.
Under the plan, all non-employee directors will be automatically granted
5,000 options to purchase SBIG stock on an annual basis every June 15th. The
exercise price will be the market value on the date of grant. On June 15,
1995, 35,000 options were granted at an exercise price of $0.875 which will
become exercisable upon shareholder approval.
The 1995 Stock Option Plan for Independent Agents became effective December 21,
1995, subject to shareholder approval at the 1996 annual shareholders' meeting.
There was no activity under this plan during 1995.
(c) The Company and its subsidiaries currently provide certain health care and
life insurance benefits for retired employees. The projected future cost of
providing postretirement benefits, such as health care and life insurance, is
being recognized as an expense as employees render service. The cumulative
effect accruing said expenses versus expensing the benefits when paid is being
recorded as a charge against income on a prospective basis as part of the
future annual benefit cost.
The postretirement benefit expense was approximately $79,000 in 1995, $91,000 in
1994, and $91,000 in 1993.
The following table presents the reconciliation of the funded status at
December 31, 1995 and 1994:
<TABLE>
1995 1994
(thousands of dollars)
------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Active employees $ (71) $ (58)
Current retirees (522) (540)
------ ------
Total (593) (598)
Fair value of assets - -
------ ------
Accumulated postretirement benefit obligation
in excess of fair value of assets (593) (598)
Unrecognized transition obligation 593 628
Unrecognized net loss (gain) (102) (116)
------ -------
Accrued postretirement benefit cost $ (102) $ (86)
====== =======
</TABLE>
Net periodic postretirement benefit cost includes the following components
for 1995 and 1994:
<TABLE>
1995 1994
(thousands of dollars)
----------------------
<S> <C> <C>
Service cost $ 4 $ 4
Interest cost 43 52
Amortization of transition obligation 35 35
Amortization of net gains (3) -
----- -----
Net periodic postretirement benefit $ 79 $ 91
===== =====
</TABLE>
The weighted average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) was 9% for 1995; 12% for
1994 and 1993 and is assumed to decrease to a 5.5% ultimate trend (7% in 1994
and 1993) with a duration to ultimate trend of 6 years (9 years in 1994 and
1993). The health care cost trend rate assumption has a significant effect on
the amounts reported. For example, increasing the assumed health care cost
trend rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1995 by $11,000.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% for 1995 and 7.5% at December 31,
1994 and 1993.
NOTE 11 COMPANY'S OPERATIONS IN DIFFERENT BUSINESS SEGMENTS
The Company's business has changed significantly in recent years. Operating
losses were experienced for several consecutive years as a consequence of un-
favorable underwriting experience. In particular, the wind losses of Hurricanes
Hugo in 1989 and Andrew in 1992, as well as loss reserve development from en-
vironmental and construction defect exposures on the West Coast depleted the
capital base of the Company and hindered its ability to write and retain
business. The Company ceased to underwrite commercial lines of insurance in
the second quarter of 1993, then voluntarily suspended underwriting personal
lines of insurance in the second quarter of 1995.
New management was put in place in mid-1995, and a transitional operating plan
was generated to change the core operations from those of a risk taker to acti-
vities which generate fee income. These activities were designed to stabilize
the financial condition of the Company. During the last three quarters of 1995,
the Company operated profitably. Although there can be no certainty of
successful operations, the Company anticipates that continued favorable results
will permit the re-entry into risk business during mid-1996. When the Company
resumes underwriting insurance risks to be retained, it will be on a more
modest volume than in the past, and will generally focus on the personal lines
that have less exposure to long periods of time between earning the premiums
and determining the ultimate development of losses.
The Company acts as a servicing carrier for certain state and federal insurance
facilities on a commission basis. The Company is also engaged in the under-
writing of property and casualty insurance through its subsidiary property
and casualty insurance group.
Effective January 1, 1995, Forest Lake Travel Service (FLT), a subsidiary travel
agency, was sold. FLT's pre-tax income was $95,000 in 1994 and $420,000 in
1993.
