<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 6, 1997
REGISTRATION NO. 333-24081
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE SEIBELS BRUCE GROUP, INC.
(Exact Name of registrant as Specified in Charter)
<TABLE>
<S> <C>
SOUTH CAROLINA 57-0672136
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
</TABLE>
------------------------
1501 Lady Street
Columbia, SC 29201
(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
Columbia, SC 29201
(803) 748-2000
(Name, address, including zip code, and telephone number, including area code of
agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
Alan J. Prince, Esq. Matt P. McClure, Esq. Lars Bang-Jensen, Esq.
KING & SPALDING THE SEIBELS BRUCE LEBOEUF, LAMB, GREENE &
191 Peachtree Street GROUP, INC. MACRAE, L.L.P.
Atlanta, Georgia 1501 Lady Street 125 West 55th Street
30303 Columbia, SC 29201 New York, New York 10019-5389
(404) 572-4600 (803) 748-2000 (212) 424-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of the 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. / /
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. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- --------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- --------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. 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.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 6, 1997
2,853,089 SHARES
[LOGO]
COMMON STOCK
------------------
Of the 2,853,089 shares of Common Stock, $1.00 par value (the "Common
Stock"), of The Seibels Bruce Group, Inc., a South Carolina corporation (the
"Company" or "SBIG"), offered for sale hereby (the "Offering"), 1,853,089 shares
are being offered by a certain shareholder (the "Selling Shareholder") and
1,000,000 shares are being offered by the Company. The Company will not receive
any of the proceeds from the sale of the shares of Common Stock by the Selling
Shareholder.
The Common Stock is currently traded on The Nasdaq Stock Market under the
symbol "SBIG". The reported closing price of the Common Stock as of June 3, 1997
was $7.25 per share. This closing price (and other share and per share
information herein) reflects a 1-for-4 reverse stock split of the Common Stock
which occurred on April 10, 1997. See "Market Price of Common Stock."
------------------------
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH IN
"RISK FACTORS" BEGINNING ON PAGE 8 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total(3)................... $ $ $ $
</TABLE>
(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of the Offering of approximately
$500,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
427,963 additional shares of Common Stock at the Price to Public less
Underwriting Discounts and Commissions solely to cover over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Shareholder will be $ , $ , $
and $ , respectively.
------------------------
The shares of Common Stock are offered severally by the Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by the
Underwriters. The Underwriters reserve the right to reject orders in whole or in
part and to withdraw, cancel or modify the Offering without notice. It is
expected that delivery of certificates representing the shares of Common Stock
will be made to the Underwriters on or about , 1997.
------------------------
ADVEST, INC. SCOTT & STRINGFELLOW, INC.
The date of this Prospectus is , 1997.
<PAGE>
DESCRIPTION OF CHART
Chart showing The Seibels Bruce Group, Inc. and certain principal
subsidiaries and their specific lines of business.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
FOR NORTH CAROLINA INVESTORS: These securities have not been approved or
disapproved by the Commissioner of Insurance for the State of North Carolina
(the "North Carolina Insurance Commissioner") nor has the North Carolina
Insurance Commissioner ruled upon the accuracy or adequacy of this prospectus.
STATE INSURANCE HOLDING COMPANY LAWS AND REGULATIONS APPLICABLE TO THE
COMPANY IN GENERAL PROVIDE THAT NO PERSON MAY ACQUIRE CONTROL OF THE COMPANY,
AND THUS INDIRECT CONTROL OF ITS INSURANCE SUBSIDIARIES, UNLESS SUCH ACQUISITION
IS APPROVED BY THE APPROPRIATE INSURANCE REGULATORY AUTHORITIES. GENERALLY, ANY
PERSON ACQUIRING BENEFICIAL OWNERSHIP OF 10% OR MORE OF THE COMMON STOCK WOULD
BE PRESUMED TO HAVE ACQUIRED SUCH CONTROL. SEE "BUSINESS--REGULATION."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE, OR INCORPORATED BY
REFERENCE, IN THIS PROSPECTUS. ALL FINANCIAL DATA FOR THE COMPANY ARE PRESENTED
ON THE BASIS OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") UNLESS
OTHERWISE STATED. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS
PROSPECTUS (OTHER THAN INFORMATION INCORPORATED BY REFERENCE) (I) ASSUMES THAT
THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED AND (II) REFLECTS
A 1-FOR-4 REVERSE STOCK SPLIT OF THE COMPANY'S COMMON STOCK WHICH OCCURRED ON
APRIL 10, 1997. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" OR "SBIG"
REFERS TO THE SEIBELS BRUCE GROUP, INC. AND ITS PREDECESSORS AND SUBSIDIARIES.
SEE "GLOSSARY OF SELECTED INSURANCE AND CERTAIN DEFINED TERMS" FOR THE
DEFINITION OF CERTAIN TERMS USED IN THIS PROSPECTUS. FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK,
SEE "RISK FACTORS."
THE COMPANY
The Seibels Bruce Group, Inc. provides automobile, flood and other property
and casualty insurance services and products through independent agents
primarily in the southeastern United States. The Company's largest source of
revenues derives from its role as one of three servicing carriers for the South
Carolina Reinsurance Facility (the "SC Facility"), a state-sponsored plan for
insuring South Carolina drivers outside of the voluntary market. The Company
also is a leading provider and an original participant in the National Flood
Insurance Program (the "NFIP"), which is underwritten by the federal government.
As a servicing carrier for the SC Facility and the NFIP, the Company receives
commissions and fees for issuing, processing and administering policies as well
as for claims adjustment, but reinsures all insurance risks with either the SC
Facility or the NFIP, as applicable. The Company provides other fee-based
services as a managing general agent ("MGA"), primarily for commercial lines,
and as an excess and surplus lines broker, and also offers storm claims
adjustment and liability run-off management services. Recently, the Company
began limited efforts to market and underwrite nonstandard automobile insurance
on a retained risk basis.
The SC Facility received approximately $452 million of private passenger
premiums for its fiscal year ended September 30, 1996, representing
approximately 35.3% of such premiums in the State of South Carolina. Throughout
its history, the SC Facility has operated at a deficit which has been funded by
additional fees assessed annually against all insured drivers in South Carolina.
Various efforts to reform the automobile insurance system in South Carolina by
means of regulatory rate increases or more comprehensive legislative
restructuring proposals have been initiated in recent years. The Company
anticipates that current reform efforts are likely to result in changes to the
South Carolina automobile insurance market that will cause the voluntary
withdrawal by insureds from the SC Facility. The Company seeks to take advantage
of the opportunity to market and sell automobile insurance products to these
insureds by capitalizing on its existing agent relationships, underwriting data
and experience with respect to the SC Facility and knowledge of the South
Carolina automobile insurance market. See "Risk Factors-- Anticipated Changes in
Automobile Insurance Business in South Carolina."
The Company has participated in the NFIP since the program's inception in
1983 and believes that it was one of the 10 largest NFIP servicing carriers for
the program's fiscal year ended September 30, 1996. NFIP servicing carriers
wrote approximately $1.2 billion of flood insurance premiums during the 1996
NFIP fiscal year. The NFIP had approximately 3.6 million flood insurance
policies in force as of September 30, 1996. The Company is licensed to sell
flood insurance in 43 states and markets its flood products through independent
agents.
The Company serves as a MGA in connection with commercial policies
underwritten by Generali-U.S. Branch ("Generali"), a member of one of the
largest international insurance groups. The Company sells and services certain
Generali commercial products, including commercial automobile insurance products
3
<PAGE>
and business owners insurance policies, in Georgia, Kentucky, North Carolina,
South Carolina and Tennessee. The Company receives a commission, and Generali
currently retains all of the underwriting risk. In addition, the Company acts as
a MGA or broker for certain excess and surplus lines; provides claims adjustment
and administrative services, including storm claims adjustment services for
various insurers and associations; and provides services to companies
running-off discontinued businesses.
The Company was established in 1869 in Columbia, South Carolina and grew to
become a leading property-casualty underwriter and managing general agent in the
southeastern United States. Through its former subsidiary, Policy Management
Systems Corporation ("PMSC"), the Company developed and marketed a computer
software system in the 1970s which is widely used by the insurance industry. The
Company sold its interest in PMSC to the public between 1981 and 1985 to absorb
significant losses in its insurance operations due primarily to environmental
and construction defect claims in California on general liability policies
written by the Company prior to 1985. Throughout the 1980s and early 1990s, the
Company continued to experience significant losses, which were attributable to
these general liability policies, poor experience on its workers' compensation
business and the effects of Hurricanes Hugo in 1989 and Andrew in 1992. These
operating losses reduced the Company's shareholders' equity to $650,000 by the
end of 1994 and prompted the Company to suspend its risk-bearing insurance
operations in early 1995.
In early 1995, the Company replaced its Chief Executive Officer and Chief
Financial Officer and began an ongoing effort to recruit additional management.
New management has taken a number of actions to stabilize and improve the
Company's financial condition through significant cost reductions, the raising
of new equity capital and a renewed emphasis on fee-based businesses. As a
result of these actions and the relative stabilization of its loss experience,
the Company was profitable in 1995 and 1996 and resumed limited insurance
underwriting activities in 1996. By December 31, 1996, shareholders' equity had
increased to $23.8 million. For the fiscal year ended December 31, 1996, the
Company's revenues were $57.2 million and net income was $5.2 million.
STRATEGY. The Company's objective is to increase its revenues and net
income by growing its business primarily in the southeastern United States. To
meet its objective, the Company intends to:
- develop its retained risk automobile insurance business by capitalizing on
the anticipated withdrawal of insureds from the SC Facility and on its
existing agent relationships and by developing retained risk business in
other markets;
- expand its flood insurance operations by expanding agent coverage
particularly in several high-volume markets, promoting its claims service
to agents, offering bundled flood insurance services and products and
providing agent incentives;
- enhance the profitability of its relationship with Generali by improving
loss ratios, reducing operating expenses and assuming a portion of the
insurance risk on the Generali commercial policies;
- increase its excess and surplus lines business and storm claims adjustment
service business by expanding the types of products available and
continuing to improve the quality of services provided to agents and
policyholders; and
- continue to reduce expenses and improve productivity through the upgrading
of management information systems and the continued implementation of an
in-house restructuring program to improve communication and work flow
between the Company's claims and underwriting staffs.
The Company's principal executive offices are located at 1501 Lady Street,
Columbia, South Carolina 29201, and its telephone number is (803) 748-2000.
4
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus Summary and under the captions "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this Prospectus constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include statements relating to
reform initiatives regarding the SC Facility and the potential voluntary
withdrawal of insureds from such facility, and the Company's strategy to
increase revenues and net income by, among other things, growing its various
lines of business, expanding into new markets, developing new products and
reducing expenses. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. See "Risk Factors."
THE OFFERING
<TABLE>
<S> <C>
Common Stock being offered by:
The Company................................ 1,000,000 shares
The Selling Shareholder.................... 1,853,089 shares
---------------------------------------------
Total shares offered..................... 2,853,089 shares
Common Stock outstanding after the Offering 7,253,238 shares
(1)........................................
Use of Proceeds.............................. The proceeds derived from the sale of shares
of Common Stock offered by the Company will
be retained for general corporate purposes,
including possible acquisitions. See
"--Recent Developments." The Company will
also contribute a portion of the proceeds to
one or more of its insurance company
subsidiaries for statutory surplus as neces-
sary to support insurance operations. The
Company will not receive any proceeds from
the sale of the shares of Common Stock
offered by the Selling Shareholder.
Nasdaq Stock Market Symbol................... SBIG
</TABLE>
- ------------------------
(1) Based upon shares outstanding on June 3, 1997. Does not include (i)
2,860,912 shares of Common Stock reserved for issuance upon the exercise of
stock options outstanding on such date and (ii) 40,186 shares of restricted
stock issued pursuant to the Company's stock plans. Of the outstanding
options, 803,250 have an exercise price of $6.00 per share and 1,967,662
have exercise prices of $8.00 or more per share.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- ---------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Commission and service income...... $ 35,943 $ 41,625 $ 60,669 $ 49,572(1) $ 45,585 $ 10,115 $ 10,964
Property and casualty premiums..... 117,172 55,331 14,718 10,384 7,186 2,999 2,309
Credit life premiums............... 4,247 3,207 1,801 890 478 125 14
Net investment income.............. 9,973 5,455 5,321 3,176 3,006 660 708
Other interest income.............. 2,987 1,635 905 1,154 801 118 297
Realized gains (losses) on
investments...................... 7,040 1,969 (6,327) 164 (14) 194 219
Other income....................... 4,019 4,697 2,673 843 151 23 4
--------- --------- --------- ---------- --------- --------- ---------
Total revenues..................... 181,381 113,919 79,760 66,183 57,193 14,234 14,515
Net income (loss).................... $ (32,666) $ (1,014) $ (19,074) $ 1,152 $ 5,176 $ 632 $ 703
Net income (loss) per share and
common equivalent share............ $ (17.42) $ (0.54) $ (6.89) $ 0.28 $ 0.90(2) $ 0.14 $ 0.11
Weighted average shares
outstanding........................ 1,875 1,875 2,767 4,181 6,382 4,390 6,175
OTHER OPERATIONS DATA:
Revenue from current operations(3)... -- -- $ 62,944 $ 50,804 $ 51,475 $ 12,438 $ 13,271
Revenue from run-off operations(4)... -- -- 14,244 10,042 1,774 801 16
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
DECEMBER 31, ---------------------------
------------------------------------------------------ AS
1992 1993 1994 1995 1996 ACTUAL ADJUSTED(7)
--------- --------- --------- ---------- --------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Total cash and investments... $ 161,769 $ 120,480 $ 61,868 $ 50,641 $ 42,944 $ 48,865 $ 54,877
Total assets(5).............. 461,136 324,695 255,935 224,005 220,472 202,016 208,028
Losses and loss adjustment
expenses(5)................ 257,602 194,682 166,698 145,523 132,152 112,597 112,597
Total debt................... 25,153 11,934 439 2,476 0 0 0
Shareholders' equity......... 14,219 13,902 650 10,187 23,791 24,211 30,223
Book value per share......... 7.58 7.41 0.18 2.43 3.86 3.91 4.18
STATUTORY SURPLUS(6)........... $ 18,440 $ 17,352 $ (1,615) $ 9,301 $ 21,632 $ 23,197 $ 23,197
</TABLE>
- ------------------------
(1) As a result of a competitive bidding process, in October 1994, the Company
was awarded a new contract with the SC Facility for a smaller block of
business at lower rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Nonstandard
Automobile Insurance Business--Industry Background."
(2) The calculation of net income per share and common equivalent share includes
additional investment income earned of $566,000 in accordance with the
modified treasury stock method.
(3) Reflects revenue from the lines of business in which the Company is
currently engaged.
(4) Reflects revenue derived from lines of business for which the Company is no
longer writing new or renewal policies. It includes (i) run-off premiums
from retained credit life business in force at the time the Company sold
such business in September 1993, (ii) workers' compensation premiums through
1994 and (iii) premiums on certain personal line policies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(5) Includes estimated amounts recoverable by the Company under reinsurance
agreements of (in thousands): $140,969 in 1992; $76,221 in 1993; $88,731 in
1994; $84,492 in 1995; $84,725 in 1996; and $66,659 at March 31, 1997.
(6) Reflects the statutory surplus of South Carolina Insurance Company ("SCIC"),
the Company's principal insurance subsidiary.
(7) The as adjusted balance sheet data is presented as if the sale of the
1,000,000 shares of Common Stock offered by the Company and the application
of the net proceeds therefrom and the exercise of a warrant to purchase
shares of Common Stock by the Selling Shareholder had occurred on March 31,
1997. See "Use of Proceeds."
6
<PAGE>
RECENT DEVELOPMENTS
On May 12, 1997, the Company entered into a letter of intent (the "Letter of
Intent") to acquire (the "Proposed Acquisition") The Innovative Company, an
insurance holding company based in Winston-Salem, North Carolina ("Innovative").
Innovative, through its subsidiary Universal Insurance Company ("Universal"),
markets and underwrites nonstandard automobile insurance through independent
agents primarily in North Carolina. Universal writes both liability and physical
damage coverages. The Company understands that a substantial portion of
Universal's liability policies are ceded to the NC Facility. The following table
sets forth certain information for Innovative for the periods indicated (in
thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------------- ENDED
1994 1995 1996 MARCH 31, 1997
--------- --------- --------- --------------
<S> <C> <C> <C> <C>
Gross premiums written.......................................... $ 26,946 $ 32,950 $ 36,289 $ 7,764
Net premiums written............................................ 9,267 11,438 12,502 2,055
Net income (loss)............................................... 221 277 (2,843) (3)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------- AT MARCH 31,
1994 1995 1996 1997
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Notes Payable...................................................... $ 3,986 $ 4,888 $ 5,937 $ 5,549
Shareholders' equity............................................... 2,897 3,329 1,413 1,348
Statutory surplus--Universal....................................... 3,610 3,882 3,562 3,196
</TABLE>
The Company believes the Proposed Acquisition will facilitate the expansion
of the Company's retained risk automobile insurance business in North Carolina
and provide the Company with access to a larger group of independent agents in
North Carolina.
The Letter of Intent provides that the Company will acquire all of the
outstanding capital stock of Innovative. The Company would issue 220,000 shares
of convertible nonvoting special (preferred) stock and pay $400,000 (subject to
adjustment) in cash. The Company also would pay at closing approximately $1.9
million of Innovative indebtedness (including accrued interest) owed to
Innovative's current shareholders. The special stock would (i) have liquidation
rights not junior to any other capital stock of the Company and a liquidation
value of $10.00 per share, (ii) pay quarterly dividends at a rate equal to $0.62
annually per share, (iii) subject to certain conditions, be convertible into
275,000 shares of Common Stock and (iv) be redeemable by the Company at a
premium beginning on August 15, 2000. The consummation of the Proposed
Acquisition is subject to a number of conditions, including the execution of a
definitive purchase agreement, the receipt of all necessary government and
regulatory approvals and satisfactory completion of due diligence by all
parties. With limited exceptions, the Letter of Intent is not binding on the
parties thereto. There is no assurance that the Company and Innovative will
agree on the terms of a definitive purchase agreement or that, if such agreement
is entered, that the transaction ultimately will close.
7
<PAGE>
RISK FACTORS
THERE ARE CERTAIN RISKS INVOLVED IN AN INVESTMENT IN THE COMMON STOCK.
ACCORDINGLY, PROSPECTIVE PURCHASERS OF THE COMMON STOCK SHOULD CONSIDER
CAREFULLY THE FACTORS SET FORTH BELOW AS WELL AS THE OTHER INFORMATION CONTAINED
IN OR INCORPORATED BY REFERENCE INTO THIS PROSPECTUS.
ANTICIPATED CHANGES IN AUTOMOBILE INSURANCE BUSINESS IN SOUTH CAROLINA
Commission and service income earned by the Company as a servicing carrier
for the SC Facility constitutes the Company's largest source of revenues. The
Company's agreement with the SC Facility expires September 30, 1999. However, if
legislation recently approved by the South Carolina Senate is enacted, the SC
Facility will be gradually phased-out over the next three years. In any event,
the Company believes that the number of South Carolina drivers obtaining
insurance from the SC Facility will be significantly reduced over the next few
years as a result of either the enactment of this or other proposed legislation
or anticipated regulatory action increasing premium rates. Accordingly, the
Company could earn significantly less commission and service income in the
future, which could materially adversely affect the Company's results of
operations. While the Company believes that a gradual depopulation of the SC
Facility will present opportunities for the Company to expand its risk-bearing
automobile insurance business in South Carolina, there can be no assurance that
the Company's strategy to expand such business will be successful or that such
business will be profitable. See "--Re-Entry into Risk-Bearing Activities" and
"Business--Nonstandard Automobile Insurance Business."
FINANCIAL CONDITION; RECENT LOSSES
The Company incurred substantial losses from 1989 through 1994. For the
years ended December 31, 1992, 1993 and 1994, the Company recorded net losses of
approximately $32.7 million, $1.0 million (after an extraordinary item) and
$19.1 million, respectively. Losses incurred by the Company through 1994
significantly reduced the shareholders' equity of the Company and the statutory
surplus of its insurance subsidiaries. As a result, the Company suspended its
insurance activities on which it retained risks in the first half of 1995.
Having increased capital and improved operating results, the Company received
authorization from the South Carolina Department of Insurance to resume
underwriting new business on a limited basis during the third quarter of 1996.
Although the Company reported net income of $1.2 million and $5.2 million for
the years ended December 31, 1995 and 1996, respectively, and $0.7 million for
the three months ended March 31, 1997, there can be no assurance that the
Company will not suffer further operating losses in the future which may
significantly affect its financial condition. See "--Uncertainty Associated with
Estimating Reserves; History of Reserve Deficiencies." The Company also has
experienced negative cash flows from operations for each of the last three
fiscal years. The Company's withdrawal from most of its insurance activities on
which it retained risks caused a significant reduction in its operating cash
flows while the Company continued to pay a significant amount of claims related
to the run-off of such retained risk activities. While the Company has been able
to meet its cash flow obligations through the sale of investments, there can be
no assurance that the Company will be able to meet its cash flow requirements in
the future if claims payment requirements significantly exceed the Company's
current expectations.
UNCERTAINTY ASSOCIATED WITH ESTIMATING RESERVES; HISTORY OF RESERVE DEFICIENCIES
Although the Company currently underwrites insurance on a limited basis, the
Company has historically written substantial amounts of insurance on a retained
risk basis, and as such it could report significant losses in the future in
excess of its current reserves for unpaid losses and loss adjustment expenses
("LAE") due to this past underwriting activity. The reserves for losses and LAE
established by the Company are estimates of ultimate amounts needed to pay
reported and unreported claims and related expenses based on facts and
circumstances known to the Company at the time it established the reserves.
Substantial uncertainties are inherent in the establishment of appropriate
reserves for property and
8
<PAGE>
casualty insurers. Such uncertainties are significantly greater in estimating
reserves for environmental, toxic tort and other casualty claims which the
Company continues to maintain. Due to the inherent uncertainty of estimating
reserves, it has been necessary, and may over time continue to be necessary, to
revise estimated future liabilities as reflected in the Company's reserves for
claims and policy expenses.
For each of the three years ended December 31, 1994, 1995 and 1996, the
Company incurred increases in estimated losses and LAE for claims occurring in
prior years of approximately $17.0 million, $3.4 million and $1.1 million,
respectively. For the calendar years 1986 through 1993, the Company ultimately
experienced cumulative reserve deficiencies for those years that ranged between
$23 million and $89 million. To the extent that reserves prove to be deficient
in the future, the Company will have to increase its reserves by the amount of
the deficiency and incur a charge to earnings in the period such reserves are
increased, which could have a material adverse effect on the results of
operations and financial condition of the Company. See "The Company" and
"Business--Reserves for Losses and Loss Adjustment Expenses."
RE-ENTRY INTO RISK-BEARING ACTIVITIES
As a result of its operating losses and impaired financial condition, the
Company suspended all insurance underwriting activities on which it retained
insurance risks in the first half of 1995. Following a recapitalization, an
improvement in operating results and the approval of the South Carolina Director
of Insurance, the Company resumed insurance underwriting activities on a
limited, risk-bearing basis in the third quarter of 1996. The Company's strategy
for adapting to the anticipated depopulation of the SC Facility and the
consequent reduction in service and commission income is dependent on the
Company's ability to market and sell nonstandard automobile insurance on a
profitable basis to insureds withdrawing from the SC Facility. The ability of
the Company to market, sell and profitably underwrite nonstandard automobile
insurance and other lines of insurance may be significantly affected by a
variety of factors specific to the Company or the business, including the
following:
ABILITY TO MARKET PRODUCTS THROUGH EXISTING AGENCY RELATIONSHIPS. The
Company intends to capitalize on its agency relationships in order to market and
sell nonstandard automobile insurance. Currently, all private passenger
automobile liability insurance business produced by Designated Agents must be
ceded to the SC Facility and, as a result, such agents are not permitted to
produce such business for insurers in the voluntary market. If, however, the SC
Facility is reorganized pursuant to legislation recently approved by the South
Carolina Senate, then the Designated Agents will be allowed to produce
automobile insurance business for the voluntary market. There can be no
assurance that Designated Agents will be legally permitted to write voluntary
business for the Company or that the Company will be able to recruit Designated
Agents that it currently services or has serviced in the past to market and sell
its nonstandard automobile insurance products.
UNCERTAIN PRICING AND PROFITABILITY. Although the Company has been
servicing the SC Facility since 1974, it has only recently begun to underwrite
nonstandard automobile insurance on a retained risk basis. There can be no
assurance that the Company will be able to price its nonstandard automobile
products or rate potential policyholders profitably or competitively. Further,
it is unclear what impact depopulation of the SC Facility will have on the
competitive environment for nonstandard automobile insurance in South Carolina.
The Company likely will compete with regional and national insurers that have
greater financial resources than the Company and superior ratings from A.M. Best
Company, Inc. ("A.M. Best").
REGULATORY CONSTRAINTS ON UNDERWRITING ACTIVITIES. The South Carolina
Director of Insurance authorized the resumption of underwriting activities by
the Company on the condition that the Company maintain a ratio of net premiums
written to statutory surplus of 0.85 to one, which ratio is substantially lower
than the maximum three to one ratio normally allowed by the regulators. As a
result of this requirement, net premiums written in 1997 cannot exceed $19.7
million based on the statutory surplus of SCIC (the Company's principal
insurance subsidiary) of approximately $23.2 million as of March 31, 1997.
9
<PAGE>
Due to the Company's history of operating losses and recently impaired financial
condition, the Company has been, and anticipates that it will continue to be,
subject to more stringent regulatory scrutiny and limitations than other
insurance carriers which could significantly impede its ability to expand its
underwriting activities.
FUTURE GROWTH AND CONTINUED OPERATIONS DEPENDENT ON ACCESS TO
CAPITAL. Significant future growth in the Company's risk-bearing insurance
operations will depend on the Company's ability to obtain additional capital for
its insurance subsidiaries. Such capital will likely have to be obtained through
equity or debt financing as well as retained earnings. There can be no assurance
that the Company will have access to sufficient capital to support future growth
and to satisfy the capital requirements of rating agencies and regulators.
ABSENCE OF RATING. The Company has elected not to be rated by A.M. Best,
the industry's leading rating authority, and accordingly was last assigned a
group rating of NR-3 ("Not Rated--Rating Procedure Inapplicable"). A.M. Best is
an independent company which rates insurance companies based on its judgment of
factors related to the insurer's ability to meet policyholder and other
contractual obligations. Most of the Company's competitors have A.M. Best
ratings. While the Company believes the lack of a rating is less significant in
underwriting nonstandard automobile business than other lines of business, there
can be no assurance that the Company's current absence of a rating or any future
rating will not affect the Company's competitive position and results of
operations.
RISKS ASSOCIATED WITH THE NATIONAL FLOOD INSURANCE PROGRAM
The Company derives a substantial portion of its net income from its role as
a servicing carrier for the NFIP. While the Company remains one of the leading
producers of flood insurance, the volume of premiums serviced by the Company has
declined in recent years. The volume of flood insurance written by the Company
and the Company's results of operations could be adversely affected by a variety
of factors specific to the Company or the NFIP generally, including the
following:
ABSENCE OF HOMEOWNER'S INSURANCE PRODUCT. The Company currently does not
offer a homeowner's insurance product in conjunction with its flood products.
Many consumers in flood-prone areas purchase flood insurance at the same time
they purchase homeowners insurance. Accordingly, the Company believes that its
failure to offer a homeowner's insurance product has limited its ability to
expand its flood insurance business in certain markets.
SYSTEMS OPERATIONS. The Company has encountered difficulties in complying
with statistical reporting requirements of the Federal Emergency Management
Agency ("FEMA"). FEMA has given the Company until June 26, 1997 to comply with
FEMA statistical reporting requirements. In order to comply with such
requirements, the Company has recently entered into an agreement with a major
provider of processing services for the NFIP to outsource the processing of its
flood insurance business. Although the Company expects that its new outsourcing
arrangement will enable the Company to meet FEMA statistical reporting
requirements, there can be no assurance that the Company will in fact be able to
do so or that the Company will be able to comply with such requirements on an
ongoing basis. If the Company fails to comply with FEMA statistical reporting
requirements, it could be prohibited from writing flood insurance through the
NFIP, which would materially adversely affect the Company's results of
operations.
INDEPENDENT AGENTS. The Company markets flood insurance through independent
agents. While the Company believes that the commissions and services it provides
to its agents are generally competitive with other servicing carriers, there can
be no assurance that the Company will be able to continue to attract and retain
independent agents to sell its flood insurance products.
VOLATILITY OF FLOOD CLAIMS BUSINESS. Since the demand for flood insurance
typically increases after the occurrence of floods and the Company's results of
operations are favorably affected through servicing
10
<PAGE>
flood claims, the extent to which floods occur infrequently or are minimal in
magnitude could have an adverse effect on the profitability of the Company. See
"Business--Flood Insurance--Claims" and "Business--Other Business--Insurance
Network Services."
LEGISLATIVE AND CONTRACT CHANGES. The Company's agreement with the NFIP is
renewed annually and is conditioned upon the Company meeting certain standards
and requirements, including growth targets, prescribed by FEMA. Commission rates
for servicing carriers participating in the NFIP are set annually by FEMA. There
can be no assurance that future federal legislative or regulatory changes in the
NFIP will not also adversely affect the Company's results of operations.
Furthermore, there can be no assurance that FEMA will renew its agreement with
the Company or that FEMA will not reduce the commission currently paid to
servicing carriers.
DEPENDENCE ON KEY PERSONNEL
The future success of the Company depends significantly upon the efforts of
certain key management personnel including former Governor of South Carolina
John C. West, Chairman of the Board of Directors, Ernst N. Csiszar, President
and Chief Executive Officer, and John A. Weitzel, Chief Financial Officer. Loss
of any of these individuals could adversely affect the Company's business. Mr.
Csiszar was diagnosed in November 1995 as having chronic myelogenous, a form of
leukemia for which he is currently receiving treatment. Mr. Csiszar's illness
currently is in remission and, to date, has not significantly impaired Mr.
Csiszar's ability to perform his duties as President and Chief Executive
Officer. There can be no assurance that the Company will be able to recruit and
retain additional qualified management personnel in the future. See
"Management--Directors and Executive Officers of the Company."
COMPETITION
The markets in which the Company does, or plans to do, business generally
are highly competitive. The Company competes with large national companies and
smaller regional companies. The Company's competitors generally have greater
financial and marketing resources and insurance underwriting experience than the
Company and superior ratings from A.M. Best, which are factors which may
significantly influence, in particular, the Company's ability to market and
profitably sell its insurance products.
Management believes that the Company's ability to compete with other
companies in its chosen lines of business will also be affected by, among other
things, its ability to develop competitive and profitable products and the
quality of service it provides to customers as well as to its agents. There can
be no assurance that the Company's responses to the highly competitive
environment in which it operates will be successful. Nor can there be any
assurance that the Company's limited capital and lack of rating from A.M. Best
will not prevent it from actively competing in the current market place. See
"Business-- Competition."
RISKS ASSOCIATED WITH SYSTEMS OPERATIONS
The Company operates and maintains its own computer system for its
operations, including policy issuance, billing, claims processing and financial
and management reporting. Commencing in late 1994, the Company began changing
its policy and claims processing operations from an outsourcing arrangement with
a third party vendor to its own computer systems primarily to reduce operating
expenses. The Company has experienced difficulties in transitioning to its
computer systems, particularly in its MGA commercial lines operations, and is in
the process of establishing a data bridge between the Company's internal data
processing systems in order to eliminate redundant entry of policy information
and reduce policy issuance time. The Company anticipates that such transitioning
will be completed during the third quarter of 1997. There can be no assurance
that the data bridge will be implemented as scheduled and as such, the Company's
plans to assume a portion of the MGA commercial lines risk may be delayed which
delay could adversely affect the Company's results of operations.
11
<PAGE>
DIVIDEND AND OTHER RESTRICTIONS
The Company is a holding company with no direct operations, the principal
asset of which is the capital stock of its wholly-owned subsidiaries. As a
holding company, the Company's primary sources of cash needed to meet its
obligations, including principal and interest payments with respect to any
indebtedness, are dividends and other permitted payments from its subsidiaries
and affiliates. The payment of dividends to the Company by SCIC, the Company's
principal subsidiary and the parent company of the Company's other insurance
subsidiaries, is subject, among other things, to limitations imposed by the
South Carolina insurance laws and regulations and will depend on SCIC's
statutory earnings, statutory surplus and capital. These laws and regulations
limit the aggregate amount of dividends or distributions that SCIC may declare
or pay to the Company within any 12-month period without the permission of the
South Carolina Director of Insurance. The payment of dividends to SCIC by the
Company's other insurance subsidiaries is subject to similar limitations. See
"Business--Regulation-- Regulation of Dividends and Other Payments from
Insurance Subsidiaries." There can be no assurance that legislative changes will
not result in statutory provisions more restrictive than those currently in
effect. For the past five years, SCIC has not made a dividend payment to the
Company. The inability of the Company's subsidiaries to pay dividends to the
Company could have a material adverse effect on the Company's ability to meet
the cash requirements of the holding company or to pay dividends to its
shareholders.
CONTROL BY PRINCIPAL SHAREHOLDERS
Prior to the completion of the Offering, the three principal shareholders of
the Company are the Selling Shareholder, a group of investors that acquired
shares of Common Stock from the Company in a private transaction in September
1996 (the "Powers Group") and a second group of investors that acquired shares
of Common Stock from the Company in a private transaction in March 1996 (the
"Avent Group"), who beneficially own approximately 29.9%, 41.3% and 12.4%,
respectively, of the Common Stock on a fully diluted basis. After completion of
the Offering, the Powers Group and the Avent Group will beneficially own
approximately 36.4% and 10.7%, respectively, of the Common Stock on a fully
diluted basis. Accordingly, the Powers Group and the Avent Group will have the
ability to exert significant influence over the policies and affairs of the
Company and will have the right to designate two directors and one director,
respectively, to be included as nominees for election to the Board of Directors
by the shareholders. See "Principal and Selling Shareholders."
GOVERNMENT REGULATION
The Company is subject to substantial government regulation in each of its
lines of business and each of the states and other jurisdictions in which it
conducts business. As a servicing carrier for the SC Facility and the NFIP, the
Company must comply with certain requirements and guidelines established by the
South Carolina Department of Insurance and FEMA, respectively. The Company's
failure to comply with these requirements and guidelines could result in the
termination of the Company's participation in these programs. See "--Risks
Associated with National Flood Insurance Program," "Business--Nonstandard
Automobile Insurance," "Business--Flood Insurance" and "Business--Regulation."
The Company's insurance, MGA and excess and surplus lines brokerage
businesses are also subject to regulation by the insurance departments in each
of the states in which these businesses are conducted. The regulation of the
Company's insurance subsidiaries is designed to protect the interests of
policyholders as opposed to stockholders and typically relates to authorized
lines of business, premium rates, capital and surplus requirements, investment
parameters, underwriting limitations, transactions with affiliates, dividend
limitations and changes in control. The Company is also subject to assessments
by guaranty funds related to insolvent insurers and by governmental pools and
associations, including the North Carolina Reinsurance Facility (the "NC
Facility"). These assessments may materially affect the Company's results of
12
<PAGE>
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Regulation." The Company is also subject
to a risk-based capital ("RBC") formula which has been adopted to enable
insurance regulators to evaluate the adequacy of statutory capital and surplus
of property and casualty insurers in relation to investment and insurance risks.
No assurance can be given that future legislative or regulatory changes will not
adversely affect the Company. See "--Re-entry into Risk-Bearing
Activities--Regulatory Constraints on Underwriting Activities" and "Business--
Regulation."
GEOGRAPHIC CONCENTRATION
A large portion of the Company's business is concentrated in the states of
South Carolina (60% of total 1996 gross premiums written), North Carolina (13%
of total 1996 gross premiums written) and Kentucky (8% of total 1996 gross
premiums written). As such, the Company's revenues and profitability may be
significantly affected by prevailing economic, regulatory, demographic and other
conditions in these states. For example, proposed legislation is currently
pending before the South Carolina legislature which, if enacted, would
materially affect the Company's business with the SC Facility. See
"--Anticipated Changes in Automobile Insurance Business in South Carolina."
SHARES ELIGIBLE FOR FUTURE SALE AND POSSIBLE EFFECT ON THE MARKET PRICE OF THE
COMMON STOCK
Upon completion of the Offering, there will be outstanding 7,253,238 shares
of Common Stock. The shares of Common Stock offered hereby by the Company and
the remaining issued and outstanding shares of Common Stock will be freely
tradeable in the public market without restriction under the Securities Act of
1933, as amended (the "Securities Act"), by persons other than affiliates of the
Company.
The Company, its officers and directors and certain shareholders (who upon
completion of this Offering will beneficially own in the aggregate approximately
4.2 million shares of Common Stock) have agreed not to, for a period of 180 days
after the date of this Prospectus and subject to certain exceptions, directly or
indirectly, (i) offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock or securities convertible into or exchangeable for Common Stock
or (ii) enter into any swap or other agreement or any transaction that
transfers, in whole or in part, the economic consequences of ownership of shares
of Common Stock whether any such swap or other agreement is to be settled by
delivery of shares of Common Stock, other securities, cash or otherwise without
the prior written consent of Advest, Inc., as representative of the
Underwriters. See "Underwriting."
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock in the public market, or the perception that such sales
could occur, could adversely affect prevailing market prices for the Common
Stock. If such sales reduce the market price of the Common Stock, the Company's
ability to raise additional capital in the equity markets also could be
adversely affected.
MARKET FOR COMMON STOCK; POSSIBLE PRICE VOLATILITY
The Common Stock is currently traded on The Nasdaq Stock Market, and its
average daily trading volume over the 52 weeks ended May 30, 1997 was
approximately 6,084 shares. While the shares to be sold by the Company in the
Offering will increase the amount of Common Stock available for trading, there
can be no assurance that a more active trading market will develop or, if
developed, that it will be maintained.
The market price of the Common Stock has experienced significant volatility
over the last five years. Factors such as significant claims payments,
adjustments in reserves, changes in the value of the Company's investment
portfolio, cancellation or amendment of contractual relationships, competitive
market conditions, governmental regulation, regulatory approvals or developments
relating to corporate alliances or
13
<PAGE>
proprietary rights may have a significant impact on the market price of the
Common Stock. In addition, general market price declines, volatility or share
illiquidity in the future could adversely affect the market price of the 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 public offering price. See "Market Price of
Common Stock."
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation, the South Carolina Business
Corporation Act of 1988, as amended, and the insurance laws of states in which
the Company conducts business contain certain provisions which could delay or
impede the removal of incumbent directors and could make more difficult a
merger, tender offer or proxy contest involving the Company, even if such a
transaction would be beneficial to the interests of the shareholders, or could
discourage a third party from attempting to acquire control of the Company. In
particular, the classification of the Company's Board of Directors and insurance
regulations which require prior regulatory approval with respect to a change of
control could have the effect of delaying or preventing a change in control of
the Company. See "Description of Capital Stock--Existing Anti-takeover
Provisions" and "Business--Regulation."
14
<PAGE>
THE COMPANY
SBIG is the holding company parent of SCIC, Seibels, Bruce & Company ("SBC")
and the wholly-owned subsidiaries of SCIC and SBC. The Company's predecessor was
established in 1869 in Columbia, South Carolina as a small insurance and real
estate business. SCIC was formed in 1910 to write fire insurance coverage. SCIC
eventually became the parent company of the other insurance subsidiaries, which
include Catawba Insurance Company ("Catawba"), Consolidated American Insurance
Company ("Consolidated American") and Kentucky Insurance Company. SBIG, a South
Carolina corporation, was formed in 1978 to become the holding company of the
group.
During the 1970s, the Company created a new business that developed,
marketed and serviced computer software systems for the property and casualty
insurance industry and provided computer processing for certain customers.
Between 1981 and 1985, the Company sold its entire interest in the company,
Policy Management Systems Corporation ("PMSC"), which is now a publicly-held
company currently listed on the New York Stock Exchange. By the early 1980s, the
Company's expanded operations included property and casualty insurance
underwriting, the servicing of various accounts, reinsurance, life, credit life
and title insurance, travel agency services, computer systems, flood operations,
reinsurance facility servicing carrier operations, excess and surplus lines and
loss adjustment services.
Beginning in 1981 the Company experienced a series of financial losses. As
part of its plans to expand operations nationwide, the Company acquired a
California managing general agency, Rathbone, King & Seeley, Inc. ("RKS"), in
1981. Through RKS' insurance company subsidiary, American Star Insurance Company
("American Star"), the Company assumed and continued to write general liability
policies in the western United States that included contractors' liability and
environmental coverages. RKS and American Star subsequently accumulated
substantial losses and were sold in 1985. A portion of the liabilities and
corresponding losses were retained by the Company. See "Business--Reserves for
Losses and Loss Adjustment Expenses."
During the late 1980s, the Company, through its subsidiary Consolidated
American, began writing increasingly larger amounts of commercial and workers'
compensation coverages in the Southeast, particularly in Florida. These risks
generated substantial losses for the Company as well and were discontinued in
the early 1990s. The last of these policies expired in 1994.
Natural catastrophes had an adverse effect on the Company due to the
significant amount of personal and commercial business written by the Company in
the Southeast. In 1989 and 1992, respectively, Hurricanes Hugo and Andrew
resulted in significant claims paid (after reinsurance) by the Company.
In December 1993, the Company initiated a recapitalization plan pursuant to
which the Selling Shareholder purchased a previously outstanding loan in the
amount of approximately $23 million and the accrued interest thereon from the
original holder at a discount. The Selling Shareholder exchanged the $23 million
loan for a new $10 million loan, resulting in an extraordinary gain from
extinguishment of debt, net of income taxes, of approximately $9.2 million.
During 1994, the Selling Shareholder exchanged the new $10 million loan for
Common Stock. The Company also sold certain of its subsidiaries which were no
longer compatible with its future business plans, including its credit life
subsidiary (for which the Company retains responsibility for certain policies
and continues to run-off the remaining book of business), an insurance premium
financing services subsidiary and a travel agency.
In 1994, the Company reduced its net writings of personal lines business
written in the States of Georgia, Kentucky, North Carolina, South Carolina and
Tennessee. Continuing operating losses reduced the Company's shareholders'
equity to $650,000 by the end of 1994; the Company suspended all underwriting
operations in early 1995 and began a year-long process of non-renewing this
business effective during the second quarter of 1995.
During the first quarter of 1995, the Company received net proceeds of
approximately $5.1 million from a Rights Offering. A loan to the Company by the
Selling Shareholder was repaid during the second
15
<PAGE>
quarter of 1996 with proceeds from a private transaction in which the Company
issued 408,750 unregistered shares of Common Stock and options to acquire an
additional 408,750 shares. In the third quarter of 1996, an investor group
acquired 1,562,500 shares of Common Stock plus options to acquire an additional
1,562,500 shares of Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
Beginning in 1995, the Company replaced the Chief Executive Officer and
Chief Financial Officer and began an ongoing effort to recruit additional
management. New management has taken a number of actions to stabilize and
improve the Company's financial condition through significant cost reductions,
the raising of new equity capital and a renewed emphasis on non-risk fee-based
businesses. As a result of these actions and the relative stabilization of loss
experience, the Company was profitable in 1995 and 1996 and resumed limited
insurance underwriting activities for which it retains risk in 1996. For the
fiscal year ended December 31, 1996, the Company's total revenue was
approximately $57.2 million, net income was approximately $5.2 million and
shareholders' equity increased to approximately $23.8 million. For the three
months ended March 31, 1997, the Company's total revenue was approximately $14.5
million, net income was approximately $0.7 million and shareholders' equity
increased to $24.2 million.
16
<PAGE>
USE OF PROCEEDS
Based on an assumed offering price of $7.00 per share, the net proceeds to
the Company of the Offering are estimated to be approximately $6.0 million
(approximately $8.8 million if the Underwriters' over-allotment option is
exercised in full), after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company. The proceeds derived from
the sale of shares offered by the Company will be retained for general corporate
purposes, including possible acquisitions. The Company regularly evaluates
possible acquisition opportunities and has entered a Letter of Intent to acquire
Innovative. See "Prospectus Summary--Recent Developments." The Company is not
currently a party to any other letter of intent regarding any acquisition. In
the event the Company consummates the Proposed Acquisition, it will use
approximately $0.4 million of the net proceeds of this Offering to fund such
acquisition and approximately $1.9 million of the net proceeds to pay Innovative
indebtedness (including accrued interest), $1.0 million of which matures on June
30, 1997 and bears interest at 10% per annum and $0.8 million of which matures
on September 27, 1998 and bears interest at 8.5% per annum. The Company will
contribute a portion of the proceeds to one or more of its insurance company
subsidiaries for statutory surplus as necessary to support insurance operations.
The Company will not receive any proceeds from any sale of the shares of Common
Stock offered by the Selling Shareholder.
DIVIDEND POLICY
There have been no dividends declared by the Company during the past five
years, and the Board of Directors does not presently intend to pay any cash
dividends in the foreseeable future. The declaration of cash dividends is at the
discretion of the Board of Directors and is based on earnings, financial
condition, capital requirements, regulatory constraints and other relevant
factors. 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. The payment of dividends by SCIC to the Company is
restricted by the South Carolina Insurance Holding Company Regulatory Act. See
"Risk Factors-- Dividend and Other Restrictions" and
"Business--Regulation--Regulation of Dividends and Other Payments from Insurance
Subsidiaries."
17
<PAGE>
MARKET PRICE OF COMMON STOCK
The following table sets forth the range of high and low closing prices as
reported on The Nasdaq Stock Market. This table reflects a 1-for-4 reverse stock
split of the Common Stock that occurred on April 10, 1997.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995
First Quarter................................. $12 $ 4
Second Quarter................................ 5 1/4 3
Third Quarter................................. 4 1/8 3
Fourth Quarter................................ 7 1/4 2
1996
First Quarter................................. $16 $ 6 1/2
Second Quarter................................ 12 1/2 9 1/2
Third Quarter................................. 10 1/2 8
Fourth Quarter................................ 10 3/4 8
1997
First Quarter................................. $ 9 1/2 $ 7 1/4
Second Quarter (through June 3, 1997)......... 8 1/4 6 1/8
</TABLE>
On June 3, 1997, the closing price of the Common Stock on The Nasdaq Stock
Market was $7.25 per share. There were approximately 2,772 shareholders of
record as of June 3, 1997. This number does not include beneficial owners
holding shares through nominee or "street" names.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997 and as adjusted to reflect the exercise of a purchase warrant by the
Selling Shareholder and the sale of the 1,000,000 shares of Common Stock offered
by the Company hereby (assuming an offering price of $7.00 per share):
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Total debt............................................................................... $ 0 $ 0
---------- -----------
Shareholders' equity:
Special Stock: no par value, authorized 5,000,000 shares, none issued or outstanding... 0 0
Common Stock: $1.00 par value; 12,500,000 shares authorized; 6,192,172
shares issued and outstanding; 7,238,636 shares issued and outstanding, as
adjusted(1).......................................................................... 6,192 7,239
Additional paid-in capital............................................................. 54,218 59,183
Unrealized gain (loss) on investments.................................................. (1,011) (1,011)
Accumulated deficit.................................................................... (35,188) (35,188)
---------- -----------
Total shareholders' equity........................................................... 24,211 30,223
---------- -----------
Total capitalization............................................................... $ 24,211 $ 30,223
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Does not include, as of June 3, 1997, (i) 2,860,912 shares of Common Stock
reserved for issuance upon the exercise of stock options outstanding on such
date and (ii) 40,186 shares of restricted stock issued pursuant to the
Company's stock plans. Of the outstanding options, 803,250 have an exercise
price of $6.00 per share and 1,967,662 have exercise prices of $8.00 or more
per share.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company are
qualified by reference to and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and Notes thereto included or
incorporated by reference in this Prospectus. The selected financial data
presented below as of the years ended December 31, 1992 through 1996 and for
each of the fiscal years in the five-year period ended December 31, 1996 have
been derived from the Company's consolidated financial statements which have
been audited by Arthur Andersen LLP, independent accountants (in thousands,
except per share amounts).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
----------- ---------- --------- ---------- --------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Commission and service income.... $ 35,943 $ 41,625 $ 60,669 $ 49,572(1) $ 45,585 $ 10,115 $ 10,964
Property and casualty premiums... 117,172 55,331 14,718 10,384 7,186 2,999 2,309
Credit life premiums............. 4,247 3,207 1,801 890 478 125 14
Net investment income............ 9,973 5,455 5,321 3,176 3,006 660 708
Other interest income............ 2,987 1,635 905 1,154 801 118 297
Realized gains (losses) on
investments.................... 7,040 1,969 (6,327) 164 (14) 194 219
Other income..................... 4,019 4,697 2,673 843 151 23 4
----------- ---------- --------- ---------- --------- ---------- ---------
Total revenues................. 181,381 113,919 79,760 66,183 57,193 14,234 14,515
----------- ---------- --------- ---------- --------- ---------- ---------
Expenses:
Losses and loss adjustments...... --(2) --(2) 36,954 17,618 10,980 4,040 3,802
Policy acquisition costs......... 35,709 17,628 5,538 3,794 1,777 683 582
Credit life benefits............. 1,538 1,374 770 545 203 70 25
Interest expense................. 1,853 2,527 321 308 174 85 17
Other operating costs and
expenses....................... --(2) --(2) 55,222 42,768 39,014 8,716 9,373
----------- ---------- --------- ---------- --------- ---------- ---------
Total expenses................. 213,989 128,930 98,805 65,033 52,148 13,594 13,799
----------- ---------- --------- ---------- --------- ---------- ---------
Income (loss) before income taxes
and extraordinary item........... (32,608) (15,011) (19,045) 1,150 5,045 640 716
Provision (benefit) for income
taxes............................ 58 (4,762) 29 (2) (131) 8 13
Extraordinary item................. -- 9,235 -- -- -- -- --
----------- ---------- --------- ---------- --------- ---------- ---------
Net income (loss).............. $ (32,666) $ (1,014) $ (19,074) $ 1,152 $ 5,176 $ 632 $ 703
----------- ---------- --------- ---------- --------- ---------- ---------
----------- ---------- --------- ---------- --------- ---------- ---------
Net income (loss) per share and
common equivalent share.......... $ (17.42) $ (0.54) $ (6.89) $ 0.28 $ 0.90(3) $ 0.14 $ 0.11
----------- ---------- --------- ---------- --------- ---------- ---------
----------- ---------- --------- ---------- --------- ---------- ---------
Weighted average shares
outstanding...................... 1,875 1,875 2,767 4,181 6,382 4,390 6,175
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- MARCH 31,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total cash and investments.................... $ 161,769 $ 120,480 $ 61,868 $ 50,641 $ 42,944 $ 48,865
Total assets (4).............................. 461,136 324,695 255,935 224,005 220,472 202,016
Losses and loss adjustment expenses (4)....... 257,602 194,682 166,698 145,523 132,152 112,597
Total debt.................................... 25,153 11,934 439 2,476 0 0
Shareholders' equity.......................... 14,219 13,902 650 10,187 23,791 24,211
Book value per share.......................... 7.58 7.41 0.18 2.43 3.86 3.91
STATUTORY SURPLUS(5)............................ $ 18,440 $ 17,352 $ (1,615) $ 9,301 $ 21,632 $ 23,197
</TABLE>
- ------------------------
20
<PAGE>
(1) As a result of a competitive bidding process, in October 1994, the Company
was awarded a new contract with the SC Facility for a smaller block of
business at lower rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Nonstandard
Automobile Insurance Business--Industry Background."
(2) Certain reclassifications were made to the expenses in 1994, 1995 and 1996
for unallocated LAE related to the Company's commission and service business
units. This reclassification increased loss and LAE while decreasing other
operating costs by the same amount. The data necessary to make this
reclassification for 1992 and 1993 is not available. For comparison
purposes, expenses for the five years ended December 31, 1996 without the
effect of reclassification are shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Expenses:
Losses and loss adjustments............................... $ 125,451 $ 58,285 $ 33,408 $ 12,921 $ 6,372
Policy acquisition costs.................................. 35,709 17,628 5,538 3,794 1,777
Credit life benefits...................................... 1,538 1,374 770 545 203
Interest expense.......................................... 1,853 2,527 321 308 174
Other operating costs and expenses........................ 49,438 49,116 58,768 47,465 43,622
--------- --------- --------- --------- ---------
Total expenses.......................................... $ 213,989 $ 128,930 $ 98,805 $ 65,033 $ 52,148
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
(3) The calculation of net income per share and common equivalent share includes
additional investment income earned of $566,000 in accordance with the
modified treasury stock method.
(4) Includes estimated amounts recoverable by the Company under reinsurance
agreements of (in thousands): $140,969 in 1992; $76,221 in 1993; $88,731 in
1994; $84,492 in 1995; $84,725 in 1996; and $66,659 at March 31, 1997.
(5) Reflects the statutory surplus of SCIC, the Company's principal insurance
subsidiary.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The selected financial data contained herein and consolidated financial
statements and related notes thereto incorporated by reference should be read in
conjunction with the following discussion as they contain important information
for evaluation of the Company's financial condition and operating results.
OVERVIEW
The Company provides automobile, flood and other property and casualty
insurance services and products through independent agents primarily in the
southeastern United States. The Company's largest source of revenue during 1994,
1995, 1996 and the three months ended March 31, 1997 was derived from its role
as one of three servicing carriers for the SC Facility. Other revenues are
derived from acting as a servicing carrier for the NFIP, a MGA primarily for
commercial lines and an excess and surplus lines broker as well as from storm
claims adjustment and liability run-off management services. The following table
shows revenues by the various lines of operations for the periods presented (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31 MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current operations:
Fee and service operations:
SC Facility premiums-based fees........................ $ 21,415 $ 13,451 $ 14,556 $ 3,697 $ 4,249
SC Facility claims-based fees.......................... 17,706 14,343 10,638 2,271 2,875
Flood premiums-based fees.............................. 10,250 9,408 8,340 1,676 1,679
Flood claims-based fees................................ 648 2,863 3,581 486 839
Other state facilities................................. 3,188 2,613 1,390 417 50
MGA.................................................... 7,094 6,734 6,170 1,523 1,087
Brokerage and other.................................... 368 160 910 45 185
Risk operations:
Nonstandard automobile................................. -- -- 71 -- 149
Assumed from pools and associations.................... 2,275 1,232 5,819 2,323 2,158
--------- --------- --------- --------- ---------
Total current operations................................... 62,944 50,804 51,475 12,438 13,271
Premiums from run-off risk operations...................... 14,244 10,042 1,774 801 16
--------- --------- --------- --------- ---------
Total................................................ $ 77,188 $ 60,846 $ 53,249 $ 13,239 $ 13,287
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
As one of three servicing carriers for the SC Facility, the Company earns
commission and service income as a percentage of gross premiums written and also
earns a fee on claims paid. Until October 1, 1994, the Company serviced the
largest of three blocks of business for the SC Facility ("Block One"). As the
result of a competitive bid process in 1994, the Company submitted the second
lowest bid and was awarded a five year contract to service the second largest
block of business ("Block Two") at lower rates than under its prior contract.
However, the Company continued to process the remaining run-off of claims from
Block One for losses incurred prior to October 1, 1994 at the rates provided
under its prior contract. Premium-based fees under the new contract are 20.99%
of gross premiums written (compared with a rate of 28.0% under its prior
contract). The Company is responsible for paying all costs of processing the
policies, including the payment to the Designated Agent that produced the
business of a mandated 12% commission on gross premiums earned (which the
Company recognizes in other operating costs and expenses). The Company earns
claims fees in the amount of 10.98% of the gross amount of paid claims (compared
with a 15.0% rate under its prior contract). The Company is responsible for
paying all costs to process these claims, including adjusting expenses. However,
the SC Facility reimburses the Company for legal expenses associated with
processing these claims.
22
<PAGE>
Until the fourth quarter of 1995, the Company served as a servicing carrier
for the North Carolina Reinsurance Facility (the "NC Facility"). This contract
was cancelled by the NC Facility as a result of regulatory concerns regarding
the Company. The Company continues to write nonstandard automobile insurance on
a voluntary basis in North Carolina, all of which it reinsures with the NC
Facility.
Beginning in July 1996, the Company expanded its participation in the South
Carolina automobile insurance market to include writing and retaining
nonstandard automobile insurance policies. These revenues were not significant
during 1996 or the first quarter of 1997.
The Company is a servicing carrier for the NFIP. During 1994, 1995, 1996 and
the three months ended March 31, 1997, the Company recognized commission and
service income for the policies it processes in the amount of 30.6% of gross
premiums written. The Company's commission rate for 1997 is 30.6%, but would
increase to 32.6% if the Company is able to increase policies in force, as
defined by the NFIP, by 10%. Commission rates of up to 34.6% could apply if the
growth in policies in force exceeds 10%. The Company is responsible for paying
all costs associated with processing the policies, including a negotiated
commission to the independent agent (which the Company recognizes in other
operating costs and expenses). The Company also receives a fee on the claims
paid on these policies in the amount of 3.3% of incurred claims and is
reimbursed for the allocated LAE ("ALAE") associated with these claims according
to a standard fee schedule.
The Company also derives revenue from its role as a MGA for Generali -- U.S.
Branch. While the Company performs all services and pays all costs (including
the independent agents' commissions) related to underwriting and processing
policies and claims, the policies are issued for Generali. The Company earns
commission income as a percentage of premiums written.
Revenues derived from pools and associations consist of mandated
participation in various state associations due to the Company's participation
in such states' markets. In 1996, the Company's operating results were affected
by premiums and losses assumed from the NC Facility. The amount of risk business
assumed by the Company in any given year is based upon its percentage of
premiums ceded to the NC Facility in prior years, which is ultimately adjusted
to reflect actual current year participation. The assumption of this risk
business is reflected in the Company's reported premiums, losses and loss
adjustment expenses incurred and policy acquisition costs.
The Company continues to maintain reserves and pay significant claims with
respect to its run-off operations. These run-off operations relate primarily to
workers' compensation policies which the Company wrote through 1993 and general
liability policies written by the Company prior to 1985 (which included
contractors, environmental and toxic tort coverages, primarily in California)
and personal lines policies written by the Company in the southeastern United
States in the late 1980s and early 1990s. Claims incurred on these policies
caused substantial losses to the Company during the past 10 years.
Beginning in early 1995, the Company replaced its Chief Executive Officer
and Chief Financial Officer and began an ongoing effort to recruit additional
management. New management has taken a number of actions to stabilize and
improve the Company's financial condition through significant cost reductions,
the raising of new equity capital and a renewed emphasis on fee-based
businesses. As a result of these actions and the relative stabilization of loss
experience, the Company was profitable in 1995, 1996 and the three months ended
March 31, 1997 and had resumed limited underwriting activities in 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
COMMISSION AND SERVICE INCOME
Commission and service income for the three months ended March 31, 1997
increased $849,000, or 8.4%, to $10,964,000 from $10,115,000 for the three
months ended March 31, 1996. This increase is due
23
<PAGE>
primarily to increases of $552,000 in SC Facility premium-based fees due to an
increase in the number of policies serviced and higher physical damage rates and
$604,000 in SC Facility claims-based fees due to a higher volume of settled
claims. Flood claims-based revenues for the three months ended March 31, 1997
increased $353,000 compared to the same period in 1996. This increase is due to
claims servicing activity resulting from Hurricane Fran which hit the East Coast
in the fourth quarter of 1996. Commission and service income attributed to the
MGA operations decreased $436,000 for the three months ended March 31, 1997
compared to the same three months in 1996. This decrease is due to lower gross
premiums written in the first quarter of 1997 as a result of the Company's
implementation of more stringent underwriting criteria.
PROPERTY AND CASUALTY PREMIUMS EARNED
Net property and casualty premiums earned for the three months ended March
31, 1997 decreased $690,000, or 23.0%, to $2,309,000 from $2,999,000 for the
three months ended March 31, 1996. Premiums from run-off operations fell from
$801,000 for the three months ended March 31, 1996 to $16,000 for the same
period in 1997 due to the suspension of retained risk business in the first half
of 1995 for which the Company continued to earn premiums in the first three
months of 1996. The Company resumed limited insurance underwriting activities in
July 1996, resulting in $149,000 of premiums earned on nonstandard automobile
insurance premiums in the first quarter of 1997.
CREDIT LIFE PREMIUMS EARNED
Net credit life premiums earned for the three months ended March 31, 1997
decreased $111,000, or 88.8%, to $14,000 from $125,000 for the three months
ended March 31, 1996. The Company sold its credit life business in September
1993. Under the sale agreement, the Company retained and continues to run-off
the policies in force at the date of the sale.
NET INVESTMENT AND INTEREST INCOME
Net investment and other interest income for the three months ended March
31, 1997 increased $227,000, or 29.2%, to $1,005,000 from $778,000 for the three
months ended March 31, 1996. This increase is primarily a result of increased
other interest income from the Company's participation in the NC Facility. In
addition, a 15.1% decrease in average total investments was more than offset by
a 26.4% increase in average yield on total cash and investments (6.17% compared
to 4.88%) in the quarter ended March 31, 1997 compared to the same period in
1996. In the three months ended March 31, 1996, the Company did not recognize
certain interest income received relating to pending investment proceeds held in
escrow.
REALIZED GAINS ON INVESTMENTS
Realized gains on investments were $219,000 for the three months ended March
31, 1997 compared to $194,000 for the three months ended March 31, 1996.
OTHER INCOME
Other income for the three months ended March 31, 1997 and 1996 was $4,000
and $23,000, respectively.
LOSS AND LOSS ADJUSTMENT EXPENSES
Property and casualty loss and loss adjustment expenses incurred for the
three months ended March 31, 1997 decreased $238,000, or 5.9%, to $3,802,000
from $4,040,000 for the three months ended March 31, 1996. This decrease
corresponds in part to the decrease in net premiums earned on run-off risk
operations during the same periods. Included in loss adjustment expenses in 1997
is $288,000 related to the loss adjustment expenses on the Company's storm
claims adjustment and liability run-off services division that did not commence
operations until April 1996.
24
<PAGE>
POLICY ACQUISITION COSTS
Property and casualty policy acquisition costs incurred decreased $101,000,
or 14.8%, to $582,000 from $683,000 for the three months ended March 31, 1997 as
compared to the three months ended March 31, 1996. This decrease is due to the
reduction in net premiums written.
CREDIT LIFE BENEFITS
Credit life benefits incurred were $25,000 and $70,000 for the three months
ended March 31, 1997 and 1996, respectively. The Company sold its credit life
business in September 1993. Under the sale agreement, the Company retained and
continues to run-off the policies in force at the date of the sale.
INTEREST EXPENSE
Interest expense was $17,000 and $85,000 for the three months ended March
31, 1997 and 1996, respectively. The majority of the interest expense during
1996 consisted of interest on notes payable to the Selling Shareholder. The
Company repaid these notes in full on May 1, 1996.
OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses for the three months ended March 31, 1997
increased $657,000, or 7.5%, to $9,373,000 from $8,716,000 for the three months
ended March 31, 1996. Salaries and fringe benefits for the three months ended
March 31, 1997 and 1996 were $3,097,000 and $2,278,000, respectively. This
increase is related to the Company's addition of new management. Agent
commissions included in other operating costs and expenses were $4,374,000 and
$5,041,000 for the three months ended March 31, 1997 and 1996, respectively.
INCOME TAXES
Provision for income taxes was $13,000 and $8,000 for the three months ended
March 31, 1997 and 1996, respectively. During 1997 and 1996, the Company
utilized net operating loss carryforwards to offset current income taxes in the
amount of $238,000 and $215,000, respectively. See "--Utilization of Net
Operating Loss Carryforwards."
YEARS ENDED DECEMBER 31, 1996 AND 1995
COMMISSION AND SERVICE INCOME
Commission and service income for the year ended December 31, 1996 decreased
$3,987,000, or 8.0%, to $45,585,000 from $49,572,000 for the year ended December
31, 1995. This decrease is due primarily to a decline of $3,705,000 in SC
Facility claims-based fees as a result of the gradual reduction of claims-based
fees related to the delayed effect of the Company's new contract with the SC
Facility. See "--Overview." Flood premium-based revenues for the year ended
December 31, 1996 decreased $1,068,000, compared to the year ended December 31,
1995, due to a decrease in the amount of flood premiums serviced by the Company.
However, this decrease was partially offset by a $718,000 increase to
claims-based revenues due to a larger amount of flood claims during 1996. The
cancellation of the contract with the NC Facility also accounted for decreased
revenues in the amount of $1,108,000.
PROPERTY AND CASUALTY PREMIUMS EARNED
Net property and casualty premiums earned for the year ended December 31,
1996 decreased $3,198,000, or 30.8%, to $7,186,000 from $10,384,000 for the year
ended December 31, 1995. This decline is largely due to the suspension of
retained risk business in the first half of 1995. The decline was partially
offset by $5,819,000 of premiums which the Company was required to assume from
pools and associations, the largest being the NC Facility, compared to
$1,232,000 of such premiums assumed in 1995. See
25
<PAGE>
"--Overview." In 1996, the Company also continued to earn premiums on personal
lines business written by the Company in the first half of 1995. Although the
Company resumed limited insurance underwriting activities in July 1996, these
activities generated $71,000 of earned premiums in 1996.
CREDIT LIFE PREMIUMS EARNED
Net credit life premiums earned for the year ended December 31, 1996
decreased $412,000, or 46.3%, to $478,000 from $890,000 for the year ended
December 31, 1995. The Company sold its credit life business in September 1993.
Under the sale agreement, the Company retained and continues to run-off the
policies in force at the date of the sale.
NET INVESTMENT AND INTEREST INCOME
Net investment and other interest income for the year ended December 31,
1996 decreased $523,000, or 12.1%, to $3,807,000 from $4,330,000 for the year
ended December 31, 1995. This decrease is primarily a result of a decrease of
$7,697,000, or 15.2%, in the Company's cash and investments from $50,641,000 at
December 31, 1995 to $42,944,000 at December 31, 1996. This decrease is due to
the Company's negative cash flow from operations in 1996 as the Company
continued to pay claims on run-off businesses. See "--Liquidity and Capital
Resources." Partially offsetting the reduction in cash and investments, the
average yield on total cash and investments increased to 6.3% for the year ended
December 31, 1996 from 5.9% for the year ended December 31, 1995.
REALIZED GAINS (LOSSES) ON INVESTMENTS
Realized gains (losses) on investments decreased $178,000 from a gain of
$164,000 for the year ended December 31, 1995 to a loss of $14,000 for the year
ended December 31, 1996.
OTHER INCOME
Other income for the years ended December 31, 1996 and 1995 was $151,000 and
$843,000, respectively. Other income in 1995 included income from the settlement
of a litigation.
LOSS AND LOSS ADJUSTMENT EXPENSES
Property and casualty loss and loss adjustment expenses incurred decreased
$6,638,000, or 37.7%, to $10,980,000 from $17,618,000 for the year ended
December 31, 1995. This decrease largely corresponds to the decrease in property
and casualty premiums earned and also reflects a smaller increase in the
provision for prior year losses of $1,117,000 in 1996 as compared to $3,375,000
in 1995. See "Business--Loss and Loss Adjustment Expense Reserves."
POLICY ACQUISITION COSTS
Property and casualty policy acquisition costs incurred decreased
$2,017,000, or 53.2%, to $1,777,000 from $3,794,000 for the year ended December
31, 1996 compared to the year ended December 31, 1995. This decrease is due to
the reduction in net premiums written. The decline was partially offset by the
policy acquisition costs associated with the premiums the Company was required
to assume from the NC Facility.
CREDIT LIFE BENEFITS
Credit life benefits incurred were $203,000 and $545,000 for the years ended
December 31, 1996 and 1995, respectively. The Company sold its credit life
business in September 1993. Under the sale agreement, the Company retained and
continues to run-off the policies in force at the date of the sale.
26
<PAGE>
INTEREST EXPENSE
Interest expense was $174,000 and $308,000 for the years ended December 31,
1996 and 1995, respectively. The majority of the interest expense during both
years consisted of interest on notes payable to one of the Company's principal
shareholders. The Company repaid these notes in full on May 1, 1996.
OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses for the year ended December 31, 1996
decreased $3,754,000 or 8.8%, to $39,014,000 from $42,768,000 for the year ended
December 31, 1995, primarily a result of the Company's continuing efforts to
maintain costs at a level appropriate to the associated revenue levels. A
combination of reductions in occupancy costs, data processing costs, salary and
employee benefit costs and agent commissions accounted for $2,087,000 of this
decrease. Agent commissions included in other operating costs and expenses were
$16,352,000 for the year ended December 31, 1996 and $16,774,000 for the year
ended December 31, 1995.
INCOME TAXES
Benefit from income taxes was $131,000 and $2,000 for the years ended
December 31, 1996, and 1995, respectively. The 1996 income tax benefit resulted
primarily from reversals of tax over accruals in prior years. During 1996 and
1995, the Company utilized net operating loss carryforwards to offset current
income taxes in the amount of $1,590,000 and $329,000, respectively.
YEARS ENDED DECEMBER 31, 1995 AND 1994
COMMISSION AND SERVICE INCOME
Commission and service income for the year ended December 31, 1995 decreased
$11,097,000, or 18.3%, to $49,572,000 from $60,669,000 for the year ended
December 31, 1994. This decrease is due primarily to a decline of $7,964,000 and
$3,363,000 in SC Facility premiums-based fees and claims-based fees,
respectively, resulting largely from the new contract effective in October 1994.
The effect of this new contract caused an immediate reduction in premium-based
fees and a more gradual reduction over an approximate eighteen month period in
claims-based fees. See "--Overview." Flood premium-based revenues for the year
ended December 31, 1995 decreased $842,000, compared to the year ended December
31, 1994, due to a decrease in the amount of flood premiums serviced by the
Company. However, this decrease was more than offset by a $2,215,000 increase in
claims-based revenues due to a larger volume of flood claims during 1995 than
1994.
PROPERTY AND CASUALTY PREMIUMS EARNED
Net property and casualty premiums earned for the year ended December 31,
1995 decreased $4,334,000, or 29.4%, to $10,384,000 from $14,718,000 for the
year ended December 31, 1994. This decline is largely due to the suspension of
retained risk insurance underwriting in the first half of 1995.
CREDIT LIFE PREMIUMS EARNED
Net credit life premiums earned for the year ended December 31, 1995
decreased $911,000, or 50.6%, to $890,000 from $1,801,000 for the year ended
December 31, 1994. The Company sold its credit life business in September 1993.
Under the sale agreement, the Company retained and continues to run-off the
policies in force at the date of the sale.
NET INVESTMENT AND INTEREST INCOME
Net investment and other interest income for the year ended December 31,
1995 decreased $1,896,000, or 30.5%, to $4,330,000 from $6,226,000 for the year
ended December 31, 1994. This decrease is primarily a result of a decrease of
$11,227,000, or 18.1%, in the Company's overall cash and investment
27
<PAGE>
position from $61,868,000 at December 31, 1994 to $50,641,000 at December 31,
1995. This decrease is due to the Company's negative cash flow from operations
in 1995. See "--Liquidity and Capital Resources." Average yield on net
investment income was 5.9% for both years.
REALIZED GAINS (LOSSES) ON INVESTMENTS
Realized gains (losses) on investments increased $6,491,000 from a loss of
$6,327,000 for the year ended December 31, 1994 to a gain of $164,000 for the
year ended December 31, 1995. Due to negative cash flow from operations during
1994, the Company sold bonds in a period of declining values, resulting in
realized losses in 1994.
OTHER INCOME
Other income for the years ended December 31, 1995 and 1994 was $843,000 and
$2,673,000, respectively. Other income in 1995 included income from the
settlement of a litigation. Other income for 1994 included $1,737,000 from
operations of the premium financing and travel agency subsidiaries which the
Company sold in February 1994 and March 1995, respectively, and a $650,000 gain
on the sale of the Company's premium financing subsidiary.
LOSS AND LOSS ADJUSTMENT EXPENSES
Property and casualty loss and loss adjustment expenses incurred for the
year ended December 31, 1995 decreased $19,336,000, or 52.3%, to $17,618,000
from $36,954,000 for the year ended December 31, 1994. This decrease corresponds
in part to the decrease in property and casualty premiums earned and also
reflects a smaller increase in the provision for prior year losses of $3,375,000
in 1995 as compared to $16,957,000 in 1994. See "Business--Loss and Loss
Adjustment Expense Reserves."
POLICY ACQUISITION COSTS
Property and casualty policy acquisition costs incurred decreased
$1,744,000, or 31.5%, from $3,794,000 for the year ended December 31, 1995
compared to $5,538,000 in the year ended December 31, 1994. This decrease is due
to the reduction in net premiums written.
CREDIT LIFE BENEFITS
Credit life benefits incurred were $545,000 and $770,000 for the years ended
December 31, 1995 and 1994, respectively. The Company sold its credit life
business in September 1993. Under the sale agreement, the Company retained and
continues to run-off the policies in force at the date of the sale.
INTEREST EXPENSE
Interest expense was $308,000 and $321,000 for the years ended December 31,
1995 and 1994, respectively. Almost all of the interest expense during both
years consisted of interest on notes payable to the Selling Shareholder. The
Company repaid these notes in full on May 1, 1996.
OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses decreased $12,454,000, or 22.6%, for the
year ended December 31, 1995, to $42,768,000 from $55,222,000 for the year ended
December 31, 1994. This decrease was primarily a result of the Company's ongoing
efforts to maintain costs at a level appropriate to the associated revenue
levels. The largest component of the decrease was due to workforce reductions in
early 1995. At December 31, 1995, the Company employed 268 full-time employees,
compared to 407 at December 31, 1994. Salaries and employee benefit expenses
were $10,676,000 for the year ended December 31, 1995, compared to $14,447,000
for the year ended December 31, 1994, a decrease of
28
<PAGE>
$3,771,000, or 26.1%. Additional savings were realized in the Company's data
processing costs. The Company converted its SC Facility business and flood
operations from the PMSC system to another data processing system in December
1994 and September 1995, respectively, reducing data processing payments to PMSC
from $3,450,000 for the year ended December 31, 1994 to $1,849,000 for the year
ended December 31, 1995. Agent commissions included in other operating costs and
expenses were $16,774,000 for the year ended December 31, 1995 and $18,948,000
for the year ended December 31, 1994.
INCOME TAXES
Provision (benefit) from income taxes was $(2,000) and $29,000 for the years
ended December 31, 1995 and 1994, respectively. During 1995, the Company
utilized net operating loss carryforwards to offset current income taxes in the
amount of $329,000.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity relates to the Company's ability to produce sufficient cash flow
to fulfill obligations to pay claims, agent commissions and other operating
expenses. Sources of liquidity include net income, premium collections,
investment income, sales or maturities of investments and financing activities.
Net cash provided by operations for the three months ended March 31, 1997
was $6,037,000, compared to cash used in operations of $1,492,000 for the same
period in 1996. This improvement in cash flows is attributable to unusually
favorable underwriting results on a cash flow basis for the SC Facility, which
is expected to result in lower cash settlements at the end of the second quarter
of 1997. Cash flows from investing activities for the three months ended March
31, 1997 was $1,870,000 related to investment sales and maturities, resulting in
a decrease in the Company's investments in debt and equity securities from
$40,252,000 at December 31, 1996 to $38,074,000 at March 31, 1997.