In the third quarter of 1993, Investors National Life Insurance Company, the
Company's credit life and credit accident and health insurance subsidiary,
transferred all of its assets, other than bonds pledged to various state
insurance departments, and all of its liabilities to Investors National Life
Insurance Company of South Carolina. Immediately following, all of the out-
standing stock of Investors National Life Insurance Company was sold. The
runoff of the business was assumed by Investors National Life Insurance Company
of South Carolina. The pretax income (loss) of Investors National Life Insur-
ance Company of South Carolina was $4,000, $(677,000) and $44,000 in 1995, 1994
and 1993, respectively.
Premium Service Corporation of Columbia ("PSC") provides insurance premium fin-
ancing services through independent agents. Pretax income of Premium Service
was $470,000 in 1993. In February, 1994, substantially all of the assets of PSC
were sold, and a new company, Policy Finance Company, ("PFC") was formed to
handle the administration of the assets retained. The pre-tax income of PFC was
$74,000 in 1995 and $538,000 in 1994. The Company has no plans to continue its
own premium financing activity.
The following sets forth certain information with respect to the Company's
operations in different business segments:
<TABLE>
Year Ended December 31,
1995 1994 1993
(thousands of dollars)
<S> <C> <C> <C>
Revenue:
Property and casualty insurance segments $ 10,384 $ 14,718 $ 55,331
Commission and service activities segment 49,572 60,669 41,625
Net investment income and other
interest income 4,038 5,690 6,578
Realized gains (losses) on investments 150 (5,793) 1,965
---------------------------
Total for property and casualty
insurance segments 64,144 75,284 105,499
Other business segments 2,039 4,476 8,420
----------------------------
Total revenue $ 66,183 $ 79,760 $113,919
===========================
</TABLE>
<TABLE>
Year Ended December 31,
1995 1994 1993
(thousands of dollars)
<S> <C> <C> <C>
Operating profit (loss):
Property and casualty insurance segments $(6,719) $(27,840) $(24,424)
Commission and service activities segment 5,641 10,109 4,321
Net investment income 4,038 5,690 6,578
Realized gains (losses) on investments 150 (5,793) 1,965
---------------------------
Subtotal 3,110 (17,834) (11,560)
Other business segments (47) 141 1,863
----------------------------
Operating income (loss) 3,063 (17,693) (9,697)
General corporate expenses, net of
miscellaneous income and expense (1,605) (1,031) (2,787)
Interest expense (308) (321) (2,527)
-----------------------------
Consolidated income (loss) before income taxes $ 1,150 $(19,045) $(15,011)
============================
</TABLE>
Operating income (loss) represents revenue less related operating expenses. Net
investment income is that related to, but not individually identifiable with,
the various property and casualty insurance underwriting and commission and
service activities business segments.
Identifiable assets by business segment or combined segments represent assets
directly identified with those operations and an allocable share of jointly used
assets.
<TABLE>
December 31,
1995 1994 1993
(thousands of dollars)
<S> <C> <C> <C>
Identifiable Assets
Property and casualty insurance underwriting
segment, including related investment
activity $ 82,493 $ 117,761 $ 182,067
Commission and service activities segment 134,598 127,628 115,006
Other business segments 5,697 8,449 26,250
General corporate assets 1,217 2,097 1,372
------------------------------
Total assets $ 224,005 $ 255,935 $ 324,695
==============================
</TABLE>
In 1995, depreciation and amortization charges for the various property and
casualty insurance underwriting and commission and service activities segments,
combined, were $0.9 million ($0.8 million in 1994 and $0.4 million in 1993).
These amounts exclude policy acquisition costs of $3.2 million in 1995, ($5.5
million in 1994 and $17.6 million in 1993).
Costs of additions to property and equipment for the property and casualty
insurance underwriting and commission and service activities segments, combined,
amounted to $0.1 million, $2.4 million and $41,000 in 1995, 1994 and 1993,
respectively. The majority of the additions in 1994 were due to purchases made
to begin the conversion to bring the Company's data processing in-house.