Total assets as of March 31, 1997 were $202,016,000, a decrease of
$18,456,000, or 8.4%, from total assets of $220,472,000 at December 31, 1996.
The majority of this decrease, $15,029,000, is related to a reduction in the
reinsurance recoverable on unpaid losses and loss adjustment expenses on
business ceded to the NFIP. The decrease in this asset is fully offset by a
decrease in the related liability for estimated losses on this ceded business.
The Company experienced negative cash flow from operations of $12,938,000 in
1996 (which was funded with existing cash and short-term investments),
$21,711,000 in 1995 and $44,608,000 in 1994. Although the Company suspended
risk-bearing insurance underwriting activities in 1995, the Company continued to
pay losses and loss adjustment expenses totaling $24,584,000 in 1996, of which
$16,267,000 were loss payments on prior year claims. During 1994, cash flows
from operations were affected by disbursements of $26,500,000 for the settlement
of all obligations to the Workers Compensation National Reinsurance Pool and a
settlement of a dispute regarding the liabilities of a former subsidiary.
Net cash used in investing activities in 1996 was $7,920,000 as $14,288,000
in new investments were acquired. The primary sources of cash for these new
investments were $7,049,000 of investments that had matured or were sold and
$6,873,000 from financing activities. During 1996, the Company continued to sell
investments that were inconsistent with its current investment policy, which
resulted in realized losses of $14,000. During 1995, the Company realized a
$164,000 gain on its portfolio sales. In order to fund negative cash flow from
operations during 1994, the Company sold bonds resulting in realized losses of
$6,327,000.
Total cash and investments at March 31, 1997 and December 31, 1996, 1995 and
1994 were $48,865,000, $42,944,000, $50,641,000 and $61,868,000, respectively.
At March 31, 1997, 22.0% of total investments were committed to cash and
short-term investments, primarily money market funds and overnight repurchase
agreements compared to 6.2% at December 31, 1996. Investments in U.S. Treasury
and U.S. Government notes represented 77.7% of the portfolio as of March 31,
1997 compared to 93.4%
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<PAGE>
as of December 31, 1996. The Company does not currently own any non-investment
grade debt securities. See "Business -- Investments."
All debt securities are considered available-for-sale and are carried at
market value as of December 31, 1996 and 1995. The market values of the debt
securities were $536,000 below book value at the end of 1996, which was
reflected as a reduction in shareholders' equity, compared to $401,000 above
book value as of December 31, 1995. The weighted average maturity of the fixed
maturity investments was 3.8 years as of December 31, 1996. Average net
investment yields on the Company's cash and investments was 6.3% in 1996 and
5.9% in 1995.
In January 1995, the Company received proceeds from a rights offering in the
amount of $5,321,000 and made a capital contribution of $5,000,000 to SCIC which
prior to this contribution had negative statutory surplus. In addition, during
the second quarter of 1995, the Selling Shareholder loaned the Company
$2,000,000, which was contributed to SCIC's statutory surplus.
In the third quarter of 1996, following receipt of regulatory approval, the
Company sold 1,562,500 shares of unregistered Common Stock at a price of $4.00
per share to the Powers Group pursuant to a letter of intent entered into in the
fourth quarter of 1995. The proceeds were used to make a $6,300,000 contribution
to SCIC. In conjunction with this sale, the Company also issued to these
investors stock options to acquire an additional 781,250 shares at the greater
of $6.00 per share or the book value per share at the date of exercise, expiring
December 31, 1998, and 781,250 shares at the greater of $8.00 or the book value
per share at date of exercise, expiring December 31, 2000.
During the first quarter of 1996, the Company sold 408,750 shares of its
unregistered Common Stock at a price of $8.00 per share to the Avent Group. The
proceeds of this stock sale were used to repay the $2,476,000 of notes payable
which were due May 1, 1996. In addition, the Company has issued to this group
stock options expiring December 31, 2000 to acquire an additional 408,750 shares
at the greater of $10.00 per share or the book value per share at the date of
exercise.
SBIG is a legal entity separate and distinct from its subsidiaries. As a
holding company, the primary sources of cash needed to meet its obligations,
including principal and interest payments with respect to any indebtedness, are
dividends and other permitted payments from its subsidiaries and affiliates.
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 require the prior approval of the Director of Insurance of
the State of South Carolina for the payment of any dividends by SCIC within any
twelve-month period that 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. The Company's payment of cash dividends is at the
discretion of the Board of Directors, upon approval of the Director of
Insurance, and is based on its earnings, financial condition, capital
requirements, and other relevant factors. If the ability of SCIC and the
Company's other insurance subsidiaries to pay dividends or make other payments
to the Company is materially restricted by regulatory requirements, it could
affect the Company's ability to service its debt and/or pay dividends. In
addition, no assurance can be given that South Carolina will not adopt statutory
provisions more restrictive than those currently in effect.
The volume of premiums that the property and casualty insurance subsidiaries
may prudently write is based in part on the amount of statutory net worth as
determined in accordance with applicable insurance regulations. The NAIC has
adopted RBC requirements for property and casualty insurance companies to
evaluate the adequacy of statutory capital and surplus in relation to
investments and insurance risks such as asset quality, asset and liability
matching, loss reserve adequacy, and other business factors. The RBC formula is
used by state insurance regulators as an early warning tool to identify, for the
purpose of initiating regulatory action, insurance companies that are
potentially inadequately capitalized. Compliance
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<PAGE>
is determined by the ratio of the companies' regulatory total adjusted capital
to its authorized control level RBC (as defined by the NAIC). All four of the
property and casualty insurance subsidiaries of the Company have December 31,
1996 ratios of total adjusted capital to RBC that are in excess of the level
which would prompt regulatory action. The South Carolina Director of Insurance
authorized the resumption of underwriting activities for which the Company
retains risk on the condition that the Company maintain a ratio of net premiums
written to statutory surplus of 0.85 to one. See "Business--Regulation."
UTILIZATION OF NET OPERATING LOSS CARRYFORWARDS
The Company has unused tax operating loss carryforwards and capital loss
carryforwards of approximately $94,808,000 at March 31, 1997 and $95,415,000 at
December 31, 1996 for income tax purposes. However, due to a "change in
ownership" event that occurred in January 1995, the Company's use of the net
operating loss carryforwards are subject to limitations in future years of
approximately $2,000,000 per year. In addition, these net operating loss
carryforwards expire between 1999 and 2010. As a result of these limitations,
the Company expects that it will not be able to utilize a majority of the net
operating loss carryforwards. Net operating loss carryforwards available for use
in 1997 is approximately $7,600,000 due to the tax losses incurred in 1995
subsequent to the date on which the change in ownership event occurred. See Note
6 to Notes to Consolidated Financial Statements.
31
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BUSINESS
OVERVIEW
The Company provides automobile, flood and other property and casualty
insurance services and products through independent agents primarily in the
southeastern United States. The Company's largest source of revenues derives
from its role as one of three servicing carriers for the SC Facility, a
state-sponsored plan for insuring South Carolina drivers outside of the
voluntary market. The Company also is a leading provider and an original
participant in the NFIP, a flood insurance program administered by the federal
government. As a servicing carrier for the SC Facility and the NFIP, the Company
receives commissions and fees for issuing, processing and administering policies
as well as for claims adjustment, but reinsures all insurance risks with either
the SC Facility or the NFIP, as applicable. The Company provides other fee-based
services as a MGA for commercial insurance, primarily for commercial lines, and
as an excess and surplus lines broker, and also offers storm claims adjustment
and liability run-off management services. Recently, the Company began limited
efforts to market and underwrite nonstandard automobile insurance on a retained
risk basis.
The following table sets forth certain information for the Company's current
insurance operations and run-off risk operations for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1994 1995 1996
------------------------------------- ------------------------------------- ------------------------
GROSS NET GROSS NET GROSS NET
PREMIUMS PREMIUMS TOTAL PREMIUMS PREMIUMS TOTAL PREMIUMS PREMIUMS
WRITTEN EARNED REVENUES(1) WRITTEN EARNED REVENUES(1) WRITTEN EARNED
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT OPERATIONS
Fee and Service Operations:
SC Facility(2):
Premiums/related
fees.............. $ 80,073 -- $ 21,415 $ 64,206 -- $ 13,451 $ 69,981 --
Claims-based fees... 0 -- 17,706 0 -- 14,343 0 --
Flood:
Premiums/related
fees.............. 29,517 -- 10,250 28,576 -- 9,408 27,157 --
Claims-based fees... 0 -- 648 0 -- 2,863 0 --
MGA................... 25,388 -- 7,094 24,245 -- 6,734 18,676 --
Brokerage and
Other(3)............ 13,485 -- 3,556 10,915 -- 2,773 7,342 --
Risk Operations:
Nonstandard
Automobile(4)....... -- -- -- 2,381 -- -- 2,948 71
Assumed from
Pools(5)............ 5,332 2,275 2,275 422 1,232 1,232 6,235 5,819
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL CURRENT
OPERATIONS............ $ 153,795 $ 2,275 $ 62,944 $ 130,745 $ 1,232 $ 50,804 $ 132,339 $ 5,890
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
RUN-OFF RISK
OPERATIONS(6)......... $ 18,728 $ 14,244 $ 14,244 $ 9,264 $ 10,042 $ 10,042 $ 710 $ 1,774
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
-------------------------------------
GROSS NET
TOTAL PREMIUMS PREMIUMS TOTAL
REVENUES(1) WRITTEN EARNED REVENUES(1)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CURRENT OPERATIONS
Fee and Service Operatio
SC Facility(2):
Premiums/related
fees.............. $ 14,556 $ 20,187 -- $ 4,249
Claims-based fees... 10,638 0 -- 2,875
Flood:
Premiums/related
fees.............. 8,340 5,414 -- 1,679
Claims-based fees... 3,581 0 -- 839
MGA................... 6,170 4,097 -- 1,087
Brokerage and
Other(3)............ 2,300 206 -- 235
Risk Operations:
Nonstandard
Automobile(4)....... 71 728 149 149
Assumed from
Pools(5)............ 5,819 2,202 2,158 2,158
----------- ----------- ----------- -----------
TOTAL CURRENT
OPERATIONS............ $ 51,475 $ 32,834 $ 2,307 $ 13,271
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
RUN-OFF RISK
OPERATIONS(6)......... $ 1,774 $ 0 $ 16 $ 16
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------------------
(1) Excludes revenues from investment income and other income.
(2) As a result of a competitive bidding process in October 1994, the Company
was awarded a new contract with the SC Facility for a smaller block of
business at lower rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Nonstandard
Automobile Insurance Business-- Industry Background."
(3) Includes excess and surplus lines brokerage and other state facilities for
which the Company acted as a servicing carrier and other fee service income.
(4) Includes nonstandard automobile insurance written on a voluntary basis in
North Carolina which is reinsured 100% with the NC Facility.
(5) Consists of mandated participation in various state associations due to the
Company's participation in such states' markets.
(6) Reflects revenue derived from lines of business for which the Company is no
longer writing new or renewal policies. It includes (i) run-off premiums
from retained credit life business in force at the time the Company sold
such business in September 1993, (ii) workers' compensation premiums through
1994 and (iii) premiums on certain personal line policies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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<PAGE>
NONSTANDARD AUTOMOBILE INSURANCE BUSINESS
INDUSTRY BACKGROUND
Total private passenger automobile insurance premiums written by insurance
carriers in the United States have been estimated by A.M. Best to be $122.2
billion, of which $1.5 billion was written in South Carolina, in 1995. South
Carolina premiums consisted of approximately $968 million of automobile
liability coverage and approximately $533 million of automobile physical damage
coverage.
Many states, including South Carolina, have state-sponsored plans to provide
insurance to drivers who are unable to obtain insurance in the voluntary market.
The SC Facility was created in 1974, as a result of the South Carolina
Automobile Reformation Act of 1974 (the "Facility Legislation"). The Facility
Legislation created a pool of "Designated Agents" which are divided into three
"blocks." The Designated Agents produce automobile liability insurance business
exclusively for the SC Facility through one of three servicing carriers that
each service a "block" of Designated Agents. In addition, voluntary automobile
insurance companies may selectively reinsure policy risks with the SC Facility
by ceding up to a maximum of 35% of their automobile liability premiums to the
SC Facility. Of the policies ceded to the SC Facility, as of September 30, 1996,
approximately 61% were written by voluntary insurance companies and
approximately 39% were written through Designated Agents by the servicing
carriers. The total written premium volume for private passenger policies in the
SC Facility for the fiscal year ended September 30, 1996 was approximately $452
million, and the total amount of written premium volume for private passenger
policies of all Designated Agents for the fiscal year ended September 30, 1996
was approximately $175 million.
Servicing carriers contract with the SC Facility in exchange for a
percentage of premiums written and claims handled. These carriers must pay the
Designated Agents assigned to them a 12% commission on the premiums for policies
written by them. Each servicing carrier reinsures 100% of the risks under such
policies with the SC Facility. When a policyholder whose premium has been ceded
to the SC Facility incurs a loss, the voluntary insurance company or servicing
carrier that issued the policy adjusts the loss and is reimbursed for the loss
and expenses by the SC Facility.
Approximately 175 Designated Agents participated in the SC Facility as of
September 30, 1996. Prior to October 1994, the Company serviced the Designated
Agents assigned to Block One, the largest of the three blocks. In 1994, the SC
Facility for the first time instituted a bid and qualification process for each
of the three blocks. The bidding was open to all qualified insurers, and
successful bidders were awarded a five-year servicing contract beginning in
October 1994. The Company submitted the second lowest bid and was awarded the
contract to service Designated Agents assigned to Block Two. Block Two accounts
for approximately one-third of both the Designated Agents and the gross premiums
written through Designated Agents for the SC Facility. Block Two Designated
Agents are primarily located in the Charleston area, Block One agents are
primarily located in the Columbia area and Block Three includes agents located
in the Greenville area.
The Company has worked with the Designated Agents in each of the SC
Facility's three blocks. From 1974 to 1994, the Company serviced the Designated
Agents of Block One; since 1994, the Company has serviced the Designated Agents
of Block Two; and since 1996, the Company has serviced the Designated Agents of
Block Three in its capacity as a provider of run-off services for the previous
Block Three servicing carrier.
Throughout its history, the SC Facility has operated at a deficit. Total
losses for private passenger automobile insurance policies in the SC Facility
amounted to approximately $506 million for the fiscal year ended September 30,
1996 for a loss ratio of 111% and a combined ratio of 144%. The deficit of the
SC Facility is subsidized by all South Carolina drivers who are assessed a
"recoupment fee" in addition to their insurance premium. These fees ranged from
approximately $50 to approximately $3,900 per insured in 1996 based upon driving
records. SC Facility loss ratios have been due, in large part, to the fact that
33
<PAGE>
automobile insurance premium rates for drivers insured by the SC Facility have
been inadequate to support the SC Facility on a self-sustaining basis. However,
the current South Carolina Director of Insurance has allowed physical damage
premium rate increases aggregating approximately 62% in order to reduce the SC
Facility's losses related to such risks. An increase in liability rates has not
yet occurred.
The South Carolina Senate recently passed reform legislation which, if
enacted, would reorganize the SC Facility over a three-year transition period.
In particular, this legislation would replace the SC Facility with either an
assigned risk plan or a joint underwriter association ("JUA"), and Designated
Agents would lose their designated status. An assigned risk plan typically
assigns qualifying insureds to insurance carriers based on their premiums
written in the voluntary market, while a JUA typically shares profits and losses
related to qualifying insureds among the carriers participating in the JUA. This
legislation was proposed in response to the SC Facility's significant deficits
and the resulting subsidization of the SC Facility through recoupment fees paid
by all South Carolina drivers. The Company believes that the proposed
reorganization is likely to result in SC Facility rates increasing to a
self-sustaining level, thereby triggering a voluntary exit from the SC Facility
by insureds able to obtain more attractive rates in the voluntary market.
Several reform bills also are currently pending before the South Carolina
House of Representatives. Although certain of these bills would not reorganize
the SC Facility, they would eliminate certain factors used in rating insured
South Carolina drivers and recalculate the recoupment fees. The Company believes
that enactment of any of these bills would likely result in higher SC Facility
rates and a voluntary with-drawal of insureds from the SC Facility.
If the South Carolina Legislature does not enact reform legislation with
respect to the SC Facility, the Company believes that the Director of Insurance
will allow premium rates for liability insurance to rise to approximate
self-sustaining levels based on the recent increase in physical damage rates of
approximately 62%. These rate increases may be effected through adjustments to
criteria under the SC Facility Legislation which are within the purview of the
Director. See "Risk Factors--Anticipated Changes in Automobile Insurance
Business in South Carolina."
In the event SC Facility rates are increased and insureds voluntarily
withdraw from the SC Facility, the Company believes there will be an opportunity
to attract such insureds to the Company's nonstandard automobile insurance
products and, eventually, into standard and preferred automobile products. In
particular, the Company believes that its Designated Agent relationships, its
underwriting data and experience with the SC Facility and knowledge of the South
Carolina automobile insurance market will allow it to obtain and underwrite
additional business. See "Risk Factors--Re-entry into Risk-Bearing Activities."
The voluntary automobile insurance market in most states includes three
tiers of risks: preferred, standard and nonstandard. Nonstandard risk drivers
are individuals who are unable to obtain insurance through standard market
carriers due to factors such as poor premium payment history, limited driving
experience, unsatisfactory driving records, automobile make or model or other
restrictive underwriting criteria. Premium rates for nonstandard risks generally
are higher and policy limits generally are lower than for preferred or standard
risk drivers.
Several factors influence the tiers of the automobile insurance business,
including compulsory state insurance laws, premium rate regulation, market
conditions for standard automobile insurance and state assigned risk (or
residual market) plans. In cases where these factors have contributed to an
unattractive market environment, certain insurance companies have ceased to
underwrite personal automobile insurance, many have elected to write insurance
for preferred or standard risks only and others have selectively withdrawn from
certain states. In addition, the underwriting standards for preferred and
standard risks have become more restrictive, thereby requiring more drivers to
seek coverage in the nonstandard market. These and other factors have
contributed to an increase in the size of the nonstandard automobile market
nationwide.
34
<PAGE>
According to statistical information derived from insurer annual statements
compiled by A.M. Best, the nonstandard automobile market accounted for
approximately $20.6 billion in total annual premium volume in the United States
for 1995. Overall, based on information provided by A.M. Best, from 1990 through
1995, the nonstandard automobile segment grew from approximately 8.6% to
approximately 14.5% of the total private passenger automobile market. In South
Carolina, virtually all potential nonstandard automobile insurance business is
written by the SC Facility, which had approximately $452 million in total
written premium volume for private passenger coverages for the fiscal year ended
September 30, 1996.
STRATEGY
As discussed above, the Company expects that rates in the SC Facility will
increase (whether as a result of legislative or administrative action),
eventually resulting in insureds leaving the SC Facility. See "Risk
Factors--Anticipated Changes in Automobile Insurance Business in South
Carolina." In anticipation of these expected events, the Company has adopted a
transition strategy designed to expand its risk-bearing automobile insurance
business and increase the profitability of its current servicing carrier
operations. To accomplish these objectives, the Company intends to:
- EXPAND RETAINED RISK AUTOMOBILE INSURANCE BUSINESS. The Company intends to
expand its automobile business in South Carolina. In addition to
increasing its existing physical damage coverage business, the Company
plans to add liability coverage and will offer these insurance products to
certain drivers voluntarily leaving the SC Facility. The Company also
intends to write automobile insurance policies on a retained risk basis in
North Carolina, where it currently writes nonstandard automobile liability
insurance policies that are entirely ceded to the NC Facility. In
addition, the Company has entered into a Letter of Intent to acquire
Innovative, which writes nonstandard automobile insurance through
Universal primarily in North Carolina. See "Prospectus Summary-- Recent
Developments."
- CAPITALIZE ON EXISTING AGENT RELATIONSHIPS. The Company intends to
capitalize on its agent relationships to expand its risk-bearing
automobile insurance business. The Company has been a servicing carrier
for the SC Facility since 1974 and, as a result, has established
relationships with many of the SC Facility's Designated Agents. In
addition, the Company intends to continue its efforts to develop
relationships with independent agents in non-urban areas which the Company
believes are often not developed by larger insurance companies. The
Company also intends to utilize the relationships it currently has with
independent agents in North Carolina to obtain profitable risks for
underwritten automobile insurance products that it will offer in North
Carolina.
- DEVELOP MULTI-TIERED PRODUCTS FOR THE AUTOMOBILE INSURANCE MARKET. The
Company is developing standard and preferred automobile insurance products
for qualified insureds that the Company expects will exit the SC Facility.
The Company also anticipates that other insureds who voluntarily leave the
SC Facility will be upgraded to standard or preferred status once they
meet the underwriting criteria.
- CAPITALIZE ON EXISTING DATABASE. The Company has been adjusting and
servicing automobile insurance policies for the SC Facility since 1974. As
a result, the Company has extensive knowledge of the South Carolina
automobile insurance market and has developed a substantial database of
insureds. The Company believes that its database will be beneficial when
considering various factors relevant in underwriting and pricing
automobile insurance in South Carolina. In the event the SC Facility is
depopulated, the Company believes that its database will provide it with
an advantage over potential competitors in profitably underwriting
automobile business in South Carolina.
- REDUCE OPERATING EXPENSES RELATED TO SC FACILITY BUSINESS. The Company's
current management intends to continue to reduce expenses related to the
Company's SC Facility operations as well as improve service and increase
productivity. In particular, the Company continues to upgrade its
management information systems in order to improve communications with its
Designated Agents.
35
<PAGE>
The Company recently created integrated customer service teams and is
providing pay-for-performance incentives to its agents to improve
productivity and service quality.
SERVICES AND PRODUCTS
The Company offers automobile insurance as a servicing carrier to the SC
Facility and, to a limited extent, on a retained risk basis where it retains
underwriting gains and losses. Policies ceded to the SC Facility are written
through Designated Agents and can include both liability and physical damage
coverages. These policies have terms that range from 6 to 12 months; the
majority have a term of 6 months. The SC Facility will only accept liability
policies with accident limits of $15,000 to $250,000 for bodily injury coverage
per person, $30,000 to $500,000 for bodily injury per accident and $5,000 to
$50,000 for property damage or a combined limit of $500,000 per accident.
Policies with greater limits cannot be ceded to the SC Facility.
As a servicing carrier, the Company rates, issues, processes and administers
the policies and adjusts claims on business produced by Designated Agents
assigned to Block Two. The Company receives a fee based upon the premiums
written as well as a fee based upon the claims that it adjusts. The Company also
is managing the run-off of claims for Block Three resulting from business
written before October 1994 by the servicing carrier that formerly serviced
Block Three.
The Company selectively retains physical damage coverages on a risk-bearing
basis for policies with terms of 6 to 12 months. The Company resumed
underwriting nonstandard products on a retained risk basis in July 1996 by
writing physical damage coverage for which it retained approximately 50% of the
risk and reinsured approximately 50% of the risk under a quota share reinsurance
arrangement with unaffiliated reinsurers. In May 1996, the Company also acquired
a book of nonowners automobile insurance business for which it retains all of
the risks. Nonowners insurance is sold to an individual with a limited-purpose
driver's license (e.g., work-related driving only). In South Carolina, drivers
must obtain nonowners insurance even if liability and physical damage coverage
has already been obtained by the employer.
The Company also writes nonstandard automobile liability insurance in North
Carolina, all of which is reinsured with the NC Facility. The NC Facility will
only accept liability policies with accident limits of $25,000 to $100,000 for
bodily injury coverage per person, $50,000 to $300,000 for bodily injury
coverage per accident and $15,000 to $50,000 for property damage per accident.
MARKETING
The SC Facility requires Designated Agents to write private passenger
automobile liability insurance through their assigned servicing carrier. As of
September 30, 1996, approximately 175 Designated Agents participated in the SC
Facility. The Company works with the Designated Agents assigned to Block Two of
the SC Facility. As of September 30, 1996, approximately 65 Designated Agents
were assigned to Block Two. Ten of the Designated Agents assigned to Block Two
accounted for approximately 42.6% (six accounted for approximately 32.5%) of the
gross premiums written for the SC Facility by the Company as of December 31,
1996.
The Company intends to concentrate its risk-bearing activities in South
Carolina, although management plans to expand selectively into additional
states. The Company writes nonstandard automobile liability insurance through
approximately 95 independent agents in North Carolina, all of which is currently
ceded to the NC Facility. The Company intends to write and retain certain
automobile insurance coverages in North Carolina in 1997. See "Prospectus
Summary--Recent Developments."
The Company seeks to foster a loyal and close working relationship with its
Designated Agents and independent agents in a variety of ways. The Company
conducts quarterly Agents Advisory Council meetings to learn of, and respond to,
the needs of its Designated Agents and is creating similar councils for its
independent agents. The Company also is developing a program that will include
underwriting training to assist its Designated Agents with the anticipated
changes to the SC Facility. The Company actively engages in recruiting and
training new independent agents as well. The Company also provides assistance
36
<PAGE>
to its independent agents through the use of seminars and underwriting training
and field representatives who consult with agencies on underwriting matters,
assist agencies in research and accompany agents on marketing visits to current
and prospective policyholders. The Company assists its independent agents with
the processing of paperwork and other administrative services and provides
automated services to selected agents.
Independent agents generally are paid higher commissions than those employed
directly by an insurance company, in part to account for the expenses of
operating as an independent agent. The Company believes that the commissions it
pays to its independent agents are competitive with the commissions paid by
other insurance companies operating through independent agents. The Company also
has established a stock option plan for certain eligible independent agents
(including selected Designated Agents), which became effective on December 31,
1995.
CLAIMS
The Company's claims management unit employs approximately 90 full-time
personnel who handle claims for both the SC Facility and the personal automobile
risk-bearing business. In addition to claims handling teams, the Company's
claims operation includes clerical, direct reporting, litigation, salvage/
automobile material damage ("AMD"), subrogation and systems teams. Claims are
received and initially processed by the direct reporting team, which assigns
them to a claims representative based upon loss type, severity and agent. Claims
representatives review claims, obtain appropriate documentation, establish loss
reserves for covered claims and negotiate and settle claims.
Claims settlement authority levels are established for each adjustor and
supervisor based on their expertise and experience. The Company processes all
claims in-house with limited use of outside adjustors for specific task
assignments. Outside adjustors have no authority to settle claims and are paid
on a time and reasonable expenses basis. Outside appraisers are frequently used
and are paid at prescribed rates. The AMD team reviews all appraisals in excess
of $2,500.
The Company recently terminated a claims supervisor after it discovered that
he had falsified certain SC Facility-related claims information and
documentation. The Company is conducting its own internal investigation as well
as assisting investigations by the South Carolina Department of Insurance, the
SC Facility and the South Carolina Attorney General. The Company estimates that
the total amount of fraudulent claims was approximately $185,000. The SC
Facility was improperly charged for certain of these fraudulent claims, which
the Company will reimburse. The Company has a fidelity bond that is expected to
pay for any losses that exceed $150,000. The Company has taken several steps to
improve its internal security, including reestablishing a corporate internal
audit function, testing and implementing several systems and work flow
procedural enhancements, and conducting unannounced, random audits of closed and
reopened files. There can be no assurance, however, that the Company will be
able to prevent similar incidents of fraud in the future.
UNDERWRITING
A voluntary insurance company or servicing carrier (each, a "Facility
Insurer") must appropriately rate and cede risks placed with the SC Facility. If
a risk is improperly rated, the Facility Insurer must either increase the
premium it charges the insured upon renewal of the policy or immediately refund
any overcharged amount, whichever is applicable. The SC Facility examines a
Facility Insurer's ratings of risks during annual underwriting audits and
determines the Facility Insurer's error percentage. If a Facility Insurer's
error percentage exceeds 15%, the Facility Insurer bears the cost of two
additional audits and, if its error percentage remains above 15% after the
second audit, is subject to losing its contract with the SC Facility. During the
past five years, the Company's error percentage has consistently been under 10%.
If a risk is improperly ceded to the SC Facility and a loss is incurred in
connection with such risk, the SC Facility may refuse to cover such loss and,
subject to an appeals process, the Facility Insurer will be solely responsible
for the loss.
37
<PAGE>
Although the Company must properly rate SC Facility-related business,
underwriting activities on which the Company retains insurance risks currently
are limited to a small amount of the nonstandard automobile physical damage
business conducted in South Carolina. See "--Nonstandard Automobile Insurance
Business--Marketing." The Company underwrites this business with the goal of
achieving adequate pricing and seeks to classify risks into narrowly defined
segments by using all available underwriting criteria and credible historical
data. As of December 31, 1996, the Company had a combined nonstandard automobile
insurance underwriting and processing staff of 12 employees.
The Company generally utilizes many factors in determining its rates,
including the number of vehicles, their type, age and location, driving
experience, number and type of convictions or accidents, limits of liability,
deductibles and, where allowed by law, sex and marital status of the insured.
Premium rates for automobile insurance generally are subject to the approval of
state insurance departments. The rate approval process varies from state to
state.
FLOOD INSURANCE
INDUSTRY BACKGROUND
Policyholders obtain flood insurance to insure structures and personal
property from flood damage. The federal government, through the Federal
Emergency Management Agency, underwrites the National Flood Insurance Program, a
federal flood insurance program. The NFIP offers flood insurance to owners of
property located in flood-prone areas both directly and through the Write Your
Own Program, which was created to increase the NFIP's policy base through the
promotion and servicing of flood insurance by the private insurance industry.
Flood insurance premium rates are set by FEMA based on the desired amount of
coverage and the location of property in one of 70 flood zone areas. Insurance
companies that participate in the WYO Program do not compete on price because
FEMA establishes flood insurance premium rates, but do compete on commissions
paid to agents and service provided to agents and policyholders. FEMA has
estimated that approximately 40% of eligible properties are currently insured
through the NFIP. The federal government, through legislation such as the
National Flood Reform Act of 1994, has sought to increase participation of
eligible properties in the NFIP in order to make the NFIP more actuarially sound
and to mitigate federal disaster assistance, which is also administered by FEMA.
In addition, as a result of legislation enacted in 1994, federally-backed
mortgage loans currently require parties to obtain flood insurance for property
located in a flood zone.
As of September 30, 1996, the total number of NFIP policies was
approximately 3.6 million, an increase of approximately 201,000 policies, or
5.9%, over the total number of NFIP policies in place at September 30, 1995.
Total premiums written by all servicing carriers were approximately $1.18
billion and approximately $1.21 billion for the years ended September 30, 1995
and 1996, respectively.
A servicing carrier for the NFIP receives a commission that ranges from
30.6% to 34.6% of the gross premiums written. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." In the event of a
flood, a servicing carrier will handle claims on behalf of the NFIP, for which
the carrier receives a fee of 3.3% of the claims paid plus reimbursement for
loss adjustment expenses. See "--Flood Insurance--Claims." Total fees for claims
paid under the NFIP were approximately $14.4 million and approximately $39.9
million for the years ended September 30, 1995 and 1996, respectively.
As of September 30, 1996, 94 servicing carriers actively participated in the
NFIP. The Company joined the NFIP as an original servicing carrier in 1983 and
believes, based on NFIP data, that it was one of the ten largest flood servicing
carriers in the NFIP for the fiscal year ended September 30, 1996. Although the
Company is licensed to sell flood insurance in approximately 43 states, and has
licensed agencies across the United States, its flood insurance business
primarily is concentrated in Florida, New Jersey, North Carolina and South
Carolina. The Company also provides specialized catastrophe claims services to
other flood insurers through its network of storm claims adjusters. See "--Other
Business--Insurance Network Services."
38
<PAGE>
STRATEGY
One of the Company's business objectives is to increase its volume of flood
insurance business through the expansion of its agent network. To accomplish
this objective, the Company intends to:
- EXPAND AGENT COVERAGE IN HIGH-VOLUME MARKETS. The Company has targeted
several high-volume markets in which it intends to increase agent coverage
for its flood insurance business. In order to implement this plan, the
Company has recently hired three marketing representatives to develop
relationships with independent agents in these markets and educate them
about the Company's flood operations and claims team. These
representatives and certain of the Company's claims personnel also plan to
make joint presentations to certain large national accounts.
- PROMOTE PAST CLAIMS PERFORMANCE TO AGENTS. The Company intends to continue
to promote its flood claims experience and capabilities. The Company
believes that an important factor necessary for retaining its current
agents and attracting new agents is its proven ability to provide reliable
catastrophe claims services through its claims adjusting division,
Insurance Network Services ("INS"). The Company also has expanded its
storm claims adjustment capabilities by establishing a second claims team,
which will allow the Company to respond to concurrent catastrophes and to
devote greater claims resources for significant catastrophes. See "--Other
Business--Insurance Network Systems."
- STRENGTHEN RELATIONSHIPS WITH AGENTS. The Company intends to place
terminals directly in the offices of selected agents. The Company expects
that direct terminal placement will expand the agent's role in processing
policies and will also attract "large agent" rollover packages from
competitors. The Company believes that it is one of the few flood
insurance servicing carriers that provides agents with the opportunity to
participate in a stock option program.
- PROVIDE BUNDLED PRODUCTS. The Company is developing a bundled product
which will include flood mapping services, national flood insurance and
access to excess flood insurance. The Company currently offers these
services through arrangements with other companies. The Company believes
that the convenience and competitive pricing of a bundled product will be
attractive to its agents and other potential sources of flood insurance
business. The Company also expects to allow policyholders to use credit
cards to pay premiums.
- DEVELOP STRATEGIC RELATIONSHIPS. The Company intends to increase its flood
insurance business by developing strategic relationships with financial
institutions. In particular, the Company expects to attract those
institutions that seek to outsource some of the flood insurance and
ancillary services associated with loan origination. The Company believes
that demand for flood insurance and related products by these institutions
will increase because recent reform legislation requires that all
properties subject to federally backed mortgages must be mapped for
potential flood exposures before a loan is issued.
PRODUCTS
The NFIP policies written by the Company provide protection to policyholders
for property damage resulting from floods, subject to limits of $250,000 on
residential buildings, $500,000 on commercial risks and $100,000 and $500,000
for residential and non-residential contents, respectively. The Company also
provides a free flood zone determination mapping service to its agents through
arrangements with other companies. This service, often completed within 24 hours
of receiving a request, provides the agent with the basic information needed to
rate, quote and sell a flood insurance policy. In a brokerage capacity, the
Company also offers excess flood insurance to policyholders. See "--Other
Business--Excess and Surplus Operations."
39
<PAGE>
MARKETING
The Company markets its flood insurance products through a network
consisting of 2,775 licensed independent agencies, who receive a commission on
the premiums they write. The following table sets forth certain Company
information for its top four states as well as the 39 other states in which the
Company is licensed to sell flood insurance:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED
1996 MARCH 31, 1997
----------------------- ---------------------------------------
GROSS GROSS
NUMBER OF PREMIUMS % OF PREMIUMS NUMBER OF PREMIUMS % OF PREMIUMS
AGENTS WRITTEN WRITTEN AGENTS WRITTEN WRITTEN
----------- ---------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Florida................................... 427 $11,721,000 43.2% 436 $2,032,000 37.5%
North Carolina............................ 241 3,099,000 11.4 248 676,000 12.5
South Carolina............................ 134 2,774,000 10.2 193 467,000 8.6
New Jersey................................ 190 2,559,000 9.4 136 581,000 10.8
39 Other States........................... 1,723 7,004,000 25.8 1,762 1,658,000 30.6
</TABLE>
While the NFIP directly markets flood insurance policies through independent
agents, the majority of NFIP policies are written by servicing carriers. The
Company believes that independent agents prefer to write flood policies through
servicing carriers rather than directly with the NFIP because servicing
carriers, including the Company, generally pay higher commissions. The Company
also offers its independent agents the opportunity to participate in its stock
option plan. The Company periodically reviews and terminates its agency
relationships with non-producing or under-producing agents or agents that do not
comply with its guidelines and policies for the sale of flood insurance.
The Company provides assistance to its agents through the use of seminars,
training and field representatives who consult with agents on various matters.
The Company also provides certain agents with a software program that is
designed to assist agents with premium calculations, flood quotes, the creation
of insurance applications and the storage of data for requoting or correcting
policies. Once the requisite application information data is entered, the
software prints the application for the agent to sign, attach payment and mail
to the Company. The Company provides its agents with flood zone determinations
and also has installed zone determination software in certain agencies.
CLAIMS
Insurance claims on flood insurance policies are investigated and settled
mainly by claims adjusters employed by INS. The Company also uses a network of
independent adjusters located throughout the United States solely for
investigation purposes; the Company makes all decisions concerning coverage and
payments. Pursuant to a fee schedule issued by FEMA, independent adjusters
receive a portion of the fees paid by FEMA for handling covered losses, while
the Company receives the balance. For claims up to $50,000 in covered losses,
FEMA pays a graduated fee up to $750. For claims over $50,000 in covered losses,
FEMA pays a percentage of such claim that ranges from approximately 3.0% to
approximately 2.1%. See "--Other Business--Insurance Network Services."
40
<PAGE>
FEMA REPORTING REQUIREMENTS
FEMA requires certain standards and procedures for the issuance, servicing
and statistical reporting of all NFIP transactions conducted by its servicing
carriers. Data is reported monthly, validated, audited in detail and compared
and balanced against the servicing carrier's financial reports. The Company
previously experienced problems in complying with FEMA's statistical reporting
requirements. See "Risk Factors--Risks Associated with the National Flood
Insurance Program." In an effort to rectify these problems, the Company recently
entered into an outsourcing agreement with a major provider of processing
services for the NFIP for the processing of its flood insurance business. This
arrangement includes policy quotation and issuance, billing, claims processing,
financial reporting and statistical reporting to the NFIP and eliminates the
need for the Company to maintain and provide such specialized processing. As a
result, the Company will be able to refocus its efforts on marketing and sales
programs.
MGA/COMMERCIAL LINES
GENERAL
In its capacity as a MGA, the Company sells commercial lines products,
including commercial automobile insurance, commercial package policies ("CPP"),
business owner policies ("BOP"), garage packages and umbrella policies.
Commercial automobile coverage insures policyholders against losses incurred
from bodily injury, bodily injury to third parties, property damage to an
insured's vehicle (including fire and theft) and damage to other vehicles and
property as a result of automobile accidents involving the insured's commercial
vehicles. The CPP provide insureds coverage on perils protecting real and
personal business property combined with comprehensive general liability
coverage. The BOP is a prepackaged "off-the-shelf" product for small to medium
sized businesses that includes building, contents and liability coverages for
business, while the garage package is tailored to provide specific coverages for
garage owners. An umbrella policy provides additional excess third party
liability protection.
All of the Company's commercial business is currently underwritten by
Generali-U.S. Branch pursuant to a MGA agreement. Generali is a member of the
Generali Group of Trieste, Italy. The Generali Group had approximately $79.6
billion dollars in total assets as of December 31, 1995 and has an A.M. Best
rating of A ("Excellent").
The Company sells, issues and performs underwriting and claims adjusting
services for Generali's commercial lines products, for which Generali retains
100% of the risk, in Georgia, Kentucky, North Carolina, South Carolina and
Tennessee. The Company is paid on a commission basis. The Company's contract
provides for contingent commissions once stated loss ratio targets are achieved.
STRATEGY
One of the Company's business objectives is to increase total revenue and
net income attributable to its MGA/commercial lines business. To accomplish this
objective, the Company intends to:
- IMPROVE LOSS RATIO. The Company plans to continue its efforts to lower the
loss ratio for the Generali business in order to qualify to receive
contingent commissions from Generali. First, the Company is increasing
enforcement of its underwriting guidelines by conducting reviews of its
underwriting staff, confining underwriting activity to in-house personnel
and phasing out policies that do not meet its underwriting guidelines.
Second, Company employees will visit the premises of its insureds in order
to identify, and recommend ways of curing, potential loss exposures.
Third, the Company is in the process of evaluating and, where appropriate,
updating the pricing of its products.
- REDUCE OPERATING EXPENSES. The Company seeks to reduce operating expenses
further through increased automation and the restructuring program
initiated for its claims and underwriting staff. The Company expects that
improvements to its systems operations will reduce the number of
41
<PAGE>
employees required to administer its commercial lines policies. The
Company also is continuing to implement a restructuring program to
redesign the flow of work through its claims and underwriting staff. In
particular, the Company recently reorganized its agency support staff to
combine claims personnel and underwriting personnel into one servicing
team. As a result of the restructuring, agents will be able to call one
number for both claims and underwriting issues. The Company also believes
that the combined group will have better access to historical claims data,
resulting in better underwriting decisions.
- ASSUME A PORTION OF THE RISK FOR PREMIUMS WRITTEN AND INCREASE THE SIZE OF
THE COMMERCIAL LINES BUSINESS. The Company expects to begin assuming on a
risk-bearing basis a 10-20% portion of its established commercial lines
business currently underwritten 100% by Generali. Generali has indicated
an interest in pursuing this objective, which would allow the Company to
assume a portion of the risks written by Generali through the MGA
relationship.
- DEVELOP NEW NICHE PRODUCTS. The Company is continuing to develop insurance
products that are tailored to specific needs of certain well-defined
insureds (for example, garage package policies for owners of garages and
parking lots). The Company also plans to increase the number of commercial
automobile insurance products offered. In addition, the Company intends to
introduce new payment plans that are flexible with respect to the timing
and method of premium payment. The Company and Generali also have reached
an agreement in principle to add multi-tier commercial lines products so
as to offer pricing alternatives.
- INCREASE AGENCY RETENTION AND RECRUITMENT. The Company intends to continue
to strengthen its relationships with, and to recruit, agents that have
demonstrated an ability to apply underwriting guidelines in the initial
selection of insureds. For example, the Company plans to continue to
encourage the participation of its successful agents in the Company's
stock option program. For the year ended December 31, 1996, independent
agents participating in the Company's stock option plan accounted for
approximately $5.5 million, or approximately 30.6%, of the Company's total
gross premiums for its MGA/commercial lines business. The Company also
believes that improvements to automation facilitate the ease of doing
business with the Company and increase agent participation in processing
policies. In addition, the Company educates its agents on the new products
and coverages it offers.
MARKETING
The Company markets its commercial lines insurance products through 410
licensed, appointed independent agencies in its core states of North Carolina,
Georgia, Kentucky, South Carolina and Tennessee. Agents participate in
continuing education programs and many have received such designations as
Chartered Property Casualty Underwriter or Certified Insurance Counselor. In
addition, each state sets continuing education requirements for maintaining an
active agent's license with the state.
42
<PAGE>
The following table sets forth, as of or for the year ended December 31,
1996 and the three months ended March 31, 1997, as applicable, certain
information regarding each of the states in which the Company conducts its
Generali MGA business:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 AT MARCH 31, 1997
---------------------------------------- ---------------------------------------
GROSS % OF GROSS % OF
NUMBER OF PREMIUMS PREMIUMS NUMBER OF PREMIUMS PREMIUMS
STATE AGENTS WRITTEN WRITTEN AGENTS WRITTEN WRITTEN
- ------------------------------------------- ------------- ---------- ------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
North Carolina............................. 143 $5,834,000 32.6% 148 $1,015,000 26.1%
Georgia.................................... 94 2,083,000 11.6 95 389,000 10.0
Kentucky................................... 62 3,427,000 19.2 62 1,069,000 27.5
South Carolina............................. 65 4,587,000 25.7 66 852,000 21.9
Tennessee.................................. 39 1,955,000 10.9 39 564,000 14.5
--- ---------- ----- --- --------- -----
Total.................................. 403 $17,886,000 100.0% 410 $3,889,000 100.0%
</TABLE>
CLAIMS
The Company's MGA claims management unit employs approximately ten full-time
personnel, including a team leader, a litigation manager and five multi-line
adjusters with varying degrees of experience and authority (ranging from $5,000
to $50,000). The MGA contract gives the Company authority to settle claims up to
$50,000; Generali must approve the settlement of claims in excess of $50,000,
although the Company's staff remains responsible for the actual settlement of
such claims. Outside adjustors and appraisers, which the Company will use when
necessary, have no claims settlement authority.
OTHER BUSINESS
EXCESS AND SURPLUS LINES OPERATIONS
The Company represents other insurance companies in both a MGA capacity and
a brokerage capacity for excess and surplus lines operations. Excess and surplus
lines insurance generally is written on classes of risks on which insurance is
not available from an insurer licensed in the state where the risk is located.
The Company has contracts with approximately 25 insurance companies selling
products such as excess flood insurance, medium-haul trucking, general
liability, professional liability and marine insurance. The Company earns a
percentage of the premiums written for selling, issuing and servicing such
policies, while retaining no risk.
The Company markets products through approximately 1,500 independent
insurance agencies in eight southeastern states. This business is marketed
through traditional sales activities, convention exhibits, sales kits and
advertisements, as well as through direct marketing campaigns.
The Company seeks to grow this business by increasing product offerings and
expanding into new markets. The Company also intends to offer its excess and
surplus products in new states in which it is licensed and recently entered a
new relationship that will enable the Company to provide additional automobile
insurance products and property coverages.
INSURANCE NETWORK SERVICES
INS provides storm claims adjustment and "run-off" services. The storm
claims adjustment service was developed to complement the Company's flood
operations and is designed to maximize customer service in the event of a wind
storm, flood or other catastrophe. This claims servicing activity has increased
as a result of the widespread incidence of flood claims over the last several
years. The Company seeks to increase utilization of its established network of
storm adjusters to service claims of other flood, wind and property insurers.
INS also is developing a plan to expand its catastrophe service beyond floods to
include other disasters. In addition, INS provides services to companies
"running-off" discontinued books of
43
<PAGE>
business, leaving the region or in temporary need of services due to sharp
increases in volume, usually due to seasonal demands, hurricanes or other
catastrophes.
INS investigates and settles insurance claims on policies through in-house
claims adjusters and independent adjusters who are utilized in locations where
there is insufficient claim volume to justify the cost of an internal claims
staff, or when specialized claims expertise is required. These independent
adjusters are paid a percentage of the income they produce and are required to
carry errors and omissions insurance.
Claims settlement authority levels are established for each adjuster and
supervisor based on their expertise and experience. Upon receipt, each claim is
reviewed and assigned to an adjuster based on the type and severity of the
claim. The claims staff then reviews the claim, obtains appropriate
documentation and establishes a loss reserve for covered claims. Home office
review and approval is needed on all claims in excess of the established
settlement authority of $50,000 for bodily injury and property damage. All
claims-related litigation is monitored by the home office or a litigation
manager. In addition, all environmental claims are handled by the home office.
One of the Company's business objectives is to increase its INS claims
service business. To accomplish this objective, the Company intends to continue
the expansion of its claims adjusting services to include additional run-off
management services for third party insurance companies. The Company is paid a
fee for these services but does not assume any risk. To support this expansion,
the Company has dedicated additional personnel to its run-off claims service
operations. The Company also has improved its catastrophe-servicing capabilities
by establishing a second claims team, which allows the Company to respond to
concurrent catastrophes and to devote greater claims resources to significant
catastrophes. The Company also is in the process of implementing new technology
in an effort to improve the efficiency of its adjusters and reduce expenses of
its claims service business.
REINSURANCE
Prior to suspending underwriting operations in the first quarter of 1995,
the Company reinsured a portion of its risks. Business was ceded principally to
reduce the Company's exposure on large individual risks and to provide
protection against large catastrophic occurrences. Currently, the Company is not
purchasing reinsurance for either of these types of exposures, but has
outstanding claims recoverable under prior reinsurance agreements primarily on
unpaid claims for liability exposures that take a lengthy period to settle. The
Company's principal reinsurer under the prior agreements, in terms of the amount
of reinsurance recoverable on incurred losses, is Swiss Reinsurance American
Corporation.
The Company currently reinsures 50% of its automobile physical damage
business under a quota share reinsurance agreement with a group of reinsurers
led by Constitution Reinsurance Company. The Company cedes a portion of the
premiums to the reinsurers net of a ceding commission and collects half of
claims payments from the reinsurers. Quota share reinsurance is designed to
increase the capacity of the Company to write new business.
Reinsurance does not legally discharge an insurer from its primary liability
on the policies it issues, but it does make the assuming reinsurer liable to the
insurer to the extent of reinsurance ceded. Therefore, the Company is subject to
credit risk with respect to the obligations of its reinsurers. The Company
evaluates the financial condition of each prospective reinsurer before it cedes
business to that carrier. Reserves for uncollectible reinsurance are provided if
deemed necessary. See "--Reserves for Losses and Loss Adjustment Expenses."
In its capacity as a servicing carrier, the Company issues policies for
automobile and flood insurance, then reinsures 100% of these risks with the SC
Facility, the NC Facility and FEMA. While the amounts of reinsurance
recoverables under these arrangements are significant, the Company believes
these balances from the SC Facility, NC Facility and FEMA are fully collectible.
44
<PAGE>
SYSTEMS OPERATIONS
The Company operates and maintains a computer system for its operations,
including policy issuance, billing, claims processing and financial and
management reporting. The system utilizes networked personal computers and an
IBM AS/400 computer for processing. The Company has entered into arrangements to
provide computer processing support in the event the Company's data center is
disabled. The disaster plan provides hardware, software and communications
backup which will allow the Company to continue to operate with limited
disruption in service.
An insurance processing system is utilized by the Company for all lines of
business, including flood, commercial and personal. The system provides support
for all aspects of the Company's business, including policy rating and issuance,
direct policyholder and agency billing, commission processing, management
reporting and regulatory reporting. The Company has supplemented the system with
other software in areas that require or can be aided by special support.
The Company uses a financial reporting system for accounting support and for
statutory and GAAP financial reporting. Automated data transfers have been
established between the insurance processing and the accounting systems. The
accounting system is designed specifically for the unique reporting requirements
of the insurance industry. A separate system is utilized by the specialty lines
brokerage operation. The system provides the quotation, commission and sales
accounting support requirements unique to the brokerage environment.
The Company currently is installing an executive information system
providing performance reporting capabilities for business profitability analysis
and for risk/rate analysis and development. The Company believes that this
system, which will report results by product, state, agent and risk
characteristics, will become fully operational in the second quarter of 1997.
FLOOD INSURANCE PROCESSING. The Company recently entered into an agreement
with a major provider of processing for the NFIP to outsource the processing of
its flood insurance business. This outsourcing arrangement includes policy
quotation and issuance, billing, claims processing, financial reporting and
statistical reporting to the NFIP, eliminating the Company's need to maintain
and provide such specialized processing and allowing it to refocus its efforts
on the support of its marketing and sales programs.
AGENCY ELECTRONIC COMMUNICATIONS. The Company provides selected agents with
electronic connections to its systems, allowing agents to submit applications
for insurance electronically. A few of the Designated Agents electronically
enter policy transactions into the Company's system. This electronic
communication is provided to improve the service level to the consumer. The
Company plans to expand its electronic communication capabilities in 1997. In
addition, selected high volume flood agents will be set up for electronic
communications and processing. Approximately 20 other agencies electronically
transfer new business applications and cancellations through an unaffiliated
finance company.
FUTURE SYSTEM ENHANCEMENTS. The Company will continue to evaluate
enhancements to its systems. Improvements in agent and consumer service, new
product offerings and reductions in administrative expenses will require ongoing
enhancements to the Company's support systems. Current plans include
establishing a data bridge between systems to eliminate redundant entry of
policy information and reduce policy issuance time. This data bridge, associated
with the Company's commercial business, is expected to be in place by the third
quarter of 1997. The Company also expects to automate a workers' compensation
product during the first half of 1998. This product will supplement the existing
commercial lines offerings in the Company's core states. In addition, support
for policy audits will be enhanced in the second quarter of 1997 to support the
workers' compensation product and to improve audit reporting and efficiencies.
The Company plans to expand its electronic communications capabilities with
agents during 1997. For example, the Company expects to develop data transfer
systems, which will allow agents to move data between their computer and the
Company's computer, during the third and fourth quarters of 1997. The
45
<PAGE>
Company expects that these expanded electronic interface capabilities will also
be available for high volume flood agents and Designated Agents by the end of
1997.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Loss reserves are estimates at a given point in time of the amount of claims
that the insurer expects to pay claimants plus investigation and litigation
costs, based on facts and circumstances then known. It can be expected that the
ultimate liability in each case will differ from such estimates. During the loss
settlement period, additional facts regarding individual claims may become known
and, consequently, it may become necessary to refine and adjust the estimates of
liability.
The liability for losses 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 may be affected by the frequency and/or severity
of future claims. Among the complications are a lack of historical data, long
reporting delays, difficulty in properly allocating responsibility and/or
liability for environmental damage, changes in underlying laws and judicial
interpretation of those laws, potential for an environmental claim to involve
many insurance providers over many periods, questions concerning interpretation
and application of insurance and reinsurance coverage, and uncertainty regarding
the number and identity of insureds with potential environmental exposure. These
estimates are continually reviewed and as experience develops and new
information becomes known, the liability is adjusted as necessary. Insurance
regulatory authorities in South Carolina required a statement of actuarial
opinion as to the reasonableness of the Company's statutory reserves as of
December 31, 1996. In order to satisfy this requirement, the Company engaged and
received such an opinion from an independent actuary.
The anticipated effect of inflation is implicitly considered when estimating
liabilities for losses and LAE. While anticipated price increases due to
inflation are considered, an increase in average severity of claims may be
caused by a number of factors that vary with the individual type of policy
written. Future average severity is projected based on historical trends
adjusting for changes in underwriting standards, policy provisions and general
economic trends. These anticipated trends are monitored based on actual
developments and are modified as necessary. The Company does not discount its
loss and LAE reserves.
46
<PAGE>
The following table presents, on a GAAP basis, a three-year analysis of
losses and LAE, net of ceded reinsurance recoverable, with the net liability
reconciled to the gross liability as reported in the Company's financial
statements:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Liability for losses and LAE at the beginning of the year:
Gross liability per balance sheet.......................................... $ 194,682 $ 166,698 $ 145,523
Ceded reinsurance recoverable, classified as an asset...................... (76,221) (88,731) (84,492)
---------- ---------- ----------
Net liability.............................................................. 118,461 77,967 61,031
---------- ---------- ----------
Provision for losses and LAE for claims occurring in the current year........ 19,997 14,243 9,863
Increase in estimated losses and LAE for claims occurring in prior years..... 16,957 3,375 1,117
---------- ---------- ----------
36,954 17,618 10,980
---------- ---------- ----------
Losses and LAE payments for claims occurring during
Current year............................................................... 13,837 11,711 8,317
Prior years................................................................ 63,611 22,843 16,267
---------- ---------- ----------
77,448 34,554 24,584
---------- ---------- ----------
Liability for losses and LAE at the end of the year:
Net liability.............................................................. 77,967 61,031 47,427
Ceded reinsurance recoverable, classified as an asset...................... 88,731 84,492 84,725
---------- ---------- ----------
Gross liability per balance sheet.......................................... $ 166,698 $ 145,523 $ 132,152
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The ceded reinsurance recoverable, classified as an asset, includes
$75,674,000 at the end of 1994, $76,067,000 at the end of 1995 and $74,786,000
at the end of 1996 of balances recoverable from certain state and federal
insurance facilities, including the SC Facility, NC Facility and the NFIP. See
Note 12 of the Notes to Consolidated Financial Statements.
As reflected in the preceding table, each year was affected by reserves from
prior years having been deficient in those earlier periods. However, the impact
of adverse development has decreased significantly since 1994. The amount of
adverse development related to claims occurring in prior years was $16,957,000
in 1994, $3,375,000 in 1995, and $1,117,000 in 1996. 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.
47
<PAGE>
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>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net liability on a SAP basis as filed in annual statement....................... $ 61,812 $ 47,952
Established salvage and subrogation recoveries recorded on a cash basis for SAP
and on an accrual basis for GAAP.............................................. (781) (525)
---------- ----------
Net liability on a GAAP basis, at year end...................................... 61,031 47,427
Ceded reinsurance recoverable, classified as an asset........................... 84,492 84,725
---------- ----------
Gross liability on a GAAP basis, at year end.................................... $ 145,523 $ 132,152
---------- ----------
---------- ----------
</TABLE>
The following table reflects the loss and LAE development for 1995 and 1996
on a GAAP basis:
<TABLE>
<CAPTION>
RE-ESTIMATED AS
UNPAID LOSSES OF
AND LAE ONE YEAR LATER DEFICIENCY
------------- ----------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
1995: Gross liability............................................... $ 145,523 $ 148,186 $ (2,663)
Less reinsurance recoverable................................... 84,492 86,038 (1,546)
------------- -------- -----------
Net liability.................................................. $ 61,031 $ 62,148 $ (1,117)
------------- -------- -----------
------------- -------- -----------
1996: Gross liability............................................... $ 132,152
Less reinsurance recoverable................................... 84,725
-------------
Net liability.................................................. $ 47,427
-------------
-------------
</TABLE>
48
<PAGE>
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>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
Gross liability for unpaid losses and
LAE...................................
Reinsurance recoverable on unpaid losses
and LAE...............................
Net liability for unpaid losses and
LAE................................... $ 162 $ 145 $ 129 $ 122 $ 114 $ 112 $ 118 $ 120
Cumulative liability paid through:
One year later........................ $ 94 $ 82 $ 104 $ 78 $ 77 $ 63 $ 30 $ 65
Two years later....................... 142 150 141 121 116 50 84 86
Three years later..................... 194 173 166 145 93 91 102 99
Four years later...................... 211 191 183 115 125 104 112
Five years later...................... 224 203 151 139 135 111
Six years later....................... 233 174 170 147 140
Seven years later..................... 208 191 176 151
Eight years later..................... 223 195 179
Nine years later...................... 226 199
Ten years later....................... 229
Net liability re-estimated as of:
One year later........................ $ 181 $ 158 $ 174 $ 135 $ 136 $ 119 $ 129 $ 138
Two years later....................... 192 197 177 150 147 124 139 144
Three years later..................... 229 200 188 156 151 134 151 143
Four years later...................... 233 210 185 159 161 145 149
Five years later...................... 240 204 185 168 172 143
Six years later....................... 235 204 195 180 171
Seven years later..................... 235 213 206 178
Eight years later..................... 243 224 204
Nine years later...................... 253 222
Ten years later....................... 251
Net cumulative (deficiency)............. (89) (77) (75) (56) (57) (31) (31) (23)
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Gross liability for unpaid losses and
LAE................................... $ 169 $ 146 $ 133
Reinsurance recoverable on unpaid losses
and LAE............................... (89) (84) (85)
--------- --------- ---------
Net liability for unpaid losses and
LAE................................... 80 62 48
Cumulative liability paid through:
One year later........................ $ 26 $ 16
Two years later....................... 42
Three years later.....................
Four years later......................
Five years later......................
Six years later.......................
Seven years later.....................
Eight years later.....................
Nine years later......................
Ten years later.......................
Net liability re-estimated as of:
One year later........................ $ 85 $ 63
Two years later....................... 87
Three years later.....................
Four years later......................
Five years later......................
Six years later.......................
Seven years later.....................
Eight years later.....................
Nine years later......................
Ten years later.......................
Net cumulative (deficiency)............. (7) (1)
--------- ---------
</TABLE>
The preceding table presents the development of balance sheet liabilities on
a SAP basis for 1986 through 1996. The top line of the preceding table shows the
initial estimated liability on a SAP basis. This liability represents the
estimated amount of losses and LAE for claims arising in years that are unpaid
at the balance sheet date, including losses that have been incurred but not yet
reported. The next portion of the table reflects the cumulative payments made
for each of the indicated years as they have developed through time. This table
has been adjusted for a modification made to 1994 paid losses on a GAAP basis,
not recorded for statutory net losses incurred. On a statutory basis, the
modification is a reclassification only and has no effect on income. Loss and
LAE development cannot be presented for a 10-year period on a GAAP basis due to
the unavailability of certain accident year data.
In evaluating this information, it should be noted that each amount includes
the effects of all changes in amounts for prior periods. This table does not
present accident or policy year development data, which readers may be more
accustomed to analyzing. Conditions and trends that have affected development of
the liability in the past may not necessarily occur in the future. Accordingly,
it may not be appropriate to extrapolate future redundancies or deficiencies
based on this table.
Establishing reserves is an estimation process and adverse developments in
future years may occur and would be recorded in the year so determined. As a
result of independent actuarial reviews of reserves
49
<PAGE>
as of December 31, 1994, the Company significantly increased its reserves for
unpaid losses and LAE related to prior years by $17.0 million in the fourth
quarter of 1994. Since that time, the Company's operating results have not been
as significantly affected by increases in reserves for incurred losses and loss
adjustment expenses for claims occurring in prior years compared to the impact
upon operating results for the year ended December 31, 1994.
The adverse loss reserve development in 1986 through 1993 is primarily
attributable to run-off on the claims of workers' compensation and general
liability policies written primarily in Florida and California, which created
substantial losses for the Company for the past 10 years.
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 on the West Coast prior to 1986. On June 7, 1994, the Company settled a
dispute with another insurance company relative to approximately 400 of these
claims. Any future liability on these claims is limited to 50% of the direct
loss and LAE paid. The Company's obligation to pay 50% of these claims will not
begin until the other company has paid subsequent to June 7, 1994, $20,000,000
in losses and LAE, net of reinsurance. As of December 31, 1996, $4,200,000 of
claims payments gross of reinsurance have been made by the other company under
this agreement. A portion of the reinsurance on this business was placed with a
reinsurer currently operating under the supervision of its state regulator.
Estimates of the Company's liabilities take into account only amounts of
reinsurance that the Company believes are recoverable.
Substantial uncertainties are inherent in the establishment of appropriate
reserves for property and casualty insurers. Such uncertainties are
significantly greater in estimating reserves for environmental, toxic tort and
other casualty claims which the Company continues to maintain. Among the
complications are a lack of historical data, long reporting delays, difficulty
in properly allocating responsibility and/or liability for environmental damage,
changes in underlying laws and judicial interpretation of those laws, potential
for an environmental claim to involve many insurance providers over many
periods, questions concerning interpretation and application of insurance and
reinsurance coverage and uncertainty regarding the number and identity of
insureds with potential environmental exposure.
Of the remaining environmental, pollution and toxic tort claims, the
following activity took place during 1996:
<TABLE>
<S> <C>
Pending, December 31, 1995............................................. 85
New claims advised..................................................... 16
Claims settled......................................................... 30
--
Pending, December 31, 1996............................................. 71
--
--
</TABLE>
The policies corresponding to these claims were written on a direct basis.
The Company has excess of loss reinsurance with company retentions through 1980
of $100,000 and of $500,000 after 1980. The claims are reserved as follows as of
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Case reserves........................................................... $ 2,229 $ 3,170
IBNR reserves........................................................... 8,675 6,381
LAE reserves............................................................ 3,453 3,764
--------- ---------
Total............................................................... $ 14,357 $ 13,315
--------- ---------
--------- ---------
</TABLE>
The above claims involve eight Superfund sites, five asbestos or toxic
claims, six underground storage tanks and 52 miscellaneous clean-up sites. For
this direct business there are usually several different
50
<PAGE>
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 when management can
reasonably estimate its liability. In exposures on both known and unasserted
claims, estimates of the liabilities are reviewed and updated continually. The
potential development of losses is restricted by policy limits.
Because only 71 claims remain open as of December 31, 1996, 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.
INVESTMENTS
The Company invests in securities and other investments authorized by
applicable state laws and regulations. Investments are managed by a management
committee comprised of the Chief Financial Officer, the Vice President of
Strategic Planning and the Treasurer.
The Company's cash and investments were distributed as follows as of the
dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------
AT MARCH 31,
1995 1996 1997
----------------------- ----------------------- -----------------------
ASSET ASSET ASSET
VALUES(1) % VALUES(1) % VALUES(1) %
----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. government and government agencies and
authorities...................................... $ 31,416 62.0% $ 40,102 93.4% $ 37,943 77.7%
States, municipalities and political
subdivisions..................................... 993 2.0 115 0.3 114 0.2
Corporate bonds.................................... 1,168 2.3 -- -- -- --
Redeemable preferred stocks........................ 4 -- -- -- -- --
----------- ----- ----------- ---------- ----------- ----------
Total debt securities.......................... 33,581 66.3 40,217 93.7 38,057 77.9
Cash and short term investments.................... 16,649 32.9 2,664 6.2 10,763 22.0
Equity securities.................................. 377 0.7 35 0.1 17 --
Other long term investments........................ 34 0.1 28 -- 28 0.1
----------- ----- ----------- ---------- ----------- ----------
Total cash and investments......................... $ 50,641 100.0% $ 42,944 100.0% $ 48,865 100.0%
----------- ----- ----------- ---------- ----------- ----------
----------- ----- ----------- ---------- ----------- ----------
</TABLE>
- ------------------------
(1) Asset values represent market values at December 31, 1995 and 1996 and March
31, 1997, as applicable.
The following table sets forth the consolidated investment results for the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Total investments(1)....................................... $ 89,894 $ 53,841 $ 47,614 $ 54,053 $ 45,904
Net investment income...................................... 5,321 3,176 3,006 660 708
Average annual yield....................................... 5.9% 5.9% 6.3% 4.9% 6.2%
Net realized investment gains (losses)..................... $ (6,327) $ 164 $ (14) $ 194 $ 219
</TABLE>
- ------------------------
(1) Average of the aggregate invested amounts (market values) as of the
beginning of the period, as of June 30 (for full year periods) and as of the
end of the period.
51
<PAGE>
In accordance with its investment policy, the Company purchases only U.S.
Treasury securities, U.S. agency securities and investment-grade municipal and
corporate securities primarily with an "A" or higher rating with the highest
yield to maturity available. As of December 31, 1996, approximately 93.7% of the
Company's total investments were fixed-income debt securities, of which 99.7%
were securities of the United States Government or its agencies or
instrumentalities, and all remaining bonds were rated "A" or better by either
Moody's Debt Rating Service or Standard & Poor's Ratings Service. The Company
generally buys investments maturing within two to twelve years of the date of
purchase. At December 31, 1996, the average maturity of the Company's bond
investment portfolio was 3.8 years. For additional information regarding the
Company's investments, see Note 2 of the Notes to Consolidated Financial
Statements.
The following table sets forth, as of the dates indicated, the composition
of the Company's portfolio of debt securities by years to maturity.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------- AT MARCH
31,
1994 1995 1996 1997
---------------------- ---------------------- ---------------------- ---------
PERCENT PERCENT PERCENT
TOTAL TOTAL TOTAL
MARKET MARKET MARKET MARKET MARKET MARKET MARKET
YEARS TO MATURITY VALUE VALUE VALUE VALUE VALUE VALUE VALUE
- -------------------------------------- --------- ----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1 year or less $ 2,030 5.2% $ 3,102 9.2% $ 1,667 4.1% $ 12,480
More than 1 year through 5 years...... 19,743 50.7 16,436 49.0 25,224 62.7 12,573
More than 5 years through 10 years.... 14,167 36.4 12,520 37.3 13,142 32.7 13,004
More than 10 years.................... 2,996 7.7 1,519 4.5 184 0.5 --
Redeemable Preferred.................. 4 -- 4 -- -- -- --
--------- ----- --------- ----- --------- ----- ---------
Total............................. $ 38,940 100.0% $ 33,581 100.0% $ 40,217 100.0% $ 38,057
--------- ----- --------- ----- --------- ----- ---------
--------- ----- --------- ----- --------- ----- ---------
<CAPTION>
PERCENT
TOTAL
MARKET
YEARS TO MATURITY VALUE
- -------------------------------------- -----------
<S> <C>
1 year or less 32.8%
More than 1 year through 5 years...... 33.0
More than 5 years through 10 years.... 34.2
More than 10 years.................... --
Redeemable Preferred.................. --
-----
Total............................. 100.0%
-----
-----
</TABLE>
RATINGS
The Company has elected not to be rated by A.M. Best and accordingly was
last assigned a rating of NR-3 ("Not Rated--Rating Procedure Inapplicable").
A.M. Best ratings represent an independent opinion of an insurer's financial
strength and ability to meet policyholder and other contractual obligations.
Such ratings are not directed toward the protection of investors or
shareholders. A.M. Best classifications include A++ and A+ (superior), A and A-
(excellent), B++ and B+ (very good), B and B- (fair), C++ and C+ (marginal), C
and C- (weak), D (poor), E (under regulatory supervision), F (in liquidation)
and S (rating suspended).
COMPETITION
The Company operates in highly competitive industry segments. Many of its
competitors have significantly greater financial, marketing and underwriting
resources and superior ratings from A.M. Best. These factors may significantly
affect the Company's ability to market and profitably sell its products. In
general, the Company competes with both large national writers and smaller
regional companies in each state in which it operates.
NONSTANDARD AUTOMOBILE INSURANCE BUSINESS. The other two servicing carriers
for the SC Facility are Unisun Insurance Company ("Unisun") and Companion
Property and Casualty Insurance Co. The Company competes with major carriers in
the voluntary automobile insurance market, including State Farm Mutual
Automobile Insurance Co., Nationwide Mutual Life Insurance Co., Farm Bureau
Mutual Insurance, Inc. and Allstate Insurance Company, Inc., as well as other
regional insurance companies. See "Risk Factors--Re-entry into Risk Bearing
Activities" and "Risk Factors--Competition."
52
<PAGE>
FLOOD PROGRAM. The Company's principal flood insurance competitors include
Bankers Insurance Co., American Bankers Insurance Group, Omaha P&C Insurance
Group, Selective Insurance Group, Inc., Redland Insurance Co., Travelers
Property-Casualty Insurance Co. and Unisun. Factors influencing the choice of a
flood insurer or servicing carrier include the ability to offer homeowners or
other property products to agents, a superior rating from A.M. Best, a
competitor's ability to increase commission rates, on-line policy issuance
capability, and credit card premium payment capability.
OTHER BUSINESS. As a MGA for Generali, the Company competes with other MGAs
and insurers seeking to write commercial lines business in Tennessee, Kentucky,
North Carolina, Georgia and South Carolina. INS primarily competes with the
independent adjusting community. As a MGA and excess and surplus lines broker,
the Company competes primarily with regional, privately held companies in eight
Southeastern states.
REGULATION
STATE INSURANCE 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, including South Carolina and Kentucky, have enacted legislation
which regulates insurance holding company systems, including acquisitions,
dividends, the terms of surplus notes, the terms of affiliate transactions and
other related matters. Further, states often require prior regulatory approval
of changes in control of an insurer and of intercorporate transfers of assets
within the holding company structure. The purchase of more than 10% of the
outstanding shares of Common Stock by one or more parties acting in concert
requires the prior approval of the Insurance Departments of South Carolina and
Kentucky and may subject such party or parties to the reporting requirements of
the insurance laws and regulations of such states and to the prior approval
and/or reporting requirements of other jurisdictions in which the Company is
licensed. 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. One subsidiary is domiciled in Kentucky and is
principally regulated by the Kentucky Department of Insurance.
Insurance companies are required to file detailed annual statements with the
state insurance regulators in each of the states in which they do business, and
their business and accounts are subject to examination by such regulators at any
time. In addition, these insurance regulators periodically examine the insurer's
financial condition, adherence to statutory accounting principles, and
compliance with insurance department rules and regulations. South Carolina
insurance laws, rather than federal bankruptcy laws, would apply to the
liquidation or reorganization of the South Carolina insurance companies.
Examinations of SCIC, Consolidated American and Catawba as of December 31, 1992
and of Kentucky Insurance Company as of June 30, 1996 have been completed.
NAIC GUIDELINES. The NAIC has adopted 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
53
<PAGE>
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, 1996, all of the Company's insurance subsidiaries
have ratios of total adjusted capital to RBC that are in excess of the level
which would prompt regulatory action.
INSURANCE REGULATORY INFORMATION SYSTEM. The NAIC Insurance Regulatory
Information System ("IRIS") was developed primarily to assist state insurance
departments in executing their statutory mandate to oversee the financial
condition of insurance companies. Insurance companies submit data on an annual
basis to NAIC, which analyzes the data using ratios concerning various
categories of financial data. IRIS ratios consist of 12 ratios with defined
acceptable ranges. They are used as an initial screening process for identifying
companies that may be in need of special attention. SCIC has several ratios that
fall outside of ranges considered acceptable by the NAIC. Companies that have
several ratios that fall outside of the acceptable range are selected for closer
review by the NAIC. If the NAIC determines that more attention may be warranted,
one of several priority designations is assigned, and the insurance department
of the state of domicile is then responsible for follow-up action.
REGULATION OF DIVIDENDS AND OTHER PAYMENTS FROM INSURANCE SUBSIDIARIES. The
Company is a legal entity separate and distinct from its subsidiaries. As a
holding company, the primary sources of cash needed to meet its obligations,
including principal and interest payments with respect to indebtedness, are
dividends and other 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 require the prior approval of the Director of Insurance of
the State of South Carolina for the payment of any dividends by SCIC within any
twelve-month period that exceed the greater of (i) 10% of SCIC's surplus as
regards policyholders as shown in SCIC's most recent annual statement or (ii)
SCIC's statutory net income, not including realized capital gains or losses, as
shown in SCIC's most recent annual statement. The Company's payment of cash
dividends is at the discretion of the Board of Directors, upon approval of the
Director of Insurance, and is based on its earnings, financial condition,
capital requirements, and other relevant factors. If the ability of SCIC and the
Company's other insurance subsidiaries to pay dividends or make other payments
to the Company is materially restricted by regulatory requirements, it could
affect the Company's ability to service its debt and/or pay dividends. In
addition, no assurance can be given that 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, because of the financial condition of the paying
insurance company or otherwise, would 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. 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 SC Facility and the NC Facility), assigned risk plans or other types
of residual market plans (collectively, the "Plans"), pursuant to which
coverages not normally available in the voluntary market are shared by all
companies writing that type of business in that state. Participation is usually
based on the ratio of the Company's 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 which may
lag behind changes in market share by two years or more.
The required participation by the Company in all such Plans is reflected in
the results of the Company as soon as such information is reported by the Plans.
Estimates are maintained for unreported data.
54
<PAGE>
REQUIRED PARTICIPATION IN INSURANCE GUARANTY FUNDS. Most states have also
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 amounts that 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 approximately 1% to 2% of direct written premiums.
During 1995 and 1996, the Company paid $116,000 and $29,000, respectively, in
such assessments. Because such assessments are typically not made for several
years after an insurer fails and depend upon the final outcome of liquidation or
rehabilitation proceedings, the Company cannot accurately determine the precise
amount or timing of any future assessments.
REGULATION OF SOUTH CAROLINA FACILITY AND SERVICING CARRIERS. The SC
Facility created a pool of "Designated Agents," which are agencies usually
comprised of a single independent agent who lost his or her access to the
voluntary automobile market. Designated Agents are assigned to one of the SC
Facility's servicing carriers. The SC Facility is an unincorporated, non-profit
administrative service association of insurers. The SC Facility also provides a
mechanism for insurance companies to cede mandated coverages under automobile
policies. Every insurer authorized to write automobile liability insurance in
South Carolina is required to participate in the SC Facility. When policyholders
whose premiums have been ceded through the SC Facility incur a loss, the member
company or servicing carrier which issued the policy adjusts the loss and
subsequently is reimbursed for the loss and expenses by the SC Facility. Prior
to October 1, 1996, the cession or retention of physical damage was dictated by
whether or not the risk was "pointed" or "clean." A "pointed" risk generally
indicates that the insured either had an accident or a driving violation in the
past. Only "clean" risk physical damage could be ceded to the SC Facility prior
to October 1, 1996. Effective October 1, 1996, however, physical damage was
removed from the mandate, and the SC Facility agreed to accept any physical
damage, "pointed" or "clean," provided the SC Facility-filed rates were used.