NOTE 12 REINSURANCE
(a) The Company's property and casualty insurance subsidiaries are involved in
several types of reinsurance arrangements. Ceding reinsurance programs include
quota share, pro-rata surplus and excess of loss. In its servicing carrier
operations, premiums are ceded entirely to the applicable state's reinsurance
facility.
(b) 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; consequently, allowances are established for amounts
deemed uncollectible. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar geo-
graphic regions, activities, or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvency. Rein-
suring companies are obligated for the following amounts for unearned premiums,
unpaid losses and LAE, and paid losses and LAE:
<TABLE>
1995 1994
(thousands of dollars)
<S> <C> <C>
Unearned premiums $ 43,469 $ 48,483
Unpaid losses and LAE $ 84,492 $ 88,731
Paid losses and LAE $ 27,423 $ 30,277
</TABLE>
Reinsurance recoverable on paid and unpaid losses and LAE and prepaid rein-
surance at December 31, 1995, reflecting the five largest balances with rein-
surers, were:
<TABLE>
Reinsurance Prepaid
Reinsurer Recoverable Reinsurance
(thousands of dollars)
<S> <C> <C>
South Carolina Reinsurance Facility $ 70,026 $ 20,608
National Flood Program 25,178 18,989
North Carolina Reinsurance Facility 7,711 1,436
Swiss Reinsurance Corp. 5,682 327
Kentucky Insurance Placement Facility 1,437 2,109
All Others 1,881 -
----------------------
Total $111,915 $ 43,469
=====================
</TABLE>
The Company believes these balances from the various facilities are fully
collectible due to the governmental agency's ability to assess member companies
for deficiencies. The remaining recoverables due from nonaffiliated reinsurance
companies have also been deemed fully collectible by the Company.
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 13 COMMITMENTS AND CONTINGENCIES
(a) A contingent liability exists with respect to reinsurance placed with other
companies. (See Note 12.)
(b) Due to the nature of their business, certain subsidiaries are parties to
various other legal proceedings, which are considered routine litigation inci-
dental to the insurance business.
(c) The 1994 results include a settlement of a dispute which was in pending
arbitration. The settlement agreement resolved all issues arising from an
indemnification dispute as well as a commutation of the Company's associated
reinsurance obligation. Under the settlement, the Company paid $10.3 million to
the other party and such party agrees to pay up to $20 million in direct losses
on all subsequent subject claims. Any loss payments in excess of $20 million
will be shared equally between the parties net of any reinsurance collections.
The Company will only share in those payments to the extent of 50% of its in-
surance company's consolidated statutory surplus above $20 million, exclusive of
direct contributions to capital. At December 31, 1995, the other party reported
payments of $2.7 million and additional liabilities of $18.4 million, net of
reinsurance. The Company has evaluated the estimated ultimate liability of
this business and has concluded that the development of this settlement should
not have a material impact on the Company.
NOTE 14 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 provides data
processing services to the Company. The term of this contract expires June 30,
1996. The Company paid data processing charges of $1.8 million in 1995 ($3.4
million in 1994 and $6.1 million in 1993). The amount payable to PMSC at
year-end was $112,000 at 1995 and $203,000 at 1994.
Another non-employee Director of the Company was an employee of Prudential
Securities, Inc. ("PSI") through mid-1995. From 1994 through mid 1995, PSI
acted as investment manager for the Company and for its retirement plan. The
amount of fees paid directly to PSI during 1995 was not material, but the amount
earned by PSI on trading activity by the Company cannot readily be determined.
The Director is no longer an employee of PSI, and PSI's services have since been
terminated.
NOTE 15 SUBSEQUENT EVENTS
During the first quarter of 1996, the Company issued 6,250,000 shares of auth-
orized but unissued shares to several related investors. The proceeds of the
sale were deposited into escrow pending shareholder approval of the transaction
and the approval of the South Carolina Department of Insurance to write new
risk-taking business. In addition, shareholders are being asked to approve the
voting of the stock since South Carolina law requires such approval for interest
in excess of 20% of the voting rights. In conjunction with the sale of common
stock, the Company also has issued stock options to acquire an additional
3,125,000 shares at the higher of $1.50 per share or book value at December 31,
1998 and 3,125,000 shares at the higher of $2.00 or book value at December 31,
2000.