The current South Carolina Director of Insurance also allowed physical damage
premium rate increases aggregating approximately 62% in order to reduce the SC
Facility's losses related to such risks. An increase in liability rates has not
yet occurred.
The SC Facility has established a policy pursuant to which penalties are
charged to member companies or servicing carriers for over-cession, late
reported premiums and uncorrected transactions. The penalties are recorded as a
balance due the SC Facility and, upon collection, are redistributed to the
member companies or servicing carrier. With respect to policy cession, a case of
overutilization may be established when a member, or a group of members under
the same management, have ceded more than 35% of total direct cedeable written
premium on South Carolina automobile insurance. In a particular calendar year, a
member company which cedes in excess of 35% of its total direct cedeable written
premium on South Carolina automobile insurance is subject to an additional share
of loss provision. The additional share of loss provision is calculated in the
results of the SC Facility at the end of each fiscal year.
NATIONAL FLOOD INSURANCE PROGRAM REGULATION. FEMA's Federal Insurance
Administration manages the NFIP. The NFIP regulations established the "Financial
Assistance/Subsidy Arrangement" pursuant to which the NFIP Administrator and the
private sector insurers participate in the WYO Program. Under the WYO Program,
insurers which are parties to a Financial Assistance/Subsidy Arrangement may
issue in their own names a Standard Flood Insurance Policy, the form and
substance of which is approved by the NFIP Administrator. Insurers are
responsible for all aspects of service, including policy issuance, endorsements
and renewals of policies and adjustments of claims brought under the policies,
and the NFIP Administrator monitors the performance levels of all insurers
participating in the WYO program.
The Company is required to furnish to FEMA such summaries and analyses of
information, including claims information, as may be necessary to carry out the
purposes of the National Flood Insurance Act of 1968, as amended. See "Risk
Factors--Risks Associated with the National Flood Insurance Program-- Systems
Operations." Upon request, the Company is required to file with the Federal
Insurance Administration true and correct copies of the Company's Fire and
Casualty Annual Statement and Insurance Expense Exhibits which are filed with
the state insurance authority of the Company's domiciliary state.
55
<PAGE>
RECENT LEGISLATIVE PROPOSALS. Various bills that propose to reform the SC
Facility are currently pending before the South Carolina State Legislature. See
"Business--Industry Background--The SC Facility" and "Risk Factors--Anticipated
Changes in the Automobile Insurance Business in South Carolina." The South
Carolina Senate recently passed reform legislation which, if enacted, would
reorganize the SC Facility over the course of a three-year transition period by
creating a single residual market mechanism rate and providing all Designated
Agents with access to the voluntary marketplace. Voluntary insurance companies
or agents would not be able to cede any business to the SC Facility after March
1, 1998, and the Facility rate would be "capped" so that no more than a 10% rate
increase each year would be allowed. Although the SC Facility would be phased
out in 2001, the servicing carrier concept would continue and a single rate
would be effective, commencing March 1, 1998, for all companies and agents. This
rate would be based on the total experience of both the voluntary market and the
Designated Agent book of business in the current SC Facility. It is not possible
to predict whether or in what form this proposal might be adopted or its effect,
if any, on the Company.
LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various lawsuits generally
arising in the normal course of their insurance and ancillary businesses. The
Company does not believe that the eventual outcome of any pending litigation
will have a material adverse effect on the financial condition or results of
operations of the Company.
PROPERTIES
The Company owns its Columbia, South Carolina home office, which contains
approximately 148,000 square feet of occupied space. The Company uses the South
Carolina home office primarily for 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.
EMPLOYEES
As of April 30, 1997, the Company and its subsidiaries employed 302
employees. The Company is not a party to any collective bargaining agreements
and believes that relations with its employees are good.
56
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors of the Company are divided into three classes and are elected
to hold office for a three-year term or until their successors are elected and
qualified. The election of each class of directors is staggered over each
three-year period. See "Description of Capital Stock--Anti-takeover Provisions."
All executive officers of the Company are elected for one year terms and serve
at the pleasure of the Board of Directors.
The following table provides information regarding the executive officers
and directors of the Company:
<TABLE>
<CAPTION>
EXPIRATION OF TERM AS
NAME AGE POSITION DIRECTOR OF THE COMPANY
- ---------------------------- --- ----------------------------------------------------- -------------------------
<S> <C> <C> <C>
John C. West................ 74 Chairman of the Board 2000
Ernst N. Csiszar............ 46 President, Chief Executive Officer and Director 1999
John A. Weitzel............. 51 Chief Financial Officer and Director 1999
Frank H. Avent.............. 56 Director 2000
William M. Barilka.......... 48 Director 1998
Fred S. Clark............... 60 Director 1998
Albert H. Cox, Jr........... 64 Director 1998
Claude E. McCain............ 72 Director 1998
Kenneth W. Pavia............ 54 Director 1998
Charles H. Powers........... 71 Director 2000
Walker S. Powers............ 43 Director 1999
John P. Seibels............. 55 Director 1999
George R.P. Walker, Jr...... 64 Director 2000
</TABLE>
Biographical information for each of the individuals listed in the above
table is set forth below.
JOHN C. WEST has been Chairman of the Board of Directors since 1994 and has
served as a director of the Company since 1994. Mr. West was the Governor of the
State of South Carolina from 1971 to 1975, and currently serves as a professor
at the University of South Carolina and as a practicing attorney. Mr. West also
serves as a member of the Board of Directors of Donaldson, Lufkin & Jenrette
Inc. From 1981 to 1994, Mr. West served as a director of Whittaker Corp., and
from 1987 to 1993, he served as a director of BioWhittaker.
ERNST N. CSISZAR has served as a director of the Company since 1995. Since
June 1995, Mr. Csiszar has held the office of President and, since January 1996,
the position of Chief Executive Officer of SBIG and all of its subsidiaries. He
also continues to serve as a visiting professor at the School of Business,
University of South Carolina, a position he has held since 1988. Prior to 1988,
he served as Managing Director of Holborn Holdings Limited, an international
merchant banking firm based in Geneva, Switzerland.
JOHN A. WEITZEL has served as a director of the Company since 1995. Since
September 1995, Mr. Weitzel has held the office of Chief Financial Officer of
SBIG and all of its subsidiaries. From April 1985 to November 1994, he served as
Chief Financial Officer of Milwaukee Insurance Group, Inc. From March to
September 1995, Mr. Weitzel acted as a consultant to SBIG.
FRANK H. AVENT has served as a director of the Company since 1997. He is the
President and General Manager of Pepsi Cola Bottling Company of Florence, South
Carolina, a position he has held since 1963. Mr. Avent was designated to serve
on the Board of Directors by members of the Avent Group.
WILLIAM M. BARILKA has served as a director of the Company since 1994. He
has served since 1991 as Chief Financial Officer of AGGAD Investment Company in
Riyadh, Saudi Arabia. From 1986 to 1991,
57
<PAGE>
Mr. Barilka was employed by the National Commercial Bank in Riyadh, Saudi Arabia
in a variety of corporate finance positions. Mr. Barilka was designated to serve
on the Board of Directors by the Selling Shareholder.
FRED S. CLARK, ESQ. has served as a director of the Company since 1996. Mr.
Clark has been a partner in the law firm of Clark and Clark in Savannah, Georgia
for the past five years. Mr. Clark was designated to serve on the Board of
Directors by the Selling Shareholder.
ALBERT H. COX, JR. has served as a director of the Company since 1994. He is
a consulting economist, formerly serving as Chief Economist of Feltman & Co., an
Atlanta-based investment banking firm, from 1995 through 1996. Mr. Cox was
designated to serve on the Board of Directors by the Selling Shareholder.
CLAUDE E. MCCAIN has served as a director of the Company since 1995. He is
also Chairman and President of H.C. McCain Agency, Inc., President of McCain
Realty Co., Inc., and President of Insurance Finance Company, Inc. He was
formerly a member of the South Carolina State Insurance Commission for fifteen
years, of which he served as Chairman for ten years. Mr. McCain has been in the
insurance business since 1946.
KENNETH W. PAVIA has served as a director of the Company since 1995. He is a
general partner of Balboa Investment Group, L.P., a position he has held since
1992. He also holds the office of Chairman of FHI, Inc., a securities holding
company, and Chairman of Fiduciary Leasco, Inc., positions he has held since
1985.
CHARLES H. POWERS has served as a director of the Company since 1997. Mr.
Powers owns and operates SADISCO Corporation, an automobile salvage company
based in Florence, South Carolina ("SADISCO"). He is also a Vice President and
Treasurer of Holland Grills, in Apex, North Carolina, and President of PC Inc.,
located in Myrtle Beach, South Carolina. Walker S. Powers is the son of Charles
H. Powers. Mr. Powers was designated by the Powers Group to serve on the Board
of Directors.
WALKER S. POWERS has served as a director of the Company since 1997. Mr.
Powers has been a member of the management of SADISCO since 1975, and served as
SADISCO's President from 1993 through 1994. Mr. Powers was designated by the
Powers Group to serve on the Board of Directors.
JOHN P. SEIBELS has served as a director of the Company since 1969.(1) Mr.
Seibels also serves as a member of the board of directors of PMSC, and he has
been an investor based in Columbia, South Carolina since 1963. George R.P.
Walker, Jr. and John P. Seibels are cousins.
GEORGE R.P. WALKER, JR. has served as a director of the Company since
1969.(1) Mr. Walker has owned and operated Middlefield Farm (a Hanoverian horse
farm) in Blythewood, South Carolina, for the past five years.
- ------------------------
(1) Each present director of the Company with election dates prior to October
1978 (when the Company became the parent of SCIC) was formerly a Director of
SCIC and the information set forth as to periods prior to 1978 reflects
positions with SCIC and the year such Director was first elected to the SCIC
Board of Directors.
58
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The table below sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, as of June 3, 1997, by: (i) each person
known to the Company to be the beneficial owner of more than 5% of the Common
Stock; (ii) each of the Company's executive officers and directors; (iii) all
directors and officers of the Company as a group; and (iv) the Selling
Shareholder, both before and after giving effect to this Offering.
<TABLE>
<CAPTION>
SHARES OWNED BEFORE OFFERING OWNERSHIP AFTER OFFERING(1)
--------------------------------- SHARES ---------------------------------
NAME NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
- ----------------------------------- ------------------ ------------- ---------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Saad A. Alissa..................... 1,853,089(2) 29.9% 1,853,089 0 0%
Avent Group........................ 818,750(3) 12.4 0 818,750(3) 10.7
Powers Group....................... 3,209,551(4) 41.3 0 3,209,551(4) 36.4
Frank H. Avent..................... 521,250(5) 8.1 0 521,250(5) 6.9
William M. Barilka................. 37,500(6) * 0 37,500(6) *
Fred S. Clark...................... 5,152(7) * 0 5,152(7) *
Albert H. Cox, Jr.................. 5,250(8) * 0 5,250(8) *
Ernst N. Csiszar................... 75,002(9) 1.2 0 75,002(9) 1.0
Claude E. McCain................... 5,010(10) * 0 5,010(10) *
Kenneth A. Pavia................... 2,500(11) * 0 2,500(11) *
Charles H. Powers.................. 2,583,301(12) 34.6 0 2,583,301(12) 30.4
Walker S. Powers................... 501,250(13) 7.8 0 501,250(13) 6.7
John P. Seibels.................... 154,227(10)(14) 2.5 0 154,227(10)(14) 2.1
George R. P. Walker, Jr............ 129,214(10)(15) 2.1 0 129,214(10)(15) 1.8
John A. Weitzel.................... 25,000(16) * 0 25,000(16) *
John C. West....................... 78,527(17) 1.3 0 78,527(17) 1.1
All Directors and Executive
Officers as a Group
(13 persons)..................... 4,123,183 50.5% 0 4,123,183 44.8%
</TABLE>
- --------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
Common Stock.
(1) Except as indicated in the footnotes set forth below, the persons named in
the table, to the Company's knowledge, have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by
them. All information assumes no exercise of the Underwriters'
over-allotment option. See "Underwriting." The numbers shown include the
shares which are not currently outstanding but which certain shareholders
are entitled to acquire or will be entitled to acquire within 60 days. Such
shares are deemed to be outstanding for the purpose of computing the
percentage of outstanding Common Stock owned by the particular shareholder
and by the group, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person.
(2) Based on information contained in a Statement on Form 4 for December, 1996
(the "Form 4"): includes 473,750 shares for which Saad A. Alissa has sole
voting power; 72,664 shares, including 46,464 shares of Common Stock
underlying a purchase warrant that will be exercised prior to this Offering,
that are beneficially owned by Mr. Alissa through General Investors Ltd., a
Cayman Island company ("GIL"), of which Mr. Alissa is the sole shareholder;
1,276,250 shares that are beneficially owned by Mr. Alissa through
Abdullatif Ali Alissa Est. (the "Establishment"); and 30,425 shares that are
beneficially owned by Mr. Alissa through Financial Investors Ltd., a Cayman
Island company ("FIL"). The Form 4 indicates that Mr. Alissa is the
President of the Establishment, that FIL is wholly-owned by the
Establishment and that GIL is wholly-owned by Mr. Alissa. Mr. Alissa's
address is P.O. Box 192, Alkhobar, Saudi Arabia.
(3) Includes (i) 260,000 shares of Common Stock and 261,250 shares of Common
Stock underlying certain options for which Mr. Frank Avent, a director of
the Company, either owns individually or shares voting and dispositive power
and (ii) 118,750 shares of Common Stock underlying certain options which are
59
<PAGE>
owned by other members of the Avent Group. The address for the Avent Group
is P.O. Box 3886, Florence, South Carolina 29502.
(4) Includes (i) 1,332,051 shares of Common Stock and 1,251,250 shares of
Common Stock underlying certain options which are owned by Mr. Charles H.
Powers, a director of the Company, (ii) 250,000 shares of Common Stock and
251,250 shares of Common Stock underlying certain options which are owned by
Mr. Walker S. Powers, a director of the Company, and (iii) 62,500 shares of
Common Stock and 62,500 shares of Common Stock underlying certain options
which are owned by Rex and Jane Huggins. The address of the Powers Group is
P.O. Box 6525, Florence, South Carolina 29502.
(5) Includes 10,000 shares of Common Stock underlying certain options for which
Mr. Avent has sole voting power as well as 250,000 shares of Common Stock
and 250,000 shares of Common Stock underlying certain options beneficially
owned by Pepsi Cola Bottling Company of Florence, South Carolina ("PepsiCo")
for which Mr. Avent shares voting and dispositive power. Includes 1,250
shares of Common Stock underlying certain options that the Company expects
to grant on June 16, 1997 pursuant to the Company's 1995 Stock Option Plan
for Non-employee Directors. Mr. Avent has informed the Company that he is
the President and General Manager of PepsiCo. Mr. Avent's address is P.O.
Box 3886, Florence, South Carolina 29502. Excludes an aggregate of 30,000
shares of Common Stock and 30,000 shares of Common Stock underlying certain
options owned by Mr. Avent's three daughters, of which shares he holds
neither sole nor shared voting or dispositive power and, therefore,
disclaims beneficial ownership.
(6) Includes 2,500 shares of Common Stock underlying certain options, 26,250
shares of Common Stock for which Mr. Barilka shares voting and dispositive
power with his wife, and 1,250 shares of Common Stock underlying certain
options that the Company expects to grant on June 16, 1997 pursuant to the
Company's 1995 Stock Option Plan for Non-employee Directors.
(7) Includes 1,525 shares of Common Stock for which Mr. Clark shares voting and
dispositive power with his wife, 960 shares of Common Stock for which Mr.
Clark shares voting and dispositive power with his minor son, and 1,250
shares of Common Stock underlying certain options that the Company expects
to grant on June 16, 1997 pursuant to the Company's 1995 Stock Option Plan
for Non-employee Directors.
(8) Includes 2,500 shares of Common Stock underlying certain options, 250
shares of Common Stock for which Mr. Cox shares voting and dispositive power
with his wife, and 1,250 shares of Common Stock underlying certain options
that the Company expects to grant on June 16, 1997 pursuant to the Company's
1995 Stock Option Plan for Non-employee Directors.
(9) Includes 75,002 shares of Common Stock underlying certain options.
(10) Includes 2,500 shares of Common Stock underlying certain options and 1,250
shares of Common Stock underlying certain options that the Company expects
to grant on June 16, 1997 pursuant to the Company's 1995 Stock Option Plan
for Non-employee Directors.
(11) Includes 1,250 shares of Common Stock underlying certain options and 1,250
shares of Common Stock underlying certain options that the Company expects
to grant on June 16, 1997 pursuant to the Company's 1995 Stock Option Plan
for Non-employee Directors.
(12) Includes 1,251,250 shares of Common Stock underlying certain options, which
includes 1,250 shares of Common Stock underlying certain options that the
Company expects to grant on June 16, 1997 pursuant to the Company's 1995
Stock Option Plan for Non-employee Directors. Mr. Powers' address is P.O.
Box 6525, Florence, South Carolina 29502. Excludes 62,500 shares of Common
Stock and 62,500 shares of Common Stock underlying certain options held by
Mr. Powers' daughter and son-in-law, of which shares he holds neither sole
nor shared voting or dispositive power and, therefore, disclaims beneficial
ownership.
(13) Includes 251,250 shares of Common Stock underlying certain options, which
includes 1,250 shares of Common Stock underlying certain options that the
Company expects to grant on June 16, 1997 pursuant to the Company's 1995
Stock Option Plan for Non-employee Directors. Mr. Powers' address is P.O.
Box 6525, Florence, South Carolina 29502. Excludes 62,500 shares of Common
Stock and 62,500 shares of Common Stock underlying certain options held by
Mr. Powers' sister and brother-in-law, of which shares
60
<PAGE>
he holds neither sole nor shared voting or dispositive power and, therefore,
disclaims beneficial ownership.
(14) Includes 1,250 shares of Common Stock underlying certain options that the
Company expects to grant on June 16, 1997 pursuant to the Company's 1995
Stock Option Plan for Non-employee Directors. Excludes 2,253 shares of
Common Stock held by Mr. Seibels' wife, of which shares he holds neither
sole nor shared voting or dispositive power and, therefore, disclaims
beneficial ownership.
(15) Includes 14,721 shares of Common Stock for which Mr. Walker shares voting
and dispositive power with his wife as well as 1,250 shares of Common Stock
underlying certain options that the Company expects to grant on June 16,
1997 pursuant to the Company's 1995 Stock Option Plan for Non-employee
Directors. Excludes 11,389 shares of Common Stock held by Mr. Walker's wife,
of which shares he holds neither sole nor shared voting or dispositive power
and, therefore, disclaims beneficial ownership.
(16) Includes 20,000 shares of Common Stock underlying certain options.
(17) Includes 70,002 shares of Common Stock underlying certain options. Excludes
250 shares held by Mr. West's wife, of which shares he holds neither sole
nor shared voting or dispositive power and, therefore, disclaims beneficial
ownership.
- --------------------------
On April 28, 1997, the Company granted options to purchase an aggregate of
260,379 shares of Common Stock at exercise prices ranging from $10 to $22 per
share. A portion of these options become exercisable on January 1, 1998.
61
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 12,500,000 shares of
Common Stock, par value $1.00 per share, and 5,000,000 shares of Special Stock,
no par value. There were issued and outstanding as of June 3, 1997, 6,206,774
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 Common Stock. See "Prospectus
Summary--Recent Developments."
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 funds
legally available therefor. However, the Board of Directors could provide, upon
issuing Special Stock, that holders of Special Stock should receive dividends in
preference to holders of Common Stock, or that no dividends 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. Shareholders of the Company are allowed to
cumulate their votes for the election of directors.
EXISTING ANTI-TAKEOVER PROVISIONS
SOUTH CAROLINA CONTROL SHARE ACQUISITIONS ACT ("CSAA"). 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. The CSAA provides that persons who acquire
beneficial ownership of the Company's Common Stock in excess of certain
thresholds (20%, 33 1/3% and 50%) lose the right to vote shares acquired in the
transaction that resulted in the person exceeding one of those thresholds,
unless the acquisition is approved by the Company's shareholders. If the
acquisition is not approved, the shares are also subject to redemption by the
Company.
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,
62
<PAGE>
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 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 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
63
<PAGE>
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.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 7,253,238 shares of
Common Stock outstanding. Such shares will be freely tradable without
restriction or further registration under the Securities Act, except by
"affiliates" of the Company, as defined under the Securities Act.
The Company's officers and directors and certain shareholders, who upon
completion of this Offering will beneficially own in the aggregate approximately
4.2 million shares, and the Company have agreed, subject to certain exceptions,
not to sell, offer for sale, or otherwise dispose of any Common Stock for a
period of 180 days from the date of this prospectus without the prior written
consent of Advest, Inc. See "Underwriting."
No prediction can be made of the effect that the sale or availability for
sale of shares of Common Stock will have on the market price of the Common
Stock. Nevertheless, sales of substantial amounts of such shares in the public
market, or the perception that such sales could occur, could adversely affect
the market price of the Common Stock and could impair the Company's future
ability to raise capital through an offering of its equity securities.
64
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions set forth in the Underwriting
Agreement, the Underwriters named below, for whom Advest, Inc. and Scott &
Stringfellow, Inc. are acting as the representatives (the "Representatives"),
have severally and not jointly agreed to purchase from the Company and the
Selling Shareholder the respective aggregate number of shares of Common Stock
set forth opposite their names below, at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Advest, Inc......................................................................
Scott & Stringfellow, Inc........................................................
----------
Total........................................................................ 2,853,089
----------
----------
</TABLE>
The Underwriters are committed to purchase and pay for all the shares of
Common Stock offered hereby (other than those shares covered by the
Underwriters' over-allotment option described below) if any are purchased. The
Underwriting Agreement provides that the obligations of the several Underwriters
are subject to approval of certain matters by their counsel and to various other
conditions.
The Company and the Selling Shareholder have been advised by the
Underwriters that the Underwriters propose to offer the shares of Common Stock
directly to the public at the offering price set forth on the cover of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. After commencement of the Offering, the public offering price and other
selling terms may be changed by the Underwriters.
In the Underwriting Agreement, the Company and the Selling Shareholder have
agreed to indemnify the Underwriters against certain liabilities that may be
incurred in connection with the offering of Common Stock, including liabilities
under the Securities Act.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 427,963
additional shares of Common Stock solely to cover over-allotments, if any, at
the price to public less underwriting discounts and commissions set forth on the
cover page of this Prospectus. If the Underwriters exercise such option, the
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof as the number of shares of Common
Stock to be purchased by each of them as shown in the table above, bears to
427,963 shares of Common Stock and the Company will be obligated, pursuant to
the option, to sell all of such shares to the Underwriters. If purchased, the
Underwriters will sell such additional shares on the same terms as those on
which the 2,853,089 shares are being sold.
The Company, the Selling Shareholder, each of the Company's officers and
directors and certain other shareholders have agreed not to, for a period of 180
days after the date of this Prospectus and subject to certain exceptions,
directly or indirectly, (i) offer, sell, contract to sell or otherwise dispose
of any shares of Common Stock or securities convertible in or exchangeable for
Common Stock or (ii) enter into any swap or other agreement or transaction that
transfers, in whole or in part, the economic consequences of ownership of shares
of Common Stock whether any such swap or other agreement is to be settled by
delivery of shares of Common Stock, other securities, cash or otherwise without
the prior written consent of Advest, Inc., as representative of the
Underwriters. In addition, the Company has agreed that, for 180
65
<PAGE>
days from the date of this Prospectus, it will not issue any shares of Common
Stock except upon, among other things, the exercise of stock options outstanding
as of the date of this Prospectus.
The Underwriters have informed the Company and the Selling Shareholder that
the Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
At the request of the Company, the Underwriters are reserving up to 142,000
shares of Common Stock at the public offering price as set forth on the cover
page of the Prospectus for sales to certain officers, directors and employees of
the Company and affiliates, certain family members of the foregoing and other
persons having business relationships with the Company or its affiliates. The
number of shares of Common Stock available for sale to the general public will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the Underwriters
to the general public on the same basis as the other shares of Common Stock
offered hereby.
The foregoing is a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to a copy of
the Underwriting Agreement which is on file as an exhibit to the Registration
Statement.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Common Stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Such stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the Common Stock to be higher than it would otherwise be
in the absence of such transactions. These transactions may be effected on The
Nasdaq Stock Market or otherwise and, if commenced, may be discounted at any
time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by King & Spalding, Atlanta, Georgia. Certain legal matters
in connection with this Offering will be passed upon for the Underwriters by
LeBoeuf, Lamb, Greene & MacRae, L.L.P., a limited liability partnership
including professional corporations, New York, New York. In rendering such
opinions, such firms will rely upon the opinion of Sinkler & Boyd, P.A.,
Columbia, South Carolina, as to matters of South Carolina law.
EXPERTS
The financial statements and schedules of the Company as of December 31,
1996 and 1995 and for each of the years in the three-year period ended December
31, 1996 have been included 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 in giving said reports.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be examined without
charge at, or copies obtained upon payment of prescribed fees from, the Public
Reference Section of the Commission at Room 1024 Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549 and are also available for inspection and
copying at the regional offices of the Commission located at Seven World Trade
Center, Suite 1300, New York, New York 10048 and at 500 West Madison Street,
Suite 1400, Chicago, Illinois
66
<PAGE>
60661-2511. The Commission maintains a Web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding the Company. In addition, the Company's Common Stock is listed on The
Nasdaq Stock Market and such material also can be inspected and copied at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-2 under the Securities Act of 1933, as amended (the "Securities Act"), and the
rules promulgated thereunder, with respect to the Common Stock. This Prospectus,
which is part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
financial schedules thereto. For further information concerning the Company and
the Common Stock, reference is made to the Registration Statement and the
exhibits and schedules filed therewith, which may be examined without charge at,
or copies obtained upon payment of prescribed fees from, the Commission and its
regional offices at the locations listed above. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company's (i) Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, and (ii) Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, each of which has previously been filed with the Commission
(File No. 0-08804), are incorporated herein by reference.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Offering of the Common Stock shall be deemed to be
incorporated by reference in this Prospectus and made a part hereof from the
date of the filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other document subsequently filed with the
Commission which also is deemed to be incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any or all of the documents incorporated by
reference herein (not including the exhibits to such documents, unless such
exhibits are specifically incorporated by reference in such documents. Requests
for such copies should be directed to: The Seibels Bruce Group, Inc., 1501 Lady
Street, Columbia, South Carolina 29201, Attention: Corporate Secretary;
telephone: (803) 748-2000.
67
<PAGE>
GLOSSARY OF SELECTED INSURANCE AND CERTAIN DEFINED TERMS
<TABLE>
<S> <C>
Admitted Insurer.............. An insurance company licensed by a state regulatory
authority to transact insurance business in that state. An
admitted insurer is subject to the rules and regulations of
each state in which it is licensed governing virtually all
aspects of its insurance operations and financial condition.
A non-admitted insurer, also known as an excess and surplus
lines insurer, is not licensed to transact insurance busi-
ness in a given state but may be permitted to write certain
business in that state in accordance with the provisions of
excess and surplus lines insurance laws which generally
involve less rate and operational regulation.
Adverse Loss Developments..... Increase in losses and loss adjustment expenses exceeding
anticipated loss and loss adjustment expense experience over
a given period of time.
Allocated Loss Adjustment
Expense ("ALAE")............ Allocated loss adjustment expense includes all legal
expenses and other expenses incurred by a company in
connection with the investigation, adjustment, settlement or
litigation of claims or losses under business covered. ALAE
does not include costs of "in-house" counsel, claims staff
or other overhead or general expense of the insurer.
A.M. Best..................... A.M. Best Company, Inc., a rating agency and publisher for
the insurance industry.
Assume........................ To accept from the primary insurer or reinsurer all or a
portion of the liability underwritten by such primary
insurer or reinsurer.
BOP........................... Business owners policy; a prepackaged insurance product for
business.
Cede.......................... To transfer to another insurer (the reinsurer) all or part
of the insurance written by an insurer (the "ceding insurer"
or "ceding company").
Ceding Commission............. A commission (usually a percentage of the reinsurance
premium) paid by the reinsurer to the ceding company.
Combined Ratio................ The sum of the expense ratio and the loss ratio, determined
in accordance with statutory accounting principles. A
combined ratio under 100% indicates an underwriting profit
and a combined ratio over 100% indicates an underwriting
loss.
Company (or SBIG)............. The Seibels Bruce Group, Inc., a South Carolina corporation,
and its subsidiaries, unless the context indicates
otherwise.
CPP........................... Commercial package policy; an insurance product that
provides insureds with coverage for real and personal
business property combined with comprehensive general
liability coverage.
Designated Agents............. Insurance agents that write insurance for the SC Facility
through one of the SC Facility's three servicing carriers.
Direct writer................. An insurer or reinsurer that markets and sells insurance
directly to its insured, either by use of telephone, mail or
exclusive agents.
</TABLE>
68
<PAGE>
<TABLE>
<S> <C>
Direct premiums written....... Total premiums collected in respect of policies issued by an
insurer during a given period without any reduction for
premiums ceded to a reinsurer.
Excess and Surplus
Insurance................... A type of insurance that is generally written on classes of
risks which admitted insurers will not write or which are
too small in premium size for larger companies to handle
efficiently. Because of the lack of availability of coverage
from admitted insurers, premium levels for excess and
surplus policies are generally higher than for standard
coverages provided by admitted insurers.
Excess of Loss Reinsurance.... A generic term describing reinsurance which indemnifies the
reinsured against all or a specified portion of losses on
underlying insurance policies in excess of a specified
dollar amount, called a "layer" or "retention."
Expense Ratio................. The ratio of commissions and other expenses incurred to
premiums. The percentage of premium used to pay all the
costs of acquiring, writing and servicing insurance and
reinsurance.
FEMA.......................... Federal Emergency Management Agency, a federal agency that
administers the NFIP.
General Liability Insurance... Coverage for an insured risk which causes bodily injury or
property damage to others.
Generally Accepted Accounting
Principles ("GAAP")......... The method of accounting used for reporting to shareholders
as defined by the American Institute of Certified Public
Accountants or the Financial Accounting Standards Board.
Unless otherwise indicated, all financial information
contained in this Prospectus is based on GAAP.
Gross Premiums Written........ Direct premiums written plus premiums collected in respect
of policies assumed, in whole or in part, from other
insurance carriers.
Incurred But Not Reported
("IBNR") claims............. Claims under policies that have been incurred but have not
yet been reported to the Company by the insured.
Incurred But Not Reported
("IBNR") reserves........... IBNR reserves include LAE related to losses anticipated from
IBNR claims and may also provide for future adverse loss
development on reported claims.
Liability Coverage............ Insurance coverage that compensates for damages for which
the insured is legally liable, including as a consequence of
negligent acts that result in injuries to other persons or
damage to their property.
Loss Adjustment Expense
("LAE")..................... Expenses incurred in the settlement of claims, including
outside adjustment expenses, legal fees and internal
administrative costs associated with claims adjustment
process, but not including general overhead expenses.
Loss and LAE Ratio............ The ratio of losses and LAE incurred to premiums earned.
Loss and LAE Reserves......... Liabilities established by insurers to reflect the ultimate
estimated cost of claim payments as of a given date.
</TABLE>
69
<PAGE>
<TABLE>
<S> <C>
Loss Ratio.................... The ratio of claims incurred and the increase in policy
reserves to premiums.
Loss Reserve.................. Loss reserves are estimates at a given point in time of
amounts that an insurer expects to pay in incurred losses
based on facts and circumstances then known. The amount of
loss reserves for reported claims is primarily based upon a
case-by-case evaluation of the type of claim involved, the
circumstances surrounding the claim, and the policy
provisions relating to the type of loss. The amount of loss
reserves for unreported claims and case reserve development
is determined on the basis of historical information and
anticipated future conditions by lines of insurance and
actuarial review. Loss reserves also include amounts for
loss adjustment expenses.
Managing General Agent or
MGA......................... A fee-for-service arrangement wherein the agent sells and
services insurance policies issued by an insurance company.
NAIC.......................... The National Association of Insurance Commissioners.
NC Facility................... The North Carolina Reinsurance Facility.
NFIP.......................... The National Flood Insurance Program.
Net Premiums Earned........... The portion of net premiums written applicable to the
expired period of policies and, accordingly, recognized as
income during a given period.
Net Written Premiums.......... Total premiums for insurance written (less any return
premiums) during a given period, reduced by premiums ceded
in respect of liability reinsured by other carriers.
Nonstandard Automobile Insur-
ance........................ Personal lines automobile insurance written for those
individuals presenting an above average risk profile (i.e.,
higher risk) in terms of payment history, driving
experience, record of prior accidents or driving violations,
particular occupation or type of vehicle and other factors.
Physical Damage Coverage...... Insurance coverage that compensate for damage to the
insured's automobile under the heading of "Collision" or
"Comprehensive" coverage. Losses under physical damage
coverage are generally limited to the value of the vehicle
insured.
Premiums...................... The consideration received by the Company pursuant to the
terms of an insurance contract.
Quota Share Reinsurance....... A generic term describing all forms of reinsurance in which
the reinsurer shares an agreed percentage of both the
original premiums and the losses of the reinsured. (Also
known as pro rata reinsurance, proportional reinsurance, and
participating reinsurance).
Redundancy (Deficiency)....... Estimates in reserves change as more information becomes
known about the frequency and severity of claims for each
year. A redundancy (deficiency) exists when the original
liability estimate is greater (less) than the re-estimated
liability. The cumulative redundancy (deficiency) is the
aggregate net changes in estimates over time subsequent to
establishing the original liability estimate.
</TABLE>
70
<PAGE>
<TABLE>
<S> <C>
Reinsurance................... A transaction in which one insurance company ("reinsurer")
assumes all or part of an insurance risk undertaken
originally by another insurer ("ceding insurer"), in
exchange for consideration paid by the ceding insurer.
Reserves...................... Estimated liabilities established by an insurer to reflect
the estimated costs of claims payments that the insurer will
ultimately be required to pay with respect to insurance it
has written.
Residual Market............... The market consisting of those persons (most frequently
drivers seeking automobile insurance) who are unable to
obtain insurance coverage in the voluntary market.
Risk-Based Capital ("RBC").... The measure adopted by the NAIC and some states setting
forth a methodology for assessing and reporting on the
adequacy of the capital of insurers.
Run-off....................... A discontinued line of business in which an insurance
company continues to maintain reserves and pay claims
although it is no longer writing new or renewal policies.
SC Facility................... The South Carolina Reinsurance Facility, a legislatively
mandated residual plan for high-risk nonstandard drivers in
South Carolina.
Specialty Lines............... A risk or a part of a risk for which there is no market
available through admitted companies. Therefore, it is
placed with non-admitted companies on an unregulated basis
with regard to premium and form. Specialty lines are
sometimes referred to as nonstandard or excess and surplus
lines.
Standard Automobile
Insurance................... Personal lines automobile insurance written for those
individuals presenting an average risk profile in terms of
loss history, driving record, type of vehicle driven and
other factors.
Statutory Accounting Practices
("SAP")..................... Accounting practices which consist of recording transactions
and preparing financial statements in accordance with the
rules and procedures prescribed or permitted by state
regulatory authorities. Statutory accounting emphasizes
solvency rather than matching revenues and expenses during
an accounting period.
Statutory Surplus............. The excess of admitted assets over total liabilities
(including loss reserves), determined using data reported in
accordance with SAP.
Underwriting.................. The process whereby an insurer reviews applications
submitted for insurance coverage and determines whether to
provide all or part of the coverage being requested for an
agreed premium.
Underwriting Expense.......... As used in the definition of "Expense Ratio", the aggregate
of policy acquisition costs and the portion of
administrative, general and other expenses of an insurer
attributable to underwriting operations.
Unearned Premiums............. The portion of a premium representing the unexpired portion
of the contract term as of a certain date.
Voluntary Market.............. The market in which a person seeking insurance obtains
coverage without the assistance of an assigned risk plan,
joint underwriting association, reinsurance facility or
similar mechanism, through an insurer of his or her own
selection.
WYO........................... The Write Your Own Flood Program of the NFIP. The WYO
includes policies sold by independent agents written by
servicing carriers and excludes policies sold directly by
the NFIP.
</TABLE>
71
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and 1996 and (unaudited) March 31, 1997................ F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and (unaudited)
for the three months ended March 31, 1996 and 1997....................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1994, 1995 and
1996 and (unaudited) for the three months ended March 31, 1996 and 1997.................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and (unaudited)
for the three months ended March 31, 1996 and 1997....................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<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, 1996 and 1995, 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, 1996. These financial statements and the schedules referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Seibels
Bruce Group, Inc. and subsidiaries, as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedules I, II, III, IV, V and VI
listed in Part IV, Item 14 (incorporated but not included herein), are presented
for purposes of complying with the Securities and Exchange Commissions rules and
are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic financial
statements, and in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Columbia, South Carolina
March 14, 1997 (except with respect to the
matters discussed in Note 15, as to which the
date is May 12, 1997).
F-2
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996 AND UNAUDITED MARCH 31, 1997
(DOLLARS SHOWN IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ---------- MARCH 31,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Investments:
Debt securities, available-for-sale, at market (Note 2)................... $ 33,581 $ 40,217 $ 38,057
Equity securities, at market (Note 2)..................................... 377 35 17
Cash and short-term investments........................................... 16,649 2,664 10,763
Other long-term investments............................................... 34 28 28
---------- ---------- -----------
Total cash and investments.............................................. 50,641 42,944 48,865
Accrued investment income................................................... 697 772 435
Premiums and agents' balances receivable, net............................... 7,005 6,477 6,380
Reinsurance recoverable on paid losses and loss adjustment expenses......... 27,423 28,218 23,319
Reinsurance recoverable on unpaid losses and loss adjustment expenses....... 84,492 84,725 66,659
Property and equipment, net................................................. 5,396 5,194 5,003
Prepaid reinsurance premiums--ceded business................................ 43,469 46,118 45,171
Deferred policy acquisition costs........................................... 293 96 55
Other assets................................................................ 4,589 5,928 6,129
---------- ---------- -----------
Total assets............................................................ $ 224,005 $ 220,472 $ 202,016
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES
Losses and claims:
Reported and estimated losses and claims
--retained business..................................................... $ 47,445 $ 37,019 $ 36,351
--ceded business........................................................ 74,918 74,735 57,258
Adjustment expenses--retained business.................................... 13,586 10,408 9,587
--ceded business........................................................ 9,574 9,990 9,401
Unearned premiums:
Property and casualty--retained business.................................. 1,900 1,380 1,300
--ceded business........................................................ 43,469 46,118 45,171
Credit life............................................................... 758 194 143
Balances due other insurance companies...................................... 12,438 8,736 11,410
Notes payable............................................................... 2,476 0 0
Current income taxes payable................................................ 191 17 9
Other liabilities and deferred items........................................ 7,063 8,084 7,175
---------- ---------- -----------
Total liabilities....................................................... $ 213,818 $ 196,681 $ 177,805
---------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Special stock, no par value, authorized 5,000,000 shares, none issued and
outstanding............................................................... -- -- --
Common stock, $1 par value, authorized 12,500,000 shares, issued and
outstanding of 4,193,171, 6,168,097 and 6,192,172 shares at 1995, 1996 and
1997)..................................................................... 4,193 6,168 6,192
Additional paid-in-capital.................................................. 46,660 54,050 54,218
Unrealized gain/(loss) on investments....................................... 401 (536) (1,011)
Accumulated deficit......................................................... (41,067) (35,891) (35,188)
---------- ---------- -----------
Total shareholders' equity.............................................. 10,187 23,791 24,211
---------- ---------- -----------
Total liabilities and shareholders' equity.................................. $ 224,005 $ 220,472 $ 202,016
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE (UNAUDITED) THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------
1994 1995 1996 1996 1997
---------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Commission & service income............................... $ 60,669 $ 49,572 $ 45,585 $ 10,115 $ 10,964
Premiums earned:
Property & casualty..................................... 14,718 10,384 7,186 2,999 2,309
Credit life............................................. 1,801 890 478 125 14
Net investment income..................................... 5,321 3,176 3,006 660 708
Other interest income..................................... 905 1,154 801 118 297
Realized gains (losses) on investments.................... (6,327) 164 (14) 194 219
Other income.............................................. 2,673 843 151 23 4
---------- --------- --------- --------- ---------
Total revenues........................................ 79,760 66,183 57,193 14,234 14,515
---------- --------- --------- --------- ---------
Expenses
Property & casualty:
Losses & loss adjustment expenses..................... 36,954 17,618 10,980 4,040 3,802
Policy acquisition costs.............................. 5,538 3,794 1,777 683 582
Credit life benefits.................................... 770 545 203 70 25
Interest expense........................................ 321 308 174 85 17
Other operating costs & expenses........................ 55,222 42,768 39,014 8,716 9,373
---------- --------- --------- --------- ---------
Total expenses........................................ 98,805 65,033 52,148 13,594 13,799
---------- --------- --------- --------- ---------
Income (loss) from operations, before income
taxes................................................... (19,045) 1,150 5,045 640 716
Provision (benefit) for income taxes...................... 29 (2) (131) 8 13
---------- --------- --------- --------- ---------
Net income (loss)......................................... $ (19,074) $ 1,152 $ 5,176 632 703
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Per share & common equivalent share:
Net income (loss)....................................... $ (6.89) $ 0.28 $ 0.90 $ 0.14 $ 0.11
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Weighted average shares outstanding..................... 2,767 4,181 6,382 4,390 6,175
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Pro forma SFAS No. 128 basic earnings per share (Note 1):
Net income (loss)....................................... $ (6.89) $ 0.28 $ 1.05 $ 0.15 $ 0.11
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Weighted average shares outstanding..................... 2,767 4,181 4,918 4,211 6,175
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE (UNAUDITED) THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(DOLLARS SHOWN IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Common stock outstanding:
Beginning of year................................... $ 1,875 $ 3,625 $ 4,193 $ 4,193 $ 6,168
Stock issued in connection with rights offering..... -- 554 -- -- --
Stock issued to benefit plans, agents and others.... -- 14 4 -- 24
Stock issued in exchange for cancellation of note
payable........................................... 1,750 -- -- --
Stock issued in connection with capital
contributions..................................... -- -- 1,971 409
---------- ---------- ---------- ---------- ----------
End of period....................................... $ 3,625 $ 4,193 $ 6,168 $ 4,602 $ 6,192
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Additional paid-in-capital:
Beginning of year................................... $ 33,609 $ 41,859 $ 46,660 $ 46,660 $ 54,050
Stock issued in connection with rights offering..... -- 4,767 -- -- --
Stock issued to benefit plans, agents and others.... -- 34 21 -- 168
Stock issued in exchange for cancellation of note
payable........................................... 8,250 -- -- -- --
Stock issued in connection with capital
contributions, net of associated expenses......... -- -- 7,369 2,799 --
---------- ---------- ---------- ---------- ----------
End of period....................................... $ 41,859 $ 46,660 $ 54,050 $ 49,459 $ 54,218
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Unrealized gain (loss) on securities:
Beginning of year................................... $ 2,404 $ (2,615) $ 401 $ 401 $ (536)
Change during the period............................ (5,019) 3,016 (937) (1,035) (475)
---------- ---------- ---------- ---------- ----------
End of period....................................... $ (2,615) $ 401 $ (536) $ (634) $ (1,011)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Accumulated deficit:
Beginning of year................................... $ (23,145) $ (42,219) $ (41,067) $ (41,067) $ (35,891)
Net income (loss) for the period.................... (19,074) 1,152 5,176 632 703
---------- ---------- ---------- ---------- ----------
End of period....................................... $ (42,219) $ (41,067) $ (35,891) $ (40,435) $ (35,188)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total shareholders' equity........................ $ 650 $ 10,187 $ 23,791 $ 12,992 $ 24,211
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
F-5
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE (UNAUDITED) THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(DOLLARS SHOWN IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................................... $ (19,074) $ 1,152 $ 5,176 $ 632 $ 703
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation......................................................... 739 925 979 239 249
Realized losses (gains) on investments............................... 6,327 (164) 14 (194) (219)
Stock issued as compensation......................................... -- 31 16 -- --
Change in assets and liabilities:
Accrued investment income.......................................... 278 112 (75) 333 337
Premium and agents' balances receivable, net....................... 690 6,023 528 (464) 97
Premium notes receivable........................................... 11,120 -- -- -- --
Reinsurance recoverable on losses and loss adjustment expenses..... (8,943) 7,093 (1,028) 20,459 22,965
Prepaid reinsurance premiums-ceded business........................ 6,443 5,014 (2,649) 855 947
Deferred policy acquisition costs.................................. 2,943 606 197 99 41
Unpaid losses and loss adjustment expenses......................... (26,837) (21,175) (13,371) (23,031) (19,555)
Unearned premiums.................................................. (8,719) (10,164) 1,565 (1,757) (1,078)
Balances due other insurance companies............................. (8,657) (6,681) (3,702) 4,438 2,674
Current income taxes payable....................................... (571) 42 (174) (36) (8)
Outstanding drafts and bank overdraft.............................. (3,336) (3,891) -- -- --
Other-net.......................................................... 2,989 (634) (414) (3,065) (1,116)
--------- --------- --------- --------- ---------
Net cash (used in) provided by operating activities...................... (44,608) (21,711) (12,938) (1,492) 6,037
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from investments sold......................................... 143,609 10,804 3,954 1,170 263
Proceeds from investments matured...................................... 45 2,030 3,095 2,795 1,665
Cost of investments acquired........................................... (88,041) (4,201) (14,288) (5,510) --
Proceeds from mortgage loan receivable................................. -- 1,965 -- -- --
Proceeds from property and equipment sold.............................. 655 57 116 108 --
Purchases from property and equipment.................................. (2,418) (92) (797) (406) (58)
--------- --------- --------- --------- ---------
Net cash (used in) provided by investing activities...................... 53,850 10,563 (7,920) (1,843) 1,870
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Issuance of capital stock.............................................. -- -- 9,340 9,458 --
Proceeds from (repayment of) notes payable............................. (1,934) 2,000 (2,476) -- --
Stock issued under stock option plans.................................. -- 18 9 -- 192
Proceeds from stock rights offering.................................... -- 5,321 -- -- --
--------- --------- --------- --------- ---------
Net cash used in financing activities.................................... (1,934) 7,339 6,873 9,458 192
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and short term investments............... 7,308 (3,809) (13,985) 6,123 8,099
Cash and short term investments, beginning of year....................... 13,150 20,458 16,649 16,649 2,664
--------- --------- --------- --------- ---------
Cash and short term investments, end of year............................. $ 20,458 $ 16,649 $ 2,664 $ 22,772 10,763
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental cash flow information:
Interest paid.......................................................... $ 210 $ 96 $ 350 -- $ 17
Income taxes paid (recovered).......................................... 600 (44) 43 43 48
Noncash investing activities:
Notes payable exchanged for common stock............................... $ 10,000 $ -- $ -- -- --
Notes payable in lieu of interest payment.............................. 439 37 -- -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
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. ("SBIG") provides automobile, flood, and other
property and casualty insurance services and products to customers located
primarily in the southeastern United States. The Company's largest source of
revenues derives from the Company's role as one of three servicing carriers for
the South Carolina Reinsurance Facility (the "Facility"), a state-sponsored plan
for insuring South Carolina drivers outside of the voluntary market. The Company
also is a leading provider, and an original participant, in the National Flood
Insurance Program (the "NFIP"), a flood insurance program administered by the
federal government. As a servicing carrier for the Facility and the NFIP, the
Company receives commissions and fees, but reinsures all of the underwriting
risk. The Company provides other fee-based services, including services in its
capacity as a managing general agent ("MGA") for commercial insurance policies
underwritten by unaffiliated insurance companies, catastrophe claims services,
excess and surplus lines brokerage services and liability run-off management
services. Recently, the Company began marketing and underwriting nonstandard
automobile insurance on a risk-bearing basis.
From the mid-1980's through the middle of 1995, the Company experienced
significant operating losses due primarily to environmental and construction
defect claims on general liability policies written by the Company prior to
1985, losses from Hurricane Hugo in 1989 and from Hurricane Andrew in 1992, and
losses on workers' compensation insurance policies written by the Company.
Despite a significant recapitalization in 1994, these operating losses reduced
the Company's shareholders' equity to $650,000 by the end of 1994, and the
Company suspended its underwriting operations in early 1995. Beginning in 1995,
new management took a number of actions to stabilize and improve the Company's
financial condition through significant cost reductions and the investment of
new equity capital as well as a renewed emphasis on the Company's fee-based
businesses. As a result of these actions, the Company realized net income in
both 1995 and 1996 and was able to resume limited insurance underwriting
activities in 1996.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP") and include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain classifications previously presented in the consolidated financial
statements for prior years have been changed to conform to current
classifications.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates, although, in
the opinion of the management, such differences would not be significant.
CASH AND SHORT-TERM INVESTMENTS
For purposes of the Statements of Cash Flows, the Company considers both
cash and short-term investments within the caption "cash and short-term
investments" to be those highly liquid investments purchased with an initial
maturity of three months or less.
F-7
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of debt and equity securities, short-term investments, other
long-term investments, cash and accrued investment income was $51.3 million and
$43.7 million at December 31, 1995 and 1996, respectively. The fair values of
cash and short-term investments approximate carrying value because of the short
maturity of those instruments.
The fair values of debt securities and equity securities were determined in
accordance with methods prescribed by the National Association of Insurance
Commissioners which do not differ materially from nationally quoted market
prices. The fair market value of certain municipal bonds is assumed to be equal
to amortized cost where no market quotations exist. Premium and agents' balances
receivable are carried at their historical costs which approximate fair value as
a result of timely collections and evaluations of recoverability with a
provision for uncollectable amounts.
The fair value of debt was $2.5 million at December 31, 1995. The fair value
of debt was estimated to be its carrying value based on the remaining short-term
maturity. The Company satisfied all notes payable in May, 1996.
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 (in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------------------------ ------------------------ ------------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Direct............................. $ 140,683 $ 146,481 $ 114,184 $ 122,912 $ 106,925 $ 105,212
Assumed............................ 5,332 2,275 422 1,232 6,235 5,819
Ceded.............................. (131,478) (134,038) (108,560) (113,760) (106,494) (103,845)
----------- ----------- ----------- ----------- ----------- -----------
Net................................ $ 14,537 $ 14,718 $ 6,046 $ 10,384 $ 6,666 $ 7,186
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The amounts of premiums pertaining to catastrophe reinsurance that were
ceded from earned premiums during 1994, 1995 and 1996 were $1.7 million, $0.8
million and $0.2 million, respectively.
CREDIT LIFE PREMIUMS
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 predominately 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. 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.
F-8
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 considers anticipated
investment income in determining whether premium deficiencies exist.
PROPERTY AND CASUALTY UNPAID LOSS AND LOSS ADJUSTMENT EXPENSE
The liability for property and casualty unpaid losses and loss adjustment
expenses includes:
(1) An accumulation of 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 expenses to paid losses.
(4) The deduction of estimated amounts recoverable from salvage and
subrogation.
(5) Estimated losses for reinsurance ceded and assumed.
Management, in conjunction with the Company's consulting actuaries, performs
a complete review of the above components of the Company's loss reserves to
evaluate the adequacy of such reserves. Management believes the reserves, which
approximate the amount determined by independent actuarial reviews, are
sufficient to prevent prior years' losses from adversely affecting future
periods; however, establishing reserves is an estimation process and adverse
developments in future years may occur and would be recorded in the year so
determined.
EARNINGS PER SHARE
Per share and common equivalent share is based on the weighted average
number of shares outstanding (2,766,891 in 1994, 4,180,526 in 1995 and 6,382,381
in 1996). Outstanding stock options and warrants are common stock equivalents
and had a dilutive effect in 1996, but had no dilutive effects on income per
share in 1994 and 1995.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share," ("SFAS No. 128") which requires the
Company to disclose both basic and diluted earnings per share. SFAS No. 128 is
effective for fiscal years ending after December 15, 1997. The Company has
disclosed pro forma basic earnings per share as will be required under SFAS No.
128. Weighted average number of shares outstanding used in the calculation of
basic earnings per share is 4,918,346 in 1996 (2,766,891 in 1994 and 4,180,526
in 1995).
F-9
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR UNCOLLECTABLE ACCOUNTS
Allowance for uncollectable accounts for agents' balances receivable, other
receivables, and premium notes receivable were $224,000 and $823,000 at December
31, 1995 and December 31, 1996, respectively.
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 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.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 1996, the Company adopted Statement No. 123 of the Financial
Accounting Standards Board, "Accounting for Stock-Based Compensation". The
Statement requires that companies with stock-based compensation plans either
recognize compensation expense based on new fair value accounting methods or
continue to apply the provisions of Accounting Principles Board Opinion No. 25
("APB 25") and disclose pro forma net income and earnings per share assuming the
fair value method had been applied. The Company has elected to adopt the
disclosure alternative in its annual financial statements and to continue
accounting for its stock-based compensation plans in accordance with APB 25 (see
Note 10).
NOTE 2 INVESTMENTS
Investments in notes and other debt securities, preferred stocks and common
stocks are all considered available-for-sale securities and are carried at
market at December 31, 1995 and 1996. Short-term investments are carried at
cost, which approximates market value.
Unrealized gains and losses on marketable debt and equity securities are
credited or charged directly to shareholders' equity. Realized gains and losses
on investments included in the results of operations are determined using the
"identified certificate" cost method.
F-10
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 INVESTMENTS (CONTINUED)
Realized gains (losses) on investments are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
DEBT EQUITY
SECURITIES SECURITIES OTHER TOTAL
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Realized:
1994...................................................... $ (7,019) $ 930 $ (238) $ (6,327)
1995...................................................... 240 (76) -- 164
1996...................................................... (62) 48 -- (14)
Change in unrealized:
1994...................................................... $ (3,222) $ (1,657) $ (140) $ (5,019)
1995...................................................... 2,790 237 (11) 3,016
1996...................................................... (902) (154) 119 (937)
</TABLE>
Net bond discount accretion and premium amortization charged to income for
the years ended December 31, 1994, 1995 and 1996 was not material.
Unrealized gains and losses reflected in equity are as follows (in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Gross unrealized gains.................................................. $ 136 $ 577 $ 8
Gross unrealized losses................................................. (2,751) (176) (544)
--------- --------- ---------
Net unrealized gain (loss).............................................. $ (2,615) $ 401 $ (536)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Proceeds from sales of debt securities and related realized gains and losses
were as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Proceeds from sales..................................................... $ 34,318 $ 10,556 $ 3,554
Gross realized gains.................................................... 98 267 30
Gross realized losses................................................... (7,517) (27) (92)
</TABLE>
Proceeds from sales of equity securities and related realized gains and
losses were as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Proceeds from sales..................................................... $ 9,291 $ 248 $ 400
Gross realized gains.................................................... 1,555 -- 75
Gross realized losses................................................... (625) (76) (127)
</TABLE>
Investments which exceed 10% of shareholders' equity, excluding investments
in U.S. Government and government agencies and authorities, at December 31,
1996, are as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING VALUE
---------------
<S> <C>
Short-term investments:
Evergreen Money Market Fund.......................................................... $ 3,301
First Union Bank -- Repurchase Agreements............................................ 4,690
</TABLE>
F-11
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 INVESTMENTS (CONTINUED)
There were no debt securities which were non-income producing for the twelve
months ended December 31, 1996. Debt securities with an amortized cost of $21.9
million and $22.0 million at December 31, 1995 and 1996, respectively, were on
deposit with regulatory authorities.
The amortized cost and estimated market values of investments in debt and
equity securities were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Government & government agencies and authorities............. $ 40,601 $ -- $ (499) $ 40,102
States, municipalities & political subdivisions................... 108 7 -- 115
----------- ----- ----- -----------
Total debt securities......................................... 40,709 7 (499) 40,217
----------- ----- ----- -----------
Non-redeemable preferred stock.................................... 17 1 -- 18
Common stocks..................................................... 17 -- -- 17
----------- ----- ----- -----------
Total equity securities....................................... 34 1 -- 35
----------- ----- ----- -----------
Other long-term investments....................................... 73 -- (45) 28
----------- ----- ----- -----------
Total......................................................... $ 40,816 $ 8 $ (544) $ 40,280
----------- ----- ----- -----------
----------- ----- ----- -----------
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
U. S. Government & government agencies and authorities............ $ 31,068 $ 348 $ -- $ 31,416
States, municipalities & political subdivisions................... 931 62 -- 993
All other corporate............................................... 1,168 -- -- 1,168
Redeemable preferred stocks....................................... 4 -- -- 4
----------- ----- ----- -----------
Total debt securities......................................... 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>
F-12
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 INVESTMENTS (CONTINUED)
Actual maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without penalties. The
amortized cost and estimated market value of debt securities at December 31, by
contractual maturity, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less.......................................................... $ 1,665 $ 1,667
Due after one year through five years............................................ 25,388 25,224
Due after five years through ten years........................................... 13,481 13,142
Due after ten years.............................................................. 175 184
----------- -----------
Total........................................................................ $ 40,709 $ 40,217
----------- -----------
----------- -----------
</TABLE>
Investment income as of December 31 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Debt securities............................................................ $ 4,348 $ 2,023 $ 2,122
Equity securities.......................................................... 266 15 9
Short-term investments..................................................... 626 1,138 849
Mortgage loan.............................................................. 255 23 --
Other...................................................................... -- 42 56
--------- --------- ---------
Total investment income................................................ 5,495 3,241 3,036
Investment expenses........................................................ (174) (65) (30)
--------- --------- ---------
Net investment income.................................................. $ 5,321 $ 3,176 $ 3,006
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 3 PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
DESCRIPTION LIFE-YEARS 1995 1996
- -------------------------------------------------------------------- ----------- ---------- ----------
<S> <C> <C> <C>
Land................................................................ -- $ 1,153 $ 1,153
Buildings........................................................... 10-40 4,323 4,320
Data processing equipment........................................... 3-7 4,218 4,963
Furniture and equipment............................................. 3-10 7,387 7,422
---------- ----------
17,081 17,858
Accumulated depreciation............................................ (11,685) (12,664)
---------- ----------
$ 5,396 $ 5,194
---------- ----------
---------- ----------
</TABLE>
Depreciation expense charged to operations was $0.7 million in 1994, $0.9
million in 1995 and $1.0 million in 1996.
F-13
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs incurred and amortized to income on property and
casualty business were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Deferred at beginning of year...................................................... $ -- $ --
Costs incurred and deferred during year:
Commissions and brokerage........................................................ 1,287 1,552
Taxes, licenses and fees......................................................... 486 13
Other............................................................................ 1,415 15
--------- ---------
Total.......................................................................... 3,188 1,580
Amortization charges to income during year......................................... (3,188) (1,580)
--------- ---------
Deferred at end of year............................................................ $ -- $ --
--------- ---------
--------- ---------
</TABLE>
Deferred policy acquisition costs attributable to the credit life operation
were $293,000 and $96,000 at December 31, 1995 and 1996, respectively. 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 1996, are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Note payable (due 5/1/96, interest accrued 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 --
--------- ---------
Notes payable........................................................................ $ 2,476 $ --
--------- ---------
--------- ---------
</TABLE>
On May 1, 1996 the Company repaid both notes which were payable to a single
investor of the Company. Proceeds for repayment were obtained through the sale
of Company stock.
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.
F-14
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 INCOME TAXES (CONTINUED)
A reconciliation of the differences between income taxes (benefit) on income
(loss) before extraordinary items computed at the federal statutory income tax
rate is as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- ---------- ---------
<S> <C> <C> <C>
Federal income tax (benefit), at statutory rates....................... $ (6,475) $ 391 $ 1,715
Increase (decrease) in taxes due to:
Tax exempt interest.................................................. (92) (22) (5)
Dividends received deduction......................................... (82) (4) (2)
Overaccrual from prior years......................................... -- -- (187)
Limitation of net operating loss carryforward due to change in
control............................................................ -- 18,007 3,617
Changes in valuation allowances:
Utilization of net operating loss.................................. 6,695 (329) (1,590)
Reduction due to limitation of net operating loss.................. -- (18,007) (3,617)
Other................................................................ (17) (38) (62)
--------- ---------- ---------
Tax expense (benefit) from operations.............................. $ 29 $ (2) $ (131)
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
The (benefit) provision for income taxes on income from operations consists
entirely of current income taxes resulting from alternative minimum tax and
overaccruals of prior years' taxes. The change in deferred amounts has been
offset by the valuation allowance.
Deferred tax liabilities and assets at December 31, 1995 and 1996, are
comprised of the following (in thousands):
<TABLE>
<CAPTION>
1995 TAX 1996 TAX
EFFECT EFFECT
-------------- --------------
<S> <C> <C>
Deferred tax liabilities
Deferred acquisition costs............................................ $ 146 $ 29
Property and equipment................................................ 95 92
Net unrealized investment gains....................................... 136 --
Other................................................................. -- 97
-------------- --------------
Total deferred liabilities.......................................... 377 218
-------------- --------------
Deferred tax assets:
Net operating loss carryforwards...................................... (15,300) (11,056)
Insurance reserves.................................................... (4,115) (3,127)
Net unrealized investment losses...................................... -- (182)
Bad debts............................................................. (449) (521)
Other................................................................. (376) (306)
-------------- --------------
Total deferred tax assets........................................... (20,240) (15,192)
-------------- --------------
Valuation allowance..................................................... 19,863 14,974
-------------- --------------
Net deferred tax liabilities............................................ $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
F-15
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 INCOME TAXES (CONTINUED)
The Company has determined, based on its recent earnings history, that a
valuation allowance of $15.0 million should be maintained against the deferred
tax asset at December 31, 1996. The Company's valuation allowance decreased by
$4.9 million during 1996 due to utilization of net operating loss and due to
unrealized investment losses.
The Company has unused tax operating loss carryforwards and capital loss
carryforwards of $95.4 million for income tax purposes. However, due to a
"change in ownership" event that occurred in January, 1995, the Company's use of
the net operating loss carryforwards are subject to limitations in future years
of approximately $2 million per year. Net operating loss carryforwards available
for use in 1997 is approximately $7.6 million due to the losses incurred in 1995
after the change in ownership event occurred.
The years of expiration of the tax carryforwards are as follows (in
thousands):
<TABLE>
<CAPTION>
NET OPERATING
YEAR OF EXPIRATION LOSS CAPITAL LOSS
- ----------------------------------------------------------------- ------------- -------------
<S> <C> <C>
1999............................................................. $ -- $ 5,002
2000............................................................. -- 825
2004............................................................. 13,986 --
2006............................................................. 20,411 --
2007............................................................. 31,931 --
2009............................................................. 19,342 --
2010............................................................. 3,918 --
------------- ------
$ 89,588 $ 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
environmental, pollution and toxic tort claims. These claims relate to business
written by a previously owned West Coast operation prior to 1986. On June 7,
1994, the Company settled a dispute relative to approximately 400 of these
claims. Any future liability on those claims is limited to 50% of the direct
loss and LAE paid. The Company's obligation does not begin until the other
company pays out subsequent to June 7,1994 a total of $20 million in losses and
LAE paid, net of reinsurance. As of December 31, 1996, $4.2 million of claims
payments have been made (gross of reinsurance) since June 7, 1994. A portion of
the reinsurance on this business was placed with a reinsurer currently operating
under the supervision of its state regulator. Estimates of any obligations of
the Company take into account potential recoverable amounts.
Of the remaining environmental and toxic tort claims, the following activity
took place during 1996:
<TABLE>
<S> <C>
Pending, December 31, 1995............................................. 85
New claims advised..................................................... 16
Claims settled......................................................... 30
--
Pending, December 31, 1996............................................. 71
--
--
</TABLE>
F-16
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 PROPERTY AND CASUALTY UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE
(CONTINUED)
The policies corresponding to the pending claims were written on a direct
basis and the Company has excess of loss reinsurance above Company retentions
through 1980 of $100,000 and $500,000 after that date. At December 31, 1995 and
1996, the claims are reserved as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Case reserves........................................................... $ 2,229 $ 3,170
IBNR.................................................................... 8,675 6,381
LAE reserves............................................................ 3,453 3,764
--------- ---------
Total............................................................... $ 14,357 $ 13,315
--------- ---------
--------- ---------
</TABLE>
The above claims involve 8 Superfund sites, 5 asbestos or toxic tort claims,
6 underground storage tanks and 52 miscellaneous clean-up sites.
In estimating the ultimate liability for 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. Usually there are several
different insurers participating in the defense and settlement with ultimate
costs pro-rated by either time on the risk or policy limits. In exposures on
both known and unasserted claims, estimates of the liabilities are reviewed and
updated continually. The potential development of losses is restricted by policy
limitations.
Because only 71 claims remain open as of December 31, 1996, 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 incurred are reduced by recoveries made and to be made from
reinsurers, which also includes substantial amounts related to business produced
as a servicing carrier. Reinsurance recoveries are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Losses incurred.................................................... $ 145,930 $ 150,339 $ 158,307
Loss adjustment expenses........................................... 19,429 5,379 5,583
---------- ---------- ----------
$ 165,359 $ 155,718 $ 163,890
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-17
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 PROPERTY AND CASUALTY UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE
(CONTINUED)
The following table summarizes net property and casualty losses and LAE
incurred (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Estimated losses and LAE incurred................................ $ 205,599 $ 173,336 $ 174,870
Estimated reinsurance loss recoveries on incurred losses......... (165,359) (155,718) (163,890)
NCCI commutation (1)............................................. (6,138) -- --
American Star commutation (2).................................... 2,852 -- --
----------- ----------- -----------
$ 36,954 $ 17,618 $ 10,980
----------- ----------- -----------
----------- ----------- -----------
</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.
F-18
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 PROPERTY AND CASUALTY UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE
(CONTINUED)
Activity in the liability for unpaid losses and LAE is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Liability for losses and LAE at beginning of year
Gross liability per balance sheet...................... $ 194,682 $ 166,698 $ 145,523
Ceded reinsurance recoverable........................ (76,221) (88,731) (84,492)
---------- ---------- ----------
Net liability...................................... 118,461 77,967 61,031
---------- ---------- ----------
Provision for losses and LAE for claims occurring in the
current year........................................... 19,997 14,243 9,863
Increase in estimated losses and LAE for claims occurring
in prior years......................................... 16,957 3,375 1,117
---------- ---------- ----------
36,954 17,618 10,980
---------- ---------- ----------
Loss and LAE payments for claims occurring during:
Current year........................................... 13,837 11,711 8,317
Prior years............................................ 63,611 22,843 16,267
---------- ---------- ----------
77,448 34,554 24,584
---------- ---------- ----------
Liability for losses and LAE at end of year:
Net liability.......................................... 77,967 61,031 47,427
Ceded reinsurance recoverable.......................... 88,731 84,492 84,725
---------- ---------- ----------
Gross liability per balance sheet.................... $ 166,698 $ 145,523 $ 132,152
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NOTE 8 DIVIDEND RESTRICTIONS
The ability of the Company to declare and pay cash dividends, as well as to
service any debt, is dependent to some degree upon the ability of South Carolina
Insurance Company ("SCIC") to declare and pay dividends to SBIG. SCIC is
regulated as to its payment of dividends by the South Carolina Insurance Holding
Company Regulatory (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 (1) 10% of SCIC's statutory surplus as regards policyholders as
of December 31 of the prior year or (2) SCIC's statutory net income, not
including the realized gains, for the prior calendar year.
NOTE 9 STATUTORY REPORTING
The Company's insurance subsidiaries' assets, liabilities and results of
operations have been reported on the basis of GAAP, which varies from statutory
accounting practices ("SAP") prescribed or permitted by insurance regulatory
authorities. The principal differences between SAP and GAAP, are that under SAP:
(1) certain assets that are not admitted assets are eliminated from the balance
sheet, (2) acquisition costs for policies are expensed as incurred, while they
may be deferred and amortized over the estimated life of the policies under
GAAP, (3) no provision is made for deferred income taxes, (4) the timing of
establishing certain reserves is different than under GAAP, and (5) valuation
allowances are established
F-19
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 STATUTORY REPORTING (CONTINUED)
against investments. Each of the Company's insurance subsidiaries must file with
applicable state insurance regulatory authorities an "Annual Statement" which
reports, among other items, net income (loss) and shareholders' equity (called
"surplus as regards policyholders" in property and casualty reporting).
A reconciliation between GAAP net income (loss) and statutory net income
(loss) of the property and casualty insurance subsidiaries is as follows for the
year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ---------
<S> <C> <C> <C>
GAAP income (loss).......................................... $ (19,074) $ 1,152 $ 5,176
Increase (decrease) due to:
Deferred policy acquisition costs......................... 2,943 606 198
Salvage/subrogation recoverable and reserves.............. 1,225 (41) 256
Deferred reinsurance benefits............................. (155) -- (6)
Parent company GAAP-only items and other non-statutory
subsidiaries.............................................. 181 1,820 1,252
Mortgage loan loss recognition.............................. -- (987) --
Intercompany dividends (1995 offset by increase in statutory
surplus).................................................. 2,500 (13,202) 2,400
Adjustment to premium and loss reserves..................... (1,833) (255) (278)
Other....................................................... 606 99 56
Allocation of Seibels Bruce and Company expenses............ -- (1,574) --
---------- ---------- ---------
Statutory net income (loss)--(1996 as adjusted; 1995 and
1994 as amended).......................................... $ (13,607) $ (12,382) $ 9,054
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
A reconciliation between GAAP shareholders' equity and statutory capital and
surplus, at December 31, is as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
GAAP shareholders' equity.................................... $ 650 $ 10,187 $ 23,791
Increase (decrease) due to:
Deferred policy acquisition costs.......................... (899) (293) (96)
Parent company debt contributed to statutory surplus....... -- 2,400 --
Non-statutory companies' shareholders' equity.............. -- 1,436 (840)
Adjustments to premium and loss reserves................... (1,874) (554) (1,128)
Other...................................................... 508 (2,301) (95)
Allocation of Seibels Bruce and Company expenses........... -- (1,574) --
--------- --------- ---------
Statutory surplus (1996 as adjusted; 1995 and 1994 as
amended)................................................... $ (1,615) $ 9,301 $ 21,632
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-20
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 STATUTORY REPORTING (CONTINUED)
Net income and shareholders' equity of the credit life insurance subsidiary
as determined in accordance with statutory accounting practices are as follows
for the year ended December 31, is as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income....................................................... $ 750 $ 276 $ 460
Shareholders' equity
("surplus as regards policyholders")........................... $ 4,036 $ 4,334 $ 4,769
</TABLE>
NOTE 10 BENEFIT PLANS AND OPTIONS
The SCIC Employees' Profit Sharing and Saving 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 four years.
The profit-sharing account held 53,646 and 39,494 shares of Company stock at
December 31, 1995 and 1996, respectively.
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
contributions, 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 $270,000 in 1994 and $87,000 in 1995. There was no
contribution in 1996.
The Company currently has three plans under which 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 were approved by the shareholders at a
special meeting held on June 14, 1996. Options granted under all plans except
the Directors' plan expire 5 years from the date of grant. Options granted under
the Directors' plan expire 10 years from the date of grant.
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.
The 1996 Plan reserves 1.25 million shares of Company stock which may be issued
as stock options, incentive stock and restricted stock to employees and
F-21
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 BENEFIT PLANS AND OPTIONS (CONTINUED)
consultants of the Company. The following table shows option activity under the
1987 and 1996 plans for the three years.
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Shares under options outstanding, beginning of year.............................. 16,043 12,787 215,293
Granted under 1987 Plan.......................................................... -- 75,000 --
Granted under 1996 Plan.......................................................... -- 138,750 368,450
Exercised during year............................................................ -- (5,000) --
Canceled or expired during year.................................................. (3,256) (6,244) (1,575)
--------- --------- ---------
Shares under options outstanding, end of year................................ 12,787 215,293 582,168
--------- --------- ---------
--------- --------- ---------
Shares under options exercisable, end of year.................................... 12,787 140,293 214,531
--------- --------- ---------
--------- --------- ---------
</TABLE>
All grants made under the Plan have exercise prices no lower than the market
price at the date of grant. At December 31, 1996, 639,552 shares of the
Company's stock have been reserved for future grant. The following table
summarizes options outstanding and exercisable by price range as of December 31,
1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
RANGE OF PRICE OUTSTANDING PRICE EXERCISABLE PRICE
- ------------------------------------------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
$0.00 - $6.00................................... 85,000 $ 3.6652 84,063 $ 3.6392
$6.01 - $10.00.................................. 358,263 8.9124 125,500 7.9008
$10.01 - $16.00................................. 71,000 15.4852 -- --
$16.01 - $22.00................................. 62,937 22.0000 -- --
$45.00.......................................... 2,306 45.0000 2,306 45.0000
$42.50.......................................... 2,662 42.5000 2,662 42.5000
----------- -----------
582,168 214,531
----------- -----------
----------- -----------
</TABLE>
Also included in the 1996 Plan are provisions for the granting of incentive
stock and restricted stock. While there were no grants of incentive stock during
1995 or 1996, 28,279 shares of restricted stock were granted in 1996. Of that
amount, 2,175 shares were issued in 1996 and 26,104 shares are to be issued in
1997 when the restrictions lapse.
The 1995 Stock Option Plan for Non-employee Directors became effective June
15, 1995. Under the Plan, all non-employee directors are automatically granted
1,250 options to purchase Company stock on an annual basis every June. The
exercise price will be the market value on the date of grant. On June 15, 1995
and 1996, 8,750 options were granted at an exercise price of $3.50 and $10.50,
respectively.
F-22
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 BENEFIT PLANS AND OPTIONS (CONTINUED)
The 1995 Stock Option Plan for Independent Agents became effective December
21, 1995. The Plan authorizes a total grant of 125,000 options. Activity may be
summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Shares under options outstanding, beginning of year........................ -- -- 17,000
Granted during year........................................................ -- 17,000 40,125
Exercised during year...................................................... -- -- (1,500)
Canceled or expired during year............................................ -- -- (1,500)
--------- --------- ---------
Shares under options outstanding, end of year.............................. -- 17,000 54,125
--------- --------- ---------
--------- --------- ---------
</TABLE>
During 1995 and 1996, a total of 57,125 options were granted at an average
exercise price of $6.00 and $8.40, respectively. At December 31, 1996, 67,875
shares of Company's stock have been reserved for future grant.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation costs for the Company's three stock option
plans been determined based on the fair value at the grant date for awards in
1995 and 1996 consistent with the provisions of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands except per share amounts).