During the first quarter of 1996, the Company entered into a contract to sell
Consolidated American Insurance Company, an inactive insurance company subsid-
iary. The sale will generate a gain of approximately $0.9 million in 1996.
Also during the first quarter of 1996, the Company issued 1,635,000 shares of
authorized but unissued shares to a different group of investors. The proceeds
of this stock sale will be available to liquidate the notes payable that are
due May 1, 1996 (See Note 5). In addition, subject to shareholder approval of
increasing the number of authorized shares, the Company has issued to this group
stock options expiring December 31, 2000 to acquire an additional 1,635,000
shares at the higher of $2.50 per share or book value at the date of exercise.
SUPPLEMENTARY DATA
QUARTERLY FINANCIAL INFORMATION (unaudited)
(Thousands of dollars, except per share amounts)
The following is a summary of unaudited quarterly information for the years
ended December 31, 1995 and 1994:
<TABLE>
1995 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Property and casualty premiums earned $3,307 $ 2,206 $ 2,997 $ 1,874
Credit life premiums 194 221 197 278
Commission and service income 13,023 12,529 12,484 11,536
Net investment income and other
interest income 1,174 1,177 1,137 842
Realized gains (losses) on investments 65 (29) - 128
Net income (loss) $(2,009) $ 250 $ 1,284 $ 1,627
Per share $(0.13) $ 0.01 $ 0.08 $ 0.11
</TABLE>
Property and casualty premiums earned continue to decrease as a result of the
Company suspending writing of retained "risk" business. However, losses
incurred on this business have stabilized due to the adequacy of reserves. The
net loss in the first quarter is due to management setting aside additional
reserves for future development. The negative effect on net income due to this
runoff business in the remaining quarters has been insignificant. Additionally,
while the Company's commission and service income has decreased due to lower
commission rates and volume, ongoing cost reductions have mitigated the effect
to net income.
<TABLE>
1994
<S> <C> <C> <C> <C>
Property and casualty premiums earned $ 5,228 $ 3,186 $ 3,488 $ 2,816
Credit life premiums 556 466 830 (51)
Commission and service income 15,875 16,630 16,512 11,652
Net investment income and other
interest income 1,757 1,862 1,960 647
Realized gains (losses) on investments 1,842 (612) (3,405) (4,152)
Net income (loss) $ 219 $ 561 $ 3,271 $(23,125)
Per share $ 0.03 $ 0.07 $ 0.23 $ (1.59)
</TABLE>
The third quarter was affected by a $6.1 million reserve redundancy in
connection with a commutation and $3.4 million in realized investment losses.
The fourth quarter results include a reserve strengthening charge of $9.0
million in loss and loss adjustment expense reserves in addition to already
recorded fourth quarter incurred losses and LAE of $10.4 million, a $2 million
decrease, compared to prior quarters, in commission and service income and
$4.1 million in realized investment losses.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Inapplicable.
The Seibels Bruce Group, Inc.
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Directors
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William M. Barilka
Albert H. Cox, Jr.
Ernst N. Csiszar
William B. Danzell
Claude E. McCain
Kenneth W. Pavia
John P. Seibels
George R.P. Walker, Jr.
John A. Weitzel
John C. West
Officers
- --------
John C. West Chairman of the Board
George R.P. Walker, Jr. Vice Chairman of the Board
Ernst N. Csiszar President
John A. Weitzel Chief Financial Officer
Michael A. Culbertson Senior Vice President
Priscilla A. Brooks Vice President and Corporate Secretary
Mary M. Gardner Vice President and Treasurer
W.W. Shealy Assistant Corporate Secretary and
Assistant Treasurer
The Seibels Bruce Group, Inc.
Post Office Box One
Columbia, South Carolina 29202
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports dated March 29, 1996,
included in The Seibels Bruce Group, Inc.'s Annual Report (Form 10-K/A-1) for
the year ended December 31, 1995 and to all references to our firm included in
this registration statement.
ARTHUR ANDERSON, LLP
Columbia, South Carolina
October 10, 1996