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Net income--as reported.................................................... $ 1,152 $ 5,176
Net income--pro forma...................................................... 597 4,026
Earnings per share--as reported............................................ 0.28 0.90
Earnings per share--pro forma.............................................. 0.16 0.72
</TABLE>
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
DIRECTORS
EMPLOYEE PLAN PLAN AGENTS PLAN
-------------- ------------- -----------
<S> <C> <C> <C>
Expected Dividend Yield.......................... 0 0 0
Expected Stock Price Volatility.................. 84.92% 84.92% 84.92%
Risk-free Interest Rate.......................... 5.92% 6.47% 5.61%
Expected Life of Options......................... 5 years 10 years 4.2 years
</TABLE>
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
affect of 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
F-23
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 BENEFIT PLANS AND OPTIONS (CONTINUED)
was approximately $91,000 in 1994, $79,000 in 1995, and $75,000 in 1996. The
following table presents the reconciliation of the obligation at December 31,
1995 and 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Active employees........................................................... $ (71) $ (37)
Current retirees........................................................... (522) (511)
--------- ---------
Total.................................................................... (593) (548)
Fair value of assets......................................................... -- --
--------- ---------
Accumulated postretirement benefit obligation in excess of fair value of
assets..................................................................... (593) (548)
Unrecognized transition obligation........................................... 593 502
Unrecognized net gain........................................................ (102) (53)
--------- ---------
Accrued postretirement benefit cost...................................... $ 102 $ 99
--------- ---------
--------- ---------
</TABLE>
Net periodic postretirement benefit cost includes the following components
for 1994, 1995, and 1996 (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Service cost............................................................. $ 4 $ 4 $ 3
Interest cost............................................................ 52 43 41
Amortization of transition obligation.................................... 35 35 31
Amortization of net gains................................................ -- (3) 0
--- --- ---
Net periodic postretirement benefits................................. $ 91 $ 79 $ 75
--- --- ---
--- --- ---
</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 1996 and
1995, and 12% for 1994 is assumed to decrease to a 5.5% ultimate trend (5.5% in
1995; 7% in 1994) with a duration to ultimate trend of 6 years (6 years in 1995
and 9 years in 1994). The health care cost trend rate assumption has an effect
on the amounts reported. For example, increasing the assumed health care cost
trend rates by one percentage point in each year would increase the
postretirement benefit obligation as of December 31, 1996 by $9,000.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% for 1994, 7.25% for 1995 and 7.75%
for December 31, 1996.
During the first quarter of 1996, the Company issued to a group of investors
stock options expiring December 31, 2000 to acquire 408,750 shares of
unregistered Company Common Stock at the greater of the price of $10.00 per
share or book value at the date of exercise.
In the third quarter of 1996, the Company issued to a different group of
investors stock options to acquire 781,250 shares of unregistered Company Common
Stock at the greater of the price of $6.00 per share or the book value at the
date of exercise, expiring December 31, 1998 and 781,250 shares at the greater
of the price of $8.00 or the book value at date of exercise, expiring December
31, 2000.
The Company had 46,464 warrants outstanding at an exercise price of $0.04
per share at December 31, 1995 and 1996.
F-24
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 COMPANY'S OPERATIONS IN DIFFERENT BUSINESS SEGMENTS
Founded in 1869, the Company performs servicing carrier activities for state
and federal insurance facilities. Managing general agency services are also
performed for a non-affiliated insurance company. Insurance products are offered
through independent agents, primarily in the southeastern states. During 1993
and 1994, the Company began to withdraw from selected states and selected risk
retained products, and changed its emphasis to fee income generating activities.
Effective in mid-1995, the Company voluntarily suspended underwriting new and
renewal business for which the risks were not reinsured to an unaffiliated
party. After both the Company and its regulators became satisfied that the
capital level was adequate to undertake such risk, underwriting on a risk
retention basis was resumed at very modest levels in mid 1996.
In February, 1994, substantially all of the assets of the former premium
financing subsidiary, Premium Service Corporation, were sold, and a new company,
Policy Finance Company, ("PFC") was formed to handle the administration of the
assets retained. The pre-tax income (loss) of PFC was $538,000 in 1994; $74,000
in 1995 and $(4,000) in 1996. The Company has no plans to continue its own
premium financing activity. Effective January 1, 1995, Forest Lake Travel
Service (FLT), a subsidiary travel agency, was sold. FLT's pre-tax income was
$420,000 in 1993 and $95,000 in 1994.
The following sets forth certain information with respect to the Company's
operations in different business segments for the year ended December 31, (in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---------- --------- ---------
<S> <C> <C> <C>
Revenue:
Property and casualty insurance segments.................. $ 14,718 $ 10,384 $ 7,186
Commission and service activities segment................. 60,669 49,572 45,585
Net investment income and other interest income........... 5,690 4,038 3,516
Realized gains (losses) on investments.................... (5,793) 150 (179)
---------- --------- ---------
Total for property & casualty insurance segments........ 75,284 64,144 56,108
Other business revenue...................................... 4,476 2,039 1,085
---------- --------- ---------
Total revenue......................................... $ 79,760 $ 66,183 $ 57,193
---------- --------- ---------
---------- --------- ---------
Operating profit (loss):
Property and casualty insurance segments.................. $ (27,840) $ (6,719) $ 25
Commission and service activities segment................. 10,109 5,641 1,595
Net investment income..................................... 5,690 4,038 3,516
Realized gains (losses) on investments.................... (5,793) 150 (179)
---------- --------- ---------
Subtotal.............................................. (17,834) 3,110 4,957
Other business segments..................................... 141 (47) 441
---------- --------- ---------
Operating income (loss)..................................... (17,693) 3,063 5,398
General corporate expenses, net of miscellaneous income
and expense............................................. (1,031) (1,605) (179)
Interest expense.......................................... (321) (308) (174)
---------- --------- ---------
Consolidated income (loss) before income taxes.............. $ (19,045) $ 1,150 $ 5,045
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-25
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 COMPANY'S OPERATIONS IN DIFFERENT BUSINESS SEGMENTS (CONTINUED)
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 segments or combined segments represent
assets directly identified with those operations and an allocable share of
jointly used assets. For the year ended December 31, (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Identifiable Assets
Property and casualty insurance underwriting segment,
including related investment activity.................. $ 117,761 $ 82,493 $ 55,427
Commission and service activities segment................ 127,628 134,598 158,237
Other business segments.................................. 8,449 5,697 5,187
General corporate assets................................. 2,097 1,217 1,621
---------- ---------- ----------
Total assets......................................... $ 255,935 $ 224,005 $ 220,472
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
In 1996, depreciation and amortization charges for the various property and
casualty insurance underwriting and commission and service activities segments,
combined, were $1.0 million ($0.8 million in 1994 and $0.9 million in 1995.)
These amounts exclude policy acquisition costs of $1.6 million in 1996, ($5.5
million in 1994 and $3.2 million in 1995).
Costs of additions to property and equipment for the property and casualty
insurance underwriting and commission and service activities segments, combined,
amounted to $2.4 million in 1994, $0.1 million in 1995 and $0.8 million in 1996.
Additions in 1996 were primarily for data processing needs and enhancements. 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
The Company's property and casualty insurance run-off operations 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 operation, premiums are ceded entirely to the applicable
state's reinsurance facility.
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 uncollectable. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsures to
minimize its exposure to significant losses from reinsurers insolvency.
Reinsuring companies are obligated for the following amounts for unearned
premiums, unpaid losses and LAE, and paid losses and LAE (in thousands):
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Unearned premiums....................................................... $ 43,469 $ 46,118
Unpaid losses and LAE................................................... 84,492 84,725
Paid losses and LAE..................................................... 27,423 28,218
</TABLE>
F-26
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 REINSURANCE (CONTINUED)
Five reinsurers comprise a significant portion of the Company's reinsurance
recoverable on paid and unpaid losses and loss adjustment expense, as well as
prepaid reinsurance at December 31, 1996. The reinsurers and related balances
are as follows (in thousands):
<TABLE>
<CAPTION>
REINSURANCE PREPAID
RECOVERABLE REINSURANCE
----------- -----------
<S> <C> <C>
South Carolina Reinsurance Facility................................ $ 70,770 $ 24,195
National Flood Program............................................. 26,325 19,005
Swiss Reinsurance Corp............................................. 7,027 --
North Carolina Reinsurance Facility................................ 5,104 1,036
Kentucky Insurance Placement Facility.............................. 2,209 1,745
All others......................................................... 1,508 137
----------- -----------
Totals......................................................... $ 112,943 $ 46,118
----------- -----------
----------- -----------
</TABLE>
The Company believes that the balances from the various Facilities are fully
collectable due to the governmental agency's ability to assess policyholders and
member companies for deficiencies. The remaining recoverables due from
nonaffiliated reinsurance companies have also been deemed fully collectable by
the Company.
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
incidental to the insurance business.
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 provided
services to the Company prior to September 30, 1996. The Company paid data
processing charges of $3.4 million in 1994, $1.8 million in 1995 and $0.9
million in 1996.
A former 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 earned by PSI on trading activity by the Company cannot readily be
determined, but the amount paid directly to PSI during 1994 and 1995 was not
material. The former Director is no longer an employee of PSI, and PSI's
services have since been terminated.
NOTE 15 SUBSEQUENT EVENTS
On April 10, 1997, the Company effected a 1-for-4 reverse stock split. All
share and per share data in the consolidated financial statements have been
adjusted to reflect the reverse stock split on a retrospective basis.
F-27
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 SUBSEQUENT EVENTS (CONTINUED)
In March 1997, the Company filed a Form S-2 Registration Statement with the
Securities and Exchange Commission in anticipation of a secondary public
offering of common stock. The Registration Statement covers up to 2,853,089
shares of common stock (excluding the over-allotment option), comprised of
shares offered by the Company (1,000,000 shares) and the Selling Shareholder
(1,853,089 shares). The proceeds derived from the sale of shares offered by the
Company will be retained for general corporate purposes, including possible
acquisitions.
On May 12, 1997, the Company entered into a Letter of Intent to acquire The
Innovative Company, an insurance holding company based in Winston-Salem, North
Carolina ("Innovative"). Innovative, through its subsidiary Universal Insurance
Company ("Universal"), markets and underwrites nonstandard automobile insurance
through independent agents primarily in North Carolina.
The Letter of Intent provides that the Company will acquire all of the
outstanding capital stock of Innovative. The Company would issue 220,000 shares
of convertible nonvoting special (preferred) stock and pay $400,000 (subject to
adjustment) in cash. The Company also would pay at closing approximately $1.9
million of Innovative indebtedness (including accrued interest) owed to
Innovative's current shareholders. The special stock would (i) have liquidation
rights not junior to any other capital stock of the Company and a liquidation
value of $10.00 per share, (ii) pay quarterly dividends at a rate equal to $0.62
annually per share, (iii) subject to certain conditions, be convertible into
275,000 shares of Common Stock and (iv) be redeemable by the Company at a
premium beginning on August 15, 2000. The consummation of the Proposed
Acquisition is subject to a number of conditions, including the execution of a
definitive purchase agreement, the receipt of all necessary government and
regulatory approvals and satisfactory completion of due diligence by all
parties. With limited exceptions, the Letter of Intent is not binding on the
parties thereto. There is no assurance that the Company and Innovative will
agree on the terms of a definitive purchase agreement or that, if such agreement
is entered, that the transaction ultimately will close.
F-28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF THE DATE HEREOF OR THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY, THE SELLING SHAREHOLDER OR THE
UNDERWRITERS SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................... 3
Risk Factors..................................... 8
The Company...................................... 15
Use of Proceeds.................................. 17
Dividend Policy.................................. 17
Market Price of Common Stock..................... 18
Capitalization................................... 19
Selected Consolidated Financial Data............. 20
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 22
Business......................................... 32
Management....................................... 57
Principal and Selling Shareholders............... 59
Description of Capital Stock..................... 62
Shares Eligible for Future Sale.................. 64
Underwriting..................................... 65
Legal Matters.................................... 66
Experts.......................................... 66
Available Information............................ 66
Incorporation of Certain Information
By Reference................................... 67
Glossary of Selected Insurance and Certain
Defined Terms.................................. 68
Index to Consolidated Financial
Statements..................................... F-1
</TABLE>
2,853,089 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
ADVEST, INC.
SCOTT & STRINGFELLOW, INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee and NASD filing fee, all amounts are estimates.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 7,209
NASD filing fee................................................... 2,879
Nasdaq National Market Listing Fee................................ 17,500
Accounting fees and expenses...................................... 95,000
Legal fees and expenses........................................... 225,000
Blue Sky fees and expenses (including counsel fees)............... 7,500
Printing.......................................................... 106,000
Transfer Agent and Registrar fees and expenses.................... 17,000
Miscellaneous Expenses............................................ 21,912
---------
Total....................................................... $ 500,000
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The South Carolina Business Corporation Act of 1988, as amended (the
"SCBCA") permits a corporation to indemnify an individual made a party to a
proceeding because he is or was a director against liability incurred in the
proceeding if (i) such individual conducted himself in good faith, (ii) in the
case of conduct in his official capacity with the corporation, his conduct was
in its best interest, and (iii) in the case of any criminal proceeding, he had
no reasonable cause to believe his conduct was unlawful. The SCBCA does not
permit a corporation to indemnify a director (x) in connection with a proceeding
by or in the right of the corporation in which the director was adjudged liable
to the corporation or (y) in connection with any other proceeding charging
improper personal benefit to him, whether or not involving action in his
official capacity, in which he was adjudged liable on the basis that personal
benefit was improperly received by him. In connection with a proceeding by or in
the right of the corporation, the SCBCA limits indemnification to reasonable
expenses incurred in connection with the proceeding. The SCBCA also permits a
corporation to indemnify its officers, employees and agents to the extent,
consistent with public policy, that may be provided by its articles of
incorporation, bylaws, general or specific action of its board of directors, or
contract.
Addendum Two to the Company's Articles of Incorporation, as amended,
provides that a director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve gross negligence, intentional misconduct or a
knowing violation of law, (iii) under Section 33-8-330 of the SCBCA (addressing
director liability for unlawful distributions), or (iv) for any transaction from
which the director derived an improper personal benefit. Section Six of Article
Eight of the Bylaws of the Company 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 relating to their employment by the Company in an amount and
according to such terms as the Board of Directors deems prudent.
II-1
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Form of Certificate for the Company's Common Stock, par value $1.00 per share.
5.1 Opinion of King & Spalding as to the legality of the Common Stock being registered.
10.1 Stock Purchase Agreement between registrant, Abdullatif Ali 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.
10.2 Stock Purchase Agreement, dated 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)-2, for the year ended December 31, 1993.
10.3 The Seibels Bruce Group, Inc., Common Stock Warrant, dated 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.
10.4 The Seibels, Bruce & Company Employees' Profit Sharing and Savings Plan, dated June 30, 1992, as amended
January 4, 1993, incorporated herein by reference to the Annual Report on Form 10-K, Exhibit (10)(9)-9,
for the year ended December 31, 1992.
10.5 Stock Purchase Agreement, dated January 29, 1996, by and between the registrant and Charles H. Powers
and Walker S. Powers, and amendment thereto, incorporated herein by reference to submission DEF 14-A,
filing date May 10, 1996, file number 000-08804, accession number 0001005150-96-000127, accepted May 9,
1996.
10.6 Stock Purchase Agreement, dated January 30, 1996, by and between the registrant and Charles H. Powers,
Walker S. Powers, and Rex and Jane Huggins, incorporated herein by reference to submission DEF 14-A,
filing date May 10, 1996, file number 000-08804, accession number 0001005150-96-000127, accepted May 9,
1996.
10.7 Stock Purchase Agreement, dated March 28, 1996, by and between the registrant and Fred C. Avent, Frank
H. Avent and Pepsico of Florence, incorporated herein by reference to submission Form S-2, filing date
October 15, 1996, file number 33314123, access number 0000276380-96-00017, accepted October 15, 1996.
10.8 Stock Purchase Agreement, dated March 28, 1996, by and between the registrant and Junius DeLeon Finklea,
Joseph K. Newsom, Sr., Mark J. Ross, Larry M. Brice, J. Howard Stokes, Winston Y. Godwin, IRA and Peter
D. and Vera C. Hyman, incorporated herein by reference to submission Form S-2, filing date October 15,
1996, file number 33314123, access number 0000276380-96-00017, accepted October 15, 1996.
10.9 The Seibels Bruce Group, Inc. 1996 Stock Option Plan for Employees, dated November 1, 1995, incorporated
herein by reference to submission DEF 14-A, filing date May 10, 1996, file number 000-08804, accession
number 0001005150-96-000127, accepted May 9, 1996.
10.10 The Seibels Bruce Group, Inc. 1995 Stock Option Plan for Independent Agents, dated June 14, 1996,
incorporated herein by reference to submission DEF 14-A, filing date May 10, 1996, file number
000-08804, accession number 0001005150-96-000127, accepted May 9, 1996.
10.11 The Seibels Bruce Group, Inc. 1995 Stock Option Plan for Non-Employee Directors, dated June 14, 1996,
incorporated herein by reference to submission DEF 14-A, filing date May 10, 1996, file number
000-08804, accession number 0001005150-96-000127, accepted May 9, 1996.
10.12 Agreement, dated October 1, 1994, by and between Catawba Insurance Company and the South Carolina
Reinsurance Facility, incorporated herein by reference to the Annual Report on Form 10-K, Exhibit 10.12,
for the year ended December 31, 1996.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.13 Managing General Agent Agreement, dated January 1, 1996, by and between Seibels Bruce & Company and
Agency Specialty of Kentucky, Inc. and Generali--US Branch, incorporated herein by reference to the
Annual Report on Form 10-K, Exhibit 10.13, for the year ended December 31, 1996.
10.14 Arrangement, dated October 1, 1996, by and between Catawba Insurance Company, Kentucky Insurance Company
and South Carolina Insurance Company and The United States of America Federal Emergency Management
Agency, incorporated herein by reference to the Annual Report on Form 10-K, Exhibit 10.14, for the year
ended December 31, 1996.
11.1 Statement re: computation of per share earnings, for the year ended December 31, 1996, incorporated
herein by reference to the Annual Report on Form 10-K, Exhibit 11.1, for the year ended December 31,
1996.
23.1 Consent of King & Spalding (contained in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1* Powers of Attorney (contained on signature page)
</TABLE>
- ------------------------
* Previously filed
ITEM 17. UNDERTAKINGS.
The undersigned registrant 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 is 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus 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.
II-3
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this amendment to the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the city of Columbia, state of South Carolina, on June 5,
1997.
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 amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Chairman of the Board and June 5, 1997
John C. West Director
/s/ ERNST N. CSISZAR
- ------------------------------ President, Chief Executive June 5, 1997
Ernst N. Csiszar Officer, and Director
/s/ JOHN A. WEITZEL
- ------------------------------ Chief Financial Officer June 5, 1997
John A. Weitzel and Director
/s/ MARY M. GARDNER
- ------------------------------ Controller (Principal June 5, 1997
Mary M. Gardner Accounting Officer)
*
- ------------------------------ Director June 5, 1997
Frank H. Avent
*
- ------------------------------ Director June 5, 1997
William M. Barilka
*
- ------------------------------ Director June 5, 1997
Fred S. Clark
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Director June 5, 1997
Albert H. Cox, Jr.
*
- ------------------------------ Director June 5, 1997
Claude E. McCain
*
- ------------------------------ Director June 5, 1997
Kenneth W. Pavia
*
- ------------------------------ Director June 5, 1997
Charles H. Powers
*
- ------------------------------ Director June 5, 1997
Walker S. Powers
*
- ------------------------------ Director June 5, 1997
John P. Seibels
*
- ------------------------------ Director June 5, 1997
George R.P. Walker, Jr.
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ERNST N. CSISZAR
------------------------------
Ernst N. Csiszar
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT 1.1
[LLG&M DRAFT 6/05/97]
2,853,089 SHARES
(PLUS 427,963 SHARES TO COVER OVER-ALLOTMENTS, IF ANY)
THE SEIBELS BRUCE GROUP, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
June [ ], 1997
ADVEST, INC.
SCOTT & STRINGFELLOW, INC.
As Representatives (the "Representatives")
of the Several Underwriters
Named in SCHEDULE I hereto
c/o Advest, Inc.
90 State House Square
Hartford, CT 06103
Dear Sirs and Mesdames:
The Seibels Bruce Group, Inc., a South Carolina corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to sell to the
several Underwriters named in SCHEDULE I hereto (the "Underwriters"), and
certain shareholders of the Company (the "Selling Shareholders") named in
SCHEDULE II hereto severally propose to sell to the several Underwriters an
aggregate of 2,853,089 shares (the "Firm Shares") of the Company's Common Stock,
par value $1.00 per share (the "Common Stock"), of which 1,000,000 shares are to
be issued and sold by the Company and 1,853,089 shares are to be sold by the
Selling Shareholders, each Selling Shareholder selling the amount set forth
opposite such Selling Shareholder's name in SCHEDULE II hereto. The Company and
the Selling Shareholders are referred to collectively as the "Sellers."
In addition, in order to cover over-allotments in the sale of the Firm
Shares, the Underwriters may, at the Underwriters' election and subject to the
terms and conditions stated herein, purchase ratably in proportion to the
amounts set forth opposite their respective names in SCHEDULE I hereto, up to
427,963 additional shares of Common Stock from the Company (such additional
shares of Common Stock, the "Optional Shares"). The Firm Shares and the Optional
Shares are referred to collectively as the "Shares."
The Sellers, intending to be legally bound, hereby confirm their agreement
with the Underwriters as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SIGNIFICANT
SUBSIDIARIES. Each of the Company and South Carolina Insurance Company,
Seibels, Bruce & Company and Catawba Insurance Company (the "Significant
Subsidiaries"), jointly and severally represent and warrant to, and agree with,
each of the Underwriters that:
(a) A registration statement on Form S-2 (File No. 333-24081) with
respect to the Shares, including a prospectus subject to completion, has
been filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and
one or more amendments to such registration statement may have been so
filed. After the
<PAGE>
execution of this Agreement, the Company will file with the Commission
either (i) if such registration statement, as it may have been amended, has
become effective under the Act and information has been omitted therefrom in
accordance with Rule 430A under the Act, a prospectus in the form most
recently included in an amendment to such registration statement (or, if no
such amendment shall have been filed, in such registration statement) with
such changes or insertions as are required by Rule 430A or permitted by Rule
424(b) under the Act and as have been provided to and approved by the
Representatives, or (ii) if such registration statement, as it may have been
amended, has not become effective under the Act, an amendment to such
registration statement, including a form of prospectus, a copy of which
amendment has been provided to and approved by the Representatives prior to
the execution of this Agreement. As used in this Agreement, the term
"Registration Statement" means such registration statement, as amended at
the time when it was or is declared effective, including (A) all financial
statements, schedules and exhibits thereto, (B) all documents (or portions
thereof) incorporated by reference therein, and (C) any information omitted
therefrom pursuant to Rule 430A under the Act and included in the Prospectus
(as hereinafter defined); the term "Preliminary Prospectus" means each
prospectus subject to completion included in such registration statement or
any amendment or post-effective amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement at the
time it was or is declared effective), including all documents (or portions
thereof) incorporated by reference therein; and the term "Prospectus" means
the prospectus first filed with the Commission pursuant to Rule 424(b) under
the Act or, if no prospectus is required to be so filed, such term means the
prospectus included in the Registration Statement, in either case, including
all documents (or portions thereof) incorporated by reference therein. As
used herein, any reference to any statement or information as being "made,"
"included," "contained," "disclosed" or "set forth" in any Preliminary
Prospectus, a Prospectus or any amendment or supplement thereto, or the
Registration Statement or any amendment thereto (or other similar
references) shall refer both to information and statements actually
appearing in such document as well as information and statements
incorporated by reference therein.
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued and no proceeding for that purpose has been
instituted or threatened by the Commission or the securities authority of
any state or other jurisdiction. If the Registration Statement has become
effective under the Act, no stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued and no proceeding
for that purpose has been instituted or, to the Company's knowledge,
threatened by the Commission or the securities authority of any state or
other jurisdiction.
(c) When any Preliminary Prospectus was filed with the Commission it
contained all statements required to be stated therein in accordance with,
and complied in all material respects with the requirements of, the Act and
the rules and regulations of the Commission thereunder. When the
Registration Statement or any amendment thereto was or is declared
effective, and at each Time of Delivery (as hereinafter defined), it (i)
contained and will contain all statements required to be stated therein in
accordance with, and all such statements, including, but not limited to, the
unaudited interim consolidated financial statements included or incorporated
by reference therein, complied or will comply in all material respects with
the requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not and will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus or any amendment or
supplement thereto is filed with the Commission pursuant to Rule 424(b) (or,
if the Prospectus or such amendment or supplement is not required to be so
filed, when the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus was or is declared effective)
and at each Time of Delivery, the Prospectus, as amended or supplemented at
any such time, (i) contained and will contain all statements required to
2
<PAGE>
be stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not and will not
include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
foregoing provisions of this paragraph (c) do not apply to statements or
omissions made in the Registration Statement or any amendment thereto or the
Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter through you specifically for use therein. It is understood that
the statements set forth in the Registration Statement or any amendment
thereto or the Prospectus or any amendment or supplement thereto (W) in the
last paragraph of the cover page of the Prospectus, (X) on the inside cover
page with respect to stabilization and passive market making, and (Y) in the
section entitled "Underwriters," regarding the Underwriters and the
underwriting arrangements constitute the only written information furnished
to the Company by or on behalf of any Underwriter through you specifically
for use in the Registration Statement or any amendment thereto or the
Prospectus and any amendment or supplement thereto, as the case may be.
(d) There are no legal or governmental proceedings pending or, to the
Company's knowledge, threatened to which the Company or any of its
subsidiaries listed on Exhibit A hereto (each a "Subsidiary" and
collectively, the "Subsidiaries") is a party or to which any of the
properties of the Company or any Subsidiary is subject that are required to
be described in the Registration Statement or the Prospectus and are not so
described or any statutes, regulations, contracts or other documents that
are required to be described in the Registration Statement or the Prospectus
or to be filed as exhibits to the Registration Statement that are not
described or filed as required.
(e) Each of the Company and the Subsidiaries has been duly incorporated,
is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has full corporate power and authority to
own or lease its properties and conduct its business as described in the
Prospectus. Each of the Company and the Significant Subsidiaries has full
corporate power and authority to enter into this Agreement and to perform
its obligations hereunder. Each of the Company and the Subsidiaries is duly
qualified to transact business as a foreign corporation and is in good
standing under the laws of each other jurisdiction in which it owns or
leases properties, or conducts any business, so as to require such
qualification, except where the failure to so qualify would not have a
material adverse effect on the financial position, results of operations or
business of the Company and the Subsidiaries taken as a whole.
(f) The Company's authorized, issued and outstanding capital stock is as
disclosed in the Prospectus. All of the issued shares of capital stock of
the Company, have been duly authorized and validly issued, are fully paid
and nonassessable and conform to the descriptions of the Common Stock
contained in the Prospectus. None of the issued shares of capital stock of
the Company or any of the Subsidiaries has been issued or is owned or held
in violation of any statutory (or to the knowledge of the Company, any
other) preemptive rights of shareholders, and no person or entity (including
any holder of outstanding shares of capital stock of the Company or the
Subsidiaries) has any statutory (or to the knowledge of the Company, any
other) preemptive or other rights to subscribe for any of the Shares. None
of the capital stock of the Company has been issued in violation of
applicable federal or state securities laws.
(g) All of the issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and are owned beneficially by the Company or one of the
Subsidiaries, free and clear of all liens, security interests, pledges,
charges, encumbrances, defects, shareholders' agreements, voting agreements,
proxies, voting trusts, equities or claims of any nature whatsoever. Other
than the Subsidiaries and the equity securities held in the investment
portfolios of the Company and the Subsidiaries (the composition of which is
not materially different
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than the disclosures in the Prospectus as of specific dates), the Company
does not own, directly or indirectly, any capital stock or other equity
securities of any other corporation or any ownership interest in any
partnership, joint venture or other association.
(h) Except as disclosed in the Prospectus, there are no outstanding (i)
securities or obligations of the Company or any of the Subsidiaries
convertible into or exchangeable for any capital stock of the Company or any
of the Subsidiaries, (ii) warrants, rights or options to subscribe for or
purchase from the Company or any of the Subsidiaries any such capital stock
or any such convertible or exchangeable securities or obligations or (iii)
obligations of the Company or any of the Subsidiaries to issue any shares of
capital stock, any such convertible or exchangeable securities or
obligations, or any such warrants, rights or options.
(i) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) neither the Company nor any
of the Subsidiaries has incurred any liabilities or obligations, direct or
contingent, or entered into any transactions, not in the ordinary course of
business, that are material to the Company and the Subsidiaries, (ii) the
Company has not purchased any of its outstanding capital stock or declared,
paid or otherwise made any dividend or distribution of any kind on its
capital stock, (iii) there has not been any material change in the capital
stock, long-term debt or short-term debt of the Company or any of the
Subsidiaries, and (iv) there has not been any material adverse change, or
any development involving a prospective material adverse change, in or
affecting the financial position, results of operations or business of the
Company and the Subsidiaries, in each case other than as disclosed in or
contemplated by the Prospectus.
(j) Except for the registration rights granted to the Avent Group,
Powers Group (as such terms are defined in the Prospectus) and to the
Selling Shareholders, there are no contracts, agreements or understandings
between the Company and any person granting such person the right to require
the Company to file a registration statement under the Act with respect to
any securities of the Company owned or to be owned by such person or, with
the exception of the Selling Shareholders, requiring the Company to include
such securities in the securities registered pursuant to the Registration
Statement (or any such right has been effectively waived) or requiring the
registration of any securities pursuant to any other registration statement
filed by the Company under the Act. Neither the filing of the Registration
Statement nor the offering or sale of Shares as contemplated by this
Agreement gives any security holder of the Company any rights for or
relating to the registration of any shares of Common Stock or any other
capital stock of the Company, except such as have been satisfied or waived.
(k) Neither the Company nor any of the Subsidiaries is, or with the
giving of notice or passage of time or both would be, in violation of its
articles of incorporation or bylaws or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement, lease
or other agreement or instrument to which the Company or any of the
Subsidiaries is a party or to which any of their respective properties or
assets are subject.
(l) The Company and the Subsidiaries have good and marketable title in
fee simple to all real property, if any, and good title to all personal
property owned by them, in each case free and clear of all liens, security
interests, pledges, charges, encumbrances, mortgages and defects, except
such as are disclosed in the Prospectus or such as would not have a material
adverse effect on the financial position, results of operations or business
of the Company and the Subsidiaries taken as a whole and do not interfere
with the use made or proposed to be made of such property by the Company and
the Subsidiaries; and any real property and buildings held under lease by
the Company or any of the Subsidiaries are held under valid, subsisting and
enforceable leases, with such exceptions as are disclosed in the Prospectus
or are not material and do not interfere with the use made or proposed to be
made of such property and buildings by the Company or any Subsidiary.
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(m) The Company does not require any consent, approval, authorization,
order or declaration of or from, or registration, qualification or filing
with, any court or governmental agency or body in connection with the sale
of the Shares or the consummation of the transactions contemplated by this
Agreement, except the registration of the Shares under the Act (which, if
the Registration Statement is not effective as of the time of execution
hereof, shall be obtained as provided in this Agreement) and such as may be
required by the National Association of Securities Dealers, Inc. (the
"NASD") or under state securities or blue sky laws in connection with the
offer, sale and distribution of the Shares by the Underwriters.
(n) Other than as disclosed in the Prospectus, there is no litigation,
arbitration, claim, proceeding (formal or informal) or investigation
(including without limitation, any insurance regulatory proceeding) pending
or, to the Company's knowledge, threatened in which the Company or any of
the Subsidiaries is a party or of which any of their respective properties
or assets are the subject which, if determined adversely to the Company or
any Subsidiary, would individually or in the aggregate have a material
adverse effect on the financial position, results of operations or business
of the Company and the Subsidiaries taken as a whole. Neither the Company
nor any of the Subsidiaries is in violation of, or in default with respect
to, any law, statute, rule, regulation, order, judgment or decree, except as
described in the Prospectus or such as do not and will not individually or
in the aggregate have a material adverse effect on the financial position,
results of operations or business of the Company and the Subsidiaries taken
as a whole.
(o) To the Company's knowledge, Arthur Andersen LLP, which has certified
certain financial statements of the Company and its consolidated
subsidiaries included in the Registration Statement and the Prospectus, are
independent public accountants as required by the Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and the respective
rules and regulations of the Commission thereunder.
(p) The consolidated financial statements and schedules (including the
related notes) of the Company and its consolidated subsidiaries included or
incorporated by reference in the Registration Statement, the Prospectus
and/or any Preliminary Prospectus were prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved and fairly present the financial position and results of operations
of the Company and the Subsidiaries, on a consolidated basis, at the dates
and for the periods presented. The selected financial data set forth under
the captions "Summary Consolidated Financial Data," "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Prospectus fairly present, on
the basis stated in the Prospectus, the information included therein, and
have been compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement. The supporting notes and
schedules included in the Registration Statement, the Prospectus and/or any
Preliminary Prospectus fairly state in all material respects the information
required to be stated therein in relation to the financial statements taken
as a whole.
(q) This Agreement has been duly authorized, executed and delivered by
each of the Company and the Significant Subsidiaries, and, assuming due
execution by the Representatives of the Underwriters, constitutes the valid
and binding agreement of each of the Company and the Significant
Subsidiaries, enforceable against the Company and the Significant
Subsidiaries in accordance with its terms, subject, as to enforcement, to
applicable bankruptcy, insolvency, reorganization and moratorium laws and
other laws relating to or affecting the enforcement of creditors' rights
generally and to general equitable principles and except as the
enforceability of rights to indemnity and contribution under this Agreement
may be limited under applicable securities laws or the public policy
underlying such laws.
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(r) The sale of the Shares and the performance of this Agreement and the
consummation of the transactions herein contemplated will not (with or
without the giving of notice or the passage of time or both) (i) conflict
with or violate any term or provision of the articles of incorporation or
bylaws or other organizational documents of the Company or any Subsidiary,
(ii) result in a breach or violation of any of the terms or provisions of,
or constitute a default under, any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which the Company or
any Subsidiary is a party or to which any of their respective properties or
assets is subject, (iii) conflict with or violate any provision of any law,
statute, rule or regulation or any order, judgment or decree of any court or
governmental agency or body having jurisdiction over the Company or any
Subsidiary or any of their respective properties or assets or (iv) result in
a breach, termination or lapse of the corporate power and authority of the
Company or any Subsidiary to own or lease and operate their respective
assets and properties and conduct their respective business as described in
the Prospectus.
(s) When the Shares to be sold by the Company hereunder have been duly
delivered against payment therefor as contemplated by this Agreement, the
Shares will be validly issued, fully paid and nonassessable, and the holders
thereof will not be subject to personal liability solely by reason of being
such holders. The certificates representing the Shares are in proper legal
form under, and conform in all respects to the requirements of, the South
Carolina Business Corporation Law of 1988, as amended.
(t) The Company has not distributed and will not distribute any offering
material in connection with the offering and sale of the Shares other than
the Registration Statement, a Preliminary Prospectus, the Prospectus and
other material, if any, permitted by the Act.
(u) Neither the Company nor any of its officers, directors or affiliates
has (i) taken, directly or indirectly, any action designed to cause or
result in, or that has constituted or might reasonably be expected to
constitute, the stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of the Shares or (ii) since
the filing of the Registration Statement (A) sold, bid for, purchased or
paid anyone any compensation for soliciting purchases of, the Shares or (B)
paid or agreed to pay to any person any compensation for soliciting another
to purchase any other securities of the Company.
(v) None of the Company, any of the Subsidiaries, nor, to the Company's
knowledge, any director, officer, employee or other person associated with
or acting on behalf of the Company or any Subsidiary has, directly or
indirectly, violated any provision of the Foreign Corrupt Practices Act of
1977, as amended.
(w) The operations of the Company and the Subsidiaries with respect to
any real property currently leased or owned or by any means controlled by
the Company or any Subsidiary (the "Real Property") are in compliance in all
material respects with all federal, state, and local laws, ordinances,
rules, and regulations relating to occupational health and safety and the
environment (collectively, "Laws"), and the Company and the Subsidiaries
have not violated any Laws in a way which would have a material adverse
effect on the financial position, results of operations or business of the
Company and the Subsidiaries taken as a whole. Except as disclosed in the
Prospectus, there is no pending or, to the Company's knowledge, threatened
claim, litigation or any administrative agency proceeding, nor has the
Company or any Subsidiary received any written or oral notice from any
governmental entity or third party, that: (i) alleges a violation of any
Laws by the Company or any Subsidiary or (ii) alleges the Company or any
Subsidiary is a liable party under the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. Section 9601 ET SEQ. or any state
superfund law.
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(x) Except for the two pending trademark applications submitted to the
United States Patent and Trademark Office by the Company for the
registration of the "SEIBELS BRUCE" mark and the "Clover Design" mark,
neither the Company nor any Subsidiary owns or has the right to use patents,
patent applications, trademarks, trademark applications, trade names,
service marks, copyrights, franchises, trade secrets, proprietary or other
confidential information and intangible properties and assets (collectively,
"Intangibles") the loss of any of which would have a material adverse effect
on the financial position, results of operations or business of the Company
and the Subsidiaries taken as a whole; and, to the knowledge of the Company,
neither the Company nor any Subsidiary has infringed or is infringing, and
neither the Company nor any Subsidiary has received notice of infringement
with respect to, asserted Intangibles of others.
(y) Each of the Company and the Subsidiaries makes and keeps accurate
books and records reflecting its assets and maintains internal accounting
controls which provide reasonable assurance that (i) transactions are
executed in accordance with management's authorization, (ii) transactions
are recorded as necessary to permit preparation of the Company's
consolidated financial statements in accordance with generally accepted
accounting principles and to maintain accountability for the assets of the
Company, (iii) access to the assets of the Company and each of the
Subsidiaries is permitted only in accordance with management's
authorization, and (iv) the recorded accountability for assets of the
Company and each of the Subsidiaries is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(z) The Company and the Subsidiaries have filed all foreign, federal,
state and local tax returns that are required to be filed by them and have
paid all taxes shown as due on such returns as well as all other taxes,
assessments and governmental charges that are due and payable; and no
material deficiency with respect to any such return has been assessed or
proposed.
(aa) Except for such plans that are expressly disclosed in the
Prospectus, the Company and the Subsidiaries do not maintain, contribute to
or have any material liability with respect to any employee benefit plan,
profit sharing plan, employee pension benefit plan, employee welfare benefit
plan, equity-based plan or deferred compensation plan or arrangement
("Plans") that are subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended, or the rules and regulations
thereunder ("ERISA"). All Plans are in compliance in all material respects
with all applicable laws, including but not limited to ERISA and the
Internal Revenue Code of 1986, as amended (the "Code"), and have been
operated and administered in all material respects in accordance with their
terms. No Plan is a defined benefit plan or multi employer plan. The Company
does not provide retiree life and/or retiree health benefits or coverage for
any employee or any beneficiary of any employee after such employee's
termination of employment, except as required by Section 4980B of the Code
or under a Plan which is intended to be "qualified" under Section 401(a) of
the Code. No material liability has been, or could reasonably be expected to
be, incurred under Title IV of ERISA or Section 412 of the Code by any
entity required to be aggregated with the Company or any of the Subsidiaries
pursuant to Section 4001(b) of ERISA and/or Section 414(b) or (c) of the
Code (and the regulations promulgated thereunder) with respect to any
"employee pension benefit plan" which is not a Plan. As used in this
subsection, the terms "defined benefit plan," "employee benefit plan,"
"employee pension benefit plan," "employee welfare benefit plan" and
"multiemployer plan" shall have the respective meanings assigned to such
terms in Section 3 of ERISA.
(bb) No material labor dispute exists with the Company's or any
Subsidiary's employees, and, to the Company's knowledge, no such labor
dispute is threatened.
(cc) The Company and the Subsidiaries have received all material
permits, licenses, franchises, authorizations, registrations, qualifications
and approvals (collectively, "Permits") of governmental or
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regulatory authorities (including, without limitation, state and/or other
insurance regulatory authorities) as may be required of them to own their
properties and conduct their businesses in the manner described in the
Prospectus, subject to such qualifications as may be set forth in the
Prospectus; and the Company and the Subsidiaries have fulfilled and
performed all of their material obligations with respect to such Permits,
and no event has occurred which allows or, after notice or lapse of time or
both, would allow revocation or termination thereof or result in any other
material impairment of the rights of the holder of any such Permit, subject
in each case to such qualification as may be set forth in the Prospectus;
and, except as described in the Prospectus, such Permits contain no
restrictions that materially affect the ability of the Company and the
Subsidiaries to conduct their businesses and no insurance regulatory agency
or body has issued any order or decree impairing, restricting or prohibiting
the payment of dividends by any of the Subsidiaries to the Company.
(dd) The Company and each of the Subsidiaries has filed, or has had
filed on its behalf, on a timely basis, all materials, reports, documents
and information, including but not limited to annual reports and reports of
examination with each applicable insurance regulatory authority, board or
agency, which are required to be filed by it, except where the failure to
have timely filed such materials, reports, documents and information would
not have a material adverse effect on the financial position, results of
operations or business of the Company and the Subsidiaries taken as a whole.
(ee) Neither the Company nor any Subsidiary is an "investment company"
or a company "controlled" by an investment company as such terms are defined
in Sections 3(a) and 2(a)(9), respectively, of the Investment Company Act of
1940, as amended (the "Investment Company Act"), and, if the Company or any
Subsidiary conducts its business as set forth in the Registration Statement
and the Prospectus, will not become an "investment company" and will not be
required to register under the Investment Company Act.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each of the
Selling Shareholders jointly and severally represents and warrants to, and
agrees with, each of the Underwriters that:
(a) This Agreement has been duly authorized, executed and delivered by
or on behalf of such Selling Shareholder, and assuming due execution by the
Company and the Representatives of the Underwriters, constitutes the valid
and binding agreement of such Selling Shareholder, enforceable against such
Selling Shareholder in accordance with its terms, subject, as to
enforcement, to applicable bankruptcy, insolvency, reorganization and
moratorium laws and other laws relating to or affecting the enforcement of
creditors' rights generally and to general equitable principles and except
as the enforcement of rights to indemnity and contribution under this
Agreement may be limited under applicable securities laws or the public
policy underlying such laws.
(b) The execution and delivery by such Selling Shareholder of, and the
performance by such Selling Shareholder of its obligations under, this
Agreement, the Custody Agreement signed by such Selling Shareholder and
American Stock Transfer and Trust Company, as Custodian, relating to the
deposit of the Shares to be sold by such Selling Shareholder and the Power
of Attorney appointing a certain individual as such Selling Shareholder's
attorney-in-fact to the extent set forth therein, relating to the
transactions contemplated hereby and by the Registration Statement (the
"Custody Agreement and Power of Attorney") will not (with or without the
giving of notice or the passage of time or both) (i) conflict with any term
or provision of such Selling Shareholder's articles of incorporation or
bylaws or other organizational documents, as amended (if such Selling
Shareholder is a corporation), (ii) result in a breach or violation of any
of the terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement or
instrument to which the Selling Shareholder is a party or to which its
properties or assets is subject or (iii) conflict with or violate any law,
statute, rule or regulation or any order, judgment or decree of any court or
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governmental agency or body having jurisdiction over such Selling
Shareholder or any of such Selling Shareholder's properties or assets.
(c) Such Selling Shareholder has, and on the First Time of Delivery (as
hereinafter defined) will have, valid title to the Shares to be sold by such
Selling Shareholder and the legal right and power, and all authorization and
approval required by law, to enter into this Agreement and the Custody
Agreement and the Power of Attorney and to sell, transfer and deliver the
Shares to be sold by such Selling Shareholder.
(d) The Custody Agreement and the Power of Attorney has been duly
authorized, executed and delivered by such Selling Shareholder and is a
valid and binding agreement of such Selling Shareholder.
(e) Delivery of the Shares to be sold by such Selling Shareholder
pursuant to this Agreement will pass title to such Shares free and clear of
all liens, security interests, pledges, charges, equities and other
encumbrances.
(f) Such Selling Shareholder does not require any consent, approval,
authorization, order or declaration of or from, or registration,
qualification or filing with, any court or governmental agency or body in
connection with the sale of the Shares to be sold by such Selling
Shareholder or the consummation of the transactions contemplated by this
Agreement, except for the registration of the Shares under the Act, the
Exchange Act and such as may be required under state securities or blue sky
laws in connection with the offer, sale and distribution of the Shares by
the Underwriters.
(g) Such Selling Shareholder has not (i) taken, directly or indirectly,
any action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of
the Shares or (ii) since the filing of the Registration Statement (A) sold,
bid for, purchased or paid anyone any compensation for soliciting purchases
of, the Shares or (B) paid or agreed to pay to any person any compensation
for soliciting another to purchase any other securities of the Company.
(h) While none of the Selling Shareholders, in its individual or
representative capacity, participated in the preparation of the Registration
Statement or believes that any Selling Shareholder, in its individual or
representative capacity, is an "affiliate" of the Company, as such term is
defined in Rule 405 under the Act, to the knowledge of the Selling
Shareholders, when the Registration Statement or any amendment thereto was
or is declared effective, and at each Time of Delivery (as hereinafter
defined), it did not and will not include any untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein not misleading. When the Prospectus or any amendment or supplement
thereto is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or such amendment or supplement is not required to be so filed,
when the Registration Statement or the amendment thereto containing such
amendment or supplement to the Prospectus was or is declared effective) and
at each Time of Delivery, the Prospectus, as amended or supplemented at any
such time, to the knowledge of the Selling Shareholders did not and will not
include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
foregoing provisions of this paragraph (i) do not apply to statements or
omissions made in the Registration Statement or any amendment thereto or the
Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter through you specifically for use therein. It is understood that
the statements set forth in the Registration Statement or any amendment
thereto or the Prospectus or any amendment or supplement thereto (W) in the
last paragraph of the cover page of the Prospectus, (X) on the inside cover
page with respect to stabilization and passive market making and (Y) in the
section entitled "Underwriting," regarding the Underwriters and the
underwriting arrangements constitute the only written information furnished
to the Company by or on behalf of any Underwriter through you
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specifically for use in the Registration Statement or any amendment thereto
or the Prospectus and any amendment or supplement thereto, as the case may
be.
3. PURCHASE AND SALE OF SHARES.
(a) Subject to the terms and conditions herein set forth, the Sellers,
severally and not jointly, agree to sell to each of the Underwriters, and
each of the Underwriters agrees, severally and not jointly, to purchase from
the Sellers, at a purchase price of [ ] Dollars and [ ] cents ($[ ]) per
share (the "Per Share Price"), the number of Firm Shares (to be adjusted by
you so as to eliminate fractional shares) determined by multiplying the
aggregate number of Firm Shares to be sold by the Company as set forth in
the first paragraph of this Agreement and by each of the Selling
Shareholders as set forth in Schedule II hereto by a fraction, the numerator
of which is the aggregate number of Firm Shares to be purchased by such
Underwriter as set forth opposite the name of such Underwriter in Schedule I
hereto, and the denominator of which is the aggregate number of Firm Shares
to be purchased by the several Underwriters hereunder.
(b) The Company hereby grants to the Underwriters the right to purchase
at their election in whole or in part (but only once) up to 427,963 Optional
Shares, at the Per Share Price, for the sole purpose of covering
over-allotments in the sale of the Firm Shares. Any such election to
purchase Optional Shares may be exercised by written notice from the
Representatives to the Company, given within a period of 30 calendar days
after the date of this Agreement and setting forth the aggregate number of
Optional Shares to be purchased and the date on which such Optional Shares
are to be delivered, as determined by you but in no event earlier than the
First Time of Delivery (as hereinafter defined) or, unless the
Representatives otherwise agree in writing, earlier than two or later than
ten business days after the date of such notice. In the event the
Underwriters elect to purchase all or a portion of the Optional Shares, the
Company agrees to furnish or cause to be furnished to the Representatives
the certificates, letters and opinions, and to satisfy all conditions, set
forth in Section 9 hereof at each Subsequent Time of Delivery (as
hereinafter defined).
(c) In making this Agreement, each Underwriter is contracting severally,
and not jointly, and except as provided in Sections 3(b) and 11 hereof, the
agreement of each Underwriter is to purchase only that number of shares
specified with respect to that Underwriter in Schedule I hereto. No
Underwriter shall be under any obligation to purchase any Optional Shares
prior to an exercise of the option with respect to such Shares granted
pursuant to Section 3(b) hereof.
4. OFFERING BY THE UNDERWRITERS. Upon the authorization by the
Representatives of the release of the Shares, the several Underwriters propose
to offer the Shares for sale upon the terms and conditions disclosed in the
Prospectus (the "Offering").
5. DELIVERY OF SHARES; CLOSING.
(a) Certificates in definitive form for the Shares to be purchased by
each Underwriter hereunder, and in such denominations and registered in such
names as the Representatives may request upon at least 48 hours' prior
notice to the Company, shall be delivered by or on behalf of the Sellers, to
the Representatives for the account of such Underwriter, against payment by
such Underwriter on its behalf of the purchase price therefor by wire
transfer of immediately available funds to such accounts as each Seller
shall designate in writing. The closing of the sale and purchase of the
Shares shall be held at the offices of LeBoeuf, Lamb, Greene & MacRae,
L.L.P., 125 West 55th Street, New York, New York 10019, except that physical
delivery of such certificates shall be made at the office of The Depository
Trust Company, 55 North Water Street, New York, New York 10041. The time and
date of such delivery and payment shall be, with respect to the Firm Shares,
at 10:00 a.m., New York, New York time, on the third (3rd) full business day
after this Agreement is executed or at such other time and date as the
Representatives and the Company may agree upon in writing, and, with respect
to the
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Optional Shares, at 10:00 a.m., New York, New York time, on the date
specified by the Representatives in the written notice given by the
Representatives of the Underwriters' election to purchase all or part of
such Optional Shares, or at such other time and date as the Representatives
and the Company may agree upon in writing. Such time and date for delivery
of the Firm Shares is herein called the "First Time of Delivery," such time
and date for delivery of any Optional Shares, if not the First Time of
Delivery, is herein called a "Subsequent Time of Delivery," and each such
time and date for delivery is herein called a "Time of Delivery." The
Sellers will make such certificates available for checking and packaging at
least 24 hours prior to each Time of Delivery at the office of The
Depository Trust Company, 55 North Water Street, New York, New York 10041 or
at such other location specified by you in writing at least 48 hours prior
to such Time of Delivery.
(b) The Sellers shall not be obligated to sell or deliver the Firm
Shares except upon tender of payment by the Underwriters for all the Firm
Shares agreed to be purchased by them hereunder. The Sellers shall not be
obligated to sell or deliver the Shares unless the Registration Statement
shall have become effective and no stop order shall have been issued or
proceedings instituted, pending or contemplated, as set forth in Section
9(a) below.
6. COVENANTS OF THE COMPANY. The Company covenants and agrees with each of
the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective prior to the execution and delivery of this
Agreement, to become effective. If the Registration Statement has been
declared effective prior to the execution and delivery of this Agreement,
the Company will file the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented to by
you, subparagraph (4)) of Rule 424(b) within the time period required under
Rule 424(b) under the Act. The Company will advise you promptly of any such
filing pursuant to Rule 424(b). The Company will file timely all reports and
any definitive proxy or information statements required to be filed by the
Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act.
(b) The Company will not file with the Commission the prospectus or the
amendment referred to in Section 1(a) hereof, any amendment or supplement to
the Prospectus or any amendment to the Registration Statement unless you
have received a reasonable period of time to review any such proposed
amendment or supplement and consented to the filing thereof and will use its
best efforts to cause any such amendment to the Registration Statement to be
declared effective as promptly as possible. Upon the request of the
Representatives or counsel for the Underwriters, the Company will promptly
prepare and file with the Commission, in accordance with the rules and
regulations of the Commission, any amendments to the Registration Statement
or amendments or supplements to the Prospectus that may be necessary or
advisable in connection with the distribution of the Shares by the several
Underwriters and will use its best efforts to cause any such amendment to
the Registration Statement to be declared effective as promptly as possible.
If required, the Company will file any amendment or supplement to the
Prospectus with the Commission in the manner and within the time period
required by Rule 424(b) under the Act. The Company will advise the
Representatives, promptly after receiving notice thereof, of the time when
the Registration Statement or any amendment thereto has been filed or
declared effective or the Prospectus or any amendment or supplement thereto
has been filed and will provide evidence to the Representatives of each such
filing or effectiveness.
(c) The Company will advise the Representatives promptly after receiving
notice or obtaining knowledge of (i) when any post-effective amendment to
the Registration Statement is filed with the Commission, (ii) the receipt of
any comments from the Commission concerning the Registration Statement,
(iii) when any post-effective amendment to the Registration Statement
becomes effective, or when any supplement to the Prospectus or any amended
Prospectus has been filed, (iv) the issuance
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by the Commission of any stop order suspending the effectiveness of the
Registration Statement or any part thereof or any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, (v) the suspension of the qualification of
the Shares for offer or sale in any jurisdiction or of the initiation or
threatening of any proceeding for any such purpose, (vi) any request made by
the Commission or any securities authority of any other jurisdiction for
amending the Registration Statement, for amending or supplementing the
Prospectus or for additional information. The Company will use its best
efforts to prevent the issuance of any such stop order or suspension and, if
any such stop order or suspension is issued, to obtain the withdrawal
thereof as promptly as possible.
(d) If the delivery of a prospectus relating to the Shares is required
under the Act at any time prior to the expiration of nine months after the
date of the Prospectus and if at such time any events have occurred as a
result of which the Prospectus as then amended or supplemented would include
an untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if for any
reason it is necessary during such same period to amend or supplement the
Prospectus, the Company will promptly notify the Representatives and upon
their request (but at the Company's expense) prepare and file with the
Commission an amendment or supplement to the Prospectus that corrects such
statement or omission or effects such compliance and will furnish without
charge to each Underwriter and to any dealer in securities as many copies of
such amended or supplemented Prospectus as the Representatives may from time
to time reasonably request.
(e) The Company promptly from time to time will take such action as the
Representatives may reasonably request to qualify the Shares for offering
and sale under the securities or blue sky laws of such jurisdictions as the
Representatives may request and will continue such qualifications in effect
for as long as may be necessary to complete the distribution of the Shares,
provided that in connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction. The Company will file such statements and
reports as may be required by the laws of each jurisdiction in which the
Shares have been qualified as above provided.
(f) The Company will promptly provide the Representatives, without
charge, (i) three manually executed copies of the Registration Statement as
originally filed with the Commission and of each amendment thereto,
including all exhibits and all documents or information incorporated by
reference therein, (ii) for each other Underwriter a conformed copy of the
Registration Statement as originally filed and of each amendment thereto,
without exhibits but including all documents or information incorporated by
reference therein and (iii) so long as a prospectus relating to the Shares
is required to be delivered under the Act, as many copies of each
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto as the Representatives may reasonably request.
(g) As soon as practicable, but in any event not later than forty-five
(45) days after the end of its fiscal quarter in which the first anniversary
of the effective date of the Registration Statement occurs, the Company will
make generally available to its security holders an earnings statement of
the Company and its subsidiaries, if any, covering a period of at least 12
months beginning after the effective date of the Registration Statement
(which need not be audited) complying with Section 11(a) of the Act and the
rules and regulations thereunder.
(h) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, the
Company will not, and will cause its officers and directors not to, without
the prior written consent of Advest, Inc., as representative of the
Underwriters, directly or indirectly (i) offer, sell, contract to sell or
otherwise dispose of, any shares of Common Stock or securities convertible
into or exercisable or exchangeable for shares of Common Stock or (ii) enter
into any swap or other agreement or any transaction that transfers, in whole
or in part, the
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economic consequences of ownership of shares of Common Stock whether any
such swap or other agreement is to be settled by delivery of shares of
Common Stock, other securities, cash or otherwise; except for (A) the sale
of the Shares hereunder; (B) the issuance of 220,000 shares of convertible
nonvoting special (preferred) stock in connection with the Company's
proposed acquisition of The Innovative Company as disclosed in the
Prospectus;(C) the issuance of Common Stock upon the exercise of stock
options or warrants or the conversion of convertible securities outstanding
on the date of this Agreement to the extent that such stock options,
warrants and convertible securities are disclosed in the Prospectus; or (D)
the grant to employees of stock options to purchase Common Stock which are
not exercisable within such 180 days.
(i) During the period of three years after the effective date of the
Registration Statement, the Company will furnish to the Representatives and,
upon request, to each of the other Underwriters, without charge, (i) copies
of all reports or other communications (financial or other) furnished to
shareholders and (ii) as soon as they are available, copies of any reports
and financial statements furnished to or filed with the Commission, the NASD
or any national securities exchange.
(j) Prior to the termination of the underwriting syndicate contemplated
by this Agreement, neither the Company nor any of its officers, directors or
affiliates will (i) take, directly or indirectly, any action designed to
cause or to result in, or that might reasonably be expected to cause or
result in, the stabilization or manipulation of the price of any security of
the Company or (ii) sell, bid for, purchase or pay anyone any compensation
for soliciting purchases of, the Shares.
(k) In case of any event, at any time within the period during which a
prospectus is required to be delivered under the Act, as a result of which
any Preliminary Prospectus or the Prospectus, as then amended or
supplemented, would contain an untrue statement of a material fact, or omit
to state any material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or, if it is necessary at any time to amend any Preliminary
Prospectus or the Prospectus to comply with the Act or any applicable
securities or blue sky laws, the Company promptly will prepare and file with
the Commission, and any applicable state securities commission, an
amendment, supplement or document that will correct such statement or
omission or effect such compliance and will furnish to the several
Underwriters such number of copies of such amendment(s), supplement(s) or
document(s) as the Representatives may reasonably request. For purposes of
this subsection, the Company will provide such information to the
Representatives, the Underwriters' counsel and counsel to the Company as
shall be necessary to enable such persons to consult with the Company with
respect to the need to amend or supplement the Registration Statement, any
Preliminary Prospectus or the Prospectus or file any document, and shall
furnish to the Representatives and the Underwriters' counsel such further
information as each may from time to time reasonably request.
(l) The Company will use its best efforts to maintain the qualification
or listing of the shares of Common Stock (including, without limitation, the
Shares) on The Nasdaq Stock Market.
7. COVENANTS OF THE SELLING SHAREHOLDERS. Each of the Selling Shareholders
covenants and agrees with each of the Underwriters that:
(a) Such Selling Shareholder will cooperate to the extent necessary to
cause the Registration Statement, if not effective prior to the execution
and delivery of this Agreement, to become effective.
(b) Such Selling Shareholder will pay all Federal and other taxes, if
any on the transfer or sale of such Shares that are sold by the Selling
Shareholder.
(c) Such Selling Shareholder will do or perform all things reasonably
required to be done or performed by the Selling Shareholder prior to the
Closing Date to satisfy all conditions precedent to the delivery of the
Shares pursuant to this Agreement.
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(d) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, such
Selling Shareholder will not, without the prior written consent of Advest,
Inc., as representative of the Underwriters, directly or indirectly (1)
offer, sell, contract to sell or otherwise dispose of, any shares of Common
Stock or securities convertible into or exercisable or exchangeable for
shares of Common Stock or (ii) enter into any swap or other agreement or any
transaction that transfers, in whole or in part, the economic consequences
of ownership of shares of Common Stock whether any such swap or other
agreement is to be settled by delivery of shares of Common Stock, other
securities, cash or otherwise.
(e) Such Selling Shareholder has not taken, nor will it take, directly
or indirectly, any action designed to or that might reasonably be expected
to cause or result in stabilization or manipulation of the price of Common
Stock to facilitate the sale or resale of the Shares.
(f) Such Selling Shareholder will advise you promptly upon becoming
aware, and if requested by you, will confirm such advice in writing, of any
change which may come to the attention of such Selling Shareholder with
respect to the Company's financial position, results of operation or
business, or of the happening of any event, as a result of which the
Registration Statement or the Prospectus would contain an untrue statement
of a material fact, or omit to state any material fact necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading, or if it is necessary to amend the Registration
Statement or the Prospectus in order to state a material fact required by
the Act or the regulations thereunder to be stated therein or necessary to
make the statements therein not misleading or of the necessity to amend the
Prospectus to comply with the Act or any other law.
8. EXPENSES.
(a) The Company will pay all costs and expenses incident to the
performance of the obligations of the Company under this Agreement, whether
or not the transactions contemplated hereby are consummated or this
Agreement is terminated pursuant to Section 12 hereof, including, without
limitation, all costs and expenses incident to (i) the printing of and
mailing expenses associated with the Registration Statement, the Preliminary
Prospectus and the Prospectus and any amendments or supplements thereto,
this Agreement, the Agreement among Underwriters, the Underwriters'
Questionnaire submitted to each of the Underwriters by the Representatives
in connection herewith, the power of attorney executed by each of the
Underwriters in favor of Advest, Inc. in connection herewith, the Dealer
Agreement and related documents (collectively, the "Underwriting Documents")
and the preliminary Blue Sky memorandum relating to the offering prepared by
LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to the Underwriters
(collectively with any supplement thereto, the "Preliminary Blue Sky
Memorandum"); (ii) the fees, disbursements and expenses of the Company's
counsel and accountants in connection with the registration of the Shares
under the Act and all expenses incurred in connection with the preparation
and, if applicable, all expenses incurred in connection with the filing of
the Registration Statement (including all amendments thereto), any
Preliminary Prospectus, the Prospectus and any amendments and supplements
thereto, the Underwriting Documents and the Preliminary Blue Sky Memorandum;
(iii) the delivery of copies of the foregoing documents to the Underwriters;
(iv) the filing fees of the Commission and the NASD relating to the Shares;
(v) the preparation, issuance and delivery to the Underwriters of any
certificates evidencing the Shares, including transfer agent's and
registrar's fees; (vi) the qualification of the Shares for offering and sale
under state securities and blue sky laws, including filing fees and fees and
disbursements of counsel for the Underwriters (and local counsel therefor)
relating thereto; (vii) any listing of the Shares on The Nasdaq Stock
Market; (viii) any expenses for travel, lodging and meals incurred by the
Company and any of its officers, directors and employees in connection with
any meetings with prospective investors in the Shares; and (ix) all other
costs and expenses reasonably incident to the performance of the Company's
obligations hereunder that are not otherwise specifically provided for in
this Section 8. [Except as provided in this Section 8(a) and Section 12(a)
hereof,
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<PAGE>
the Underwriters will pay all of their out-of-pocket expenses and costs,
including fees of their counsel, incurred in connection with the offering
and sale of the Shares.]
(b) Each Selling Shareholder, severally and not jointly, agrees to pay
or cause to be paid all taxes, if any, on the transfer and sale of the
Shares being sold by such Selling Shareholder.
9. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters hereunder to purchase and pay for the Shares to be delivered at
each Time of Delivery shall be subject, in their discretion, to the accuracy, in
all material respects, of the representations and warranties of each of the
Company, the Significant Subsidiaries and the Selling Shareholders contained
herein as of the date hereof and as of such Time of Delivery, to the accuracy,
in all material respects, of the statements of the Company's officers made
pursuant to the provisions hereof, to the performance, in all material respects,
by the Company of its covenants and agreements hereunder, and to the following
additional conditions precedent:
(a) If the registration statement as amended to date has not become
effective prior to the execution of this Agreement, such registration
statement shall have been declared effective not later than 11:00 a.m.,
Hartford, Connecticut time, on the date of this Agreement or such later date
and/or time as shall have been consented to by you in writing. If required,
the Prospectus and any amendment or supplement thereto shall have been filed
with the Commission pursuant to Rule 424(b) within the applicable time
period prescribed for such filing and in accordance with Section 6(a) of
this Agreement; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and no
proceedings for that purpose shall have been instituted, threatened or, to
the knowledge of the Company and the Representatives, contemplated by the
Commission; and all requests for additional information on the part of the
Commission shall have been complied with to your reasonable satisfaction.
(b) The Representatives shall have received a copy of an executed
lock-up agreement from the Company and each of the Company's officers and
directors and certain shareholders of Common Stock.
(c) You shall have received an opinion, dated such Time of Delivery, of
Matt P. McClure, Legal Counsel of the Company, in form and substance
satisfactory to you and your counsel, to the effect that:
(i) The Company is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of each jurisdiction
in which it owns or leases property, or conducts any business, so as to
require such qualification, except where the failure to so qualify would
not have a material adverse effect on the financial position, results of
operations or business of the Company and the Subsidiaries taken as a
whole.
(ii) Each of South Carolina Insurance Company, Seibels, Bruce &
Company, Catawba Insurance Company, Consolidated American Insurance
Company, Seibels Bruce Specialty, Inc., Seibels Bruce Service
Corporation, Investors National Life Insurance Company of South Carolina
and Policy Finance Company (each, a "South Carolina Subsidiary" and
collectively, the "South Carolina Subsidiaries") is duly qualified to
transact business as a foreign corporation and is in good standing under
the laws of each jurisdiction in which it owns or leases property, or
conducts any business, so as to require such qualification, except where
the failure to so qualify would not have a material adverse effect on the
financial position, results of operations or business of the Company and
the Subsidiaries taken as a whole.
(iii) The Company has authorized 12,500,000 shares of Common Stock,
$1.00 par value per share. All of the issued shares of Common Stock of
the Company have been duly authorized and validly issued, are fully paid
and nonassessable and conform to the description of the Common Stock
contained in the Prospectus.
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<PAGE>
(iv) All of the issued shares of capital stock of each of the South
Carolina Subsidiaries have been duly authorized and validly issued and
are fully paid and nonassessable.
(v) To such counsel's knowledge, neither the Company nor any of the
Subsidiaries is in violation of, or in default with respect to, any law,
statute, rule, regulation, order, judgment or decree, except as described
in the Prospectus or such as do not and will not individually or in the
aggregate have a material adverse effect on the financial position,
results of operations or business of the Company and the Subsidiaries
taken as a whole, nor is the Company or any of the Subsidiaries required
to take any action in order to avoid any such violation or default.
(vi) To such counsel's knowledge, the Company and the Subsidiaries
have received all permits, licenses, franchises, authorizations,
registrations, qualifications and approvals (collectively, "permits") of
governmental or regulatory authorities (including, without limitation,
state and/or other insurance regulatory authorities) as may be required
of them to own their properties and to conduct their businesses in the
manner described in the Prospectus, subject to such qualifications as may
be set forth in the Prospectus; to such counsel's knowledge, the Company
and the Subsidiaries have fulfilled and performed all of their material
obligations with respect to such permits and no event has occurred which
allows, or after notice or lapse of time or both would allow, revocation
or termination thereof or result in any other material impairment of the
rights of the holder of any such permits, subject in each case to such
qualifications as may be set forth in the Prospectus; and other than as
described in the Prospectus, such permits contain no restrictions that
materially affect the ability of the Company and the Subsidiaries to
conduct their businesses.
(d) You shall have received an opinion, dated such Time of Delivery, of
King & Spalding, counsel for the Company, in form and substance satisfactory
to you and your counsel, to the effect that:
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of South
Carolina and has the corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement and the Prospectus and to enter into this Agreement and perform
its obligations hereunder. The Company is duly qualified to transact
business as a foreign corporation and is in good standing under the laws
of the states listed on Exhibit B hereto.
(ii) Each of the South Carolina Subsidiaries is validly existing as a
corporation in good standing under the laws of the State of South
Carolina and has the corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement and the Prospectus. Each South Carolina Subsidiary is duly
qualified to transact business as a foreign corporation and is in good
standing under the laws of the states listed on Exhibit B hereto.
(iii) The Company has authorized 12,500,000 shares of Common Stock,
$1,00 par value, per share. None of the issued shares of Common Stock of
the Company or capital stock of any of the South Carolina Subsidiaries
has been issued or is owned or held in violation of any preemptive or
similar rights arising out of statute, and, to such counsel's knowledge,
no person or entity (including any holder of outstanding shares of Common
Stock of the Company or capital stock of the South Carolina Subsidiaries)
has any statutory preemptive or other rights to subscribe for any of the
Shares.
(iv) To such counsel's knowledge, all the issued shares of Common
Stock are owned by the Company or the Subsidiaries, free and clear of all
liens, security interests, pledges, charges, encumbrances, shareholders'
agreements, voting agreements, proxies, voting trusts, defects, equities
or claims of any nature whatsoever (collectively, "Encumbrances"). To
such counsel's knowledge, other than the Subsidiaries and the equity
securities held in the investment portfolios of the Company and the
Subsidiaries, the Company does not own, directly or indirectly, any
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capital stock or other equity securities of any other corporation or any
ownership interest in any partnership, joint venture or other
association.
(v) Except as disclosed in the Prospectus, there are, to such
counsel's knowledge, no outstanding (A) securities or obligations of the
Company or any of the Subsidiaries convertible into or exchangeable for
any capital stock of the Company or any Subsidiary, (B) warrants, rights
or options to subscribe for or purchase from the Company or any of the
Subsidiaries any such capital stock or any such convertible or
exchangeable securities or obligations or (C) obligations of the Company
or any of the Subsidiaries to issue any shares of capital stock, any such
convertible or exchangeable securities or obligations, or any such
warrants, rights or options.
(vi) When the Shares to be sold by the Company have been duly
delivered against payment therefor as contemplated by this Agreement, the
Shares will be duly authorized, validly issued and fully paid and
nonassessable, the holders thereof will not be subject to personal
liability solely by reason of being such holders and the Shares will
conform to the description of the Common Stock contained in the
Prospectus; the form of certificate evidencing the Shares that is
included as Exhibit 4.1 to the Registration Statement complies with all
applicable requirements of South Carolina law; and the Shares have been
authorized for trading on The Nasdaq Stock Market.
(vii) To such counsel's knowledge, except with regard to the Avent
Group, the Powers Group and the Selling Shareholders, there are no
contracts, agreements or understandings known to such counsel between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to
any securities of the Company owned or to be owned by such person or,
with the exception of the Selling Shareholders and except for such rights
that have been waived, requiring the Company to include such securities
in the securities registered pursuant to the Registration Statement or
requiring the registration of any securities being registered pursuant to
any other registration statement filed by the Company under the Act.
(viii) To such counsel's knowledge, neither the Company nor any of
the South Carolina Subsidiaries is, or with the giving of notice or
passage of time or both, would be, in violation of its articles of
incorporation or bylaws, in each case as amended to date, or, in default
in any material respect under any agreement or instrument filed as an
exhibit to the Registration Statement to which the Company or any of the
South Carolina Subsidiaries is a party or to which any of their
respective properties or assets is subject.
(ix) The sale of the Shares being sold at such Time of Delivery and
the performance of this Agreement and the consummation of the
transactions herein contemplated will not conflict with or violate any
provision of the articles of incorporation or bylaws of the Company or
any of the South Carolina Subsidiaries, in each case as amended to date,
or to such counsel's knowledge and subject to applicable qualifications,
any existing law, statute, rule or regulation, or in any material
respect, conflict with, or (with or without the giving of notice or the
passage of time or both) result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any agreement or
instrument filed as an exhibit to the Registration Statement to which the
Company or any of the Subsidiaries is a party or to which any of their
respective properties or assets is subject, or, conflict with or violate
any order, judgment or decree known to such counsel, of any court or
governmental agency or body having jurisdiction over the Company or any
of the Subsidiaries or any of their respective properties or assets.
(x) To such counsel's knowledge, no consent, approval, authorization,
order or declaration of or from, or registration, qualification or filing
with, any court or governmental agency or body is required for the sale
of the Shares or the consummation of the transactions contemplated by
this Agreement, except such as have been obtained and are in effect, and
except the registration of the Shares under the Act and such as may be
required by the NASD or under state securities
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<PAGE>
or blue sky laws in connection with the offer, sale and distribution of
the Shares by the Underwriters.
(xi) To such counsel's knowledge and other than as disclosed in or
contemplated by the Prospectus, there is no litigation, arbitration,
claim, proceeding (formal or informal) or investigation pending or
threatened, in which the Company or any of the Subsidiaries is a party or
of which any of their respective properties or assets is the subject
which, if determined adversely to the Company or any of the Subsidiaries,
would individually or in the aggregate have a material adverse effect on
the financial position, results of operations or business of the Company
and the Subsidiaries taken as a whole.
(xii) The statements in the Prospectus under "Business--Regulation,"
"Business--Legal Proceedings," "Description of Capital Stock" and "Shares
Eligible for Future Sale" have been reviewed by such counsel, and insofar
as they refer to statements of law, descriptions of statutes, licenses,
rules or regulations, or legal conclusions, are correct in all material
respects.
(xiii) This Agreement has been duly authorized, executed and
delivered by each of the Company and the Significant Subsidiaries and,
assuming due execution by the Representatives of the Underwriters and
assuming further that New York law with respect to the matters in this
Agreement is the same as South Carolina law with respect to such matters,
constitutes the valid and binding agreement of each of the Company and
the Significant Subsidiaries, enforceable against each of the Company and
the Significant Subsidiaries, in accordance with its terms, subject, as
to enforcement, to applicable bankruptcy, insolvency, reorganization and
moratorium laws and other laws relating to or affecting the enforcement
of creditors' rights generally and to general equitable principles and
except as the enforceability of rights to indemnity and contribution
under this Agreement may be limited under applicable securities laws or
the public policy underlying such laws.
(xiv) Neither the Company nor any of the Subsidiaries is an
"investment company" or a company "controlled" by an investment company
as such terms are defined in Sections 3(a) and 2(a)(9), respectively, of
the Investment Company Act.
(xv) The Registration Statement and the Prospectus and each amendment
or supplement thereto (other than the financial statements, the notes and
schedules thereto and other financial and statistical data included
therein, to which such counsel need express no opinion), as of their
respective effective or issue dates, appeared on their faces to be
appropriately responsive in all material respects to the requirements of
the Act and the respective rules and regulations thereunder. The
descriptions in the Registration Statement and the Prospectus of
contracts and other documents are accurate and fairly present the
information required to be shown; and such counsel do not know of any
contracts or documents of a character required to be described in the
Registration Statement or Prospectus or to be filed as exhibits to the
Registration Statement which are not described and filed as required.
(xvi) Such counsel has been advised by the Division of Corporation
Finance of the Commission that the Registration Statement has become
effective under the Act; any required filing of the Prospectus pursuant
to Rule 424(b) has been made in the manner and within the time period
required by Rule 424(b); and, to such counsel's knowledge, (A) no stop
order suspending the effectiveness of the Registration Statement or any
part thereof has been issued and, (B) no proceedings for that purpose
have been instituted or, to such counsel's knowledge, threatened by the
Commission.
Such counsel shall also state that they have participated in the preparation
of the Registration Statement and the Prospectus and in conferences with
officers and other representatives of the Company, representatives of the
independent public accountants for the Company, and representatives of and
counsel to the Underwriters at which the contents of the Registration Statement,
the Prospectus and
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related matters were discussed and, although such counsel has not passed upon or
assumed any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus, and
although such counsel has not undertaken to verify independently the accuracy or
completeness of the statements in the Registration Statement or the Prospectus,
nothing has come to such counsel's attention to lead them to believe that the
Registration Statement, or any further amendment thereto made prior to such Time
of Delivery, on its effective date contained or contains any untrue statement of
a material fact or omitted or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus, or any amendment or supplement thereto made prior to such
Time of Delivery, as of its issue date and as of such Time of Delivery,
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (provided that such counsel need express no belief regarding the
financial statements, the notes and schedules thereto and other financial and
statistical data contained in the Registration Statement, any amendment thereto,
or the Prospectus, or any amendment or supplement thereto).
In rendering any such opinion, such counsel may rely, as to matters of fact,
to the extent such counsel deem proper, on certificates of officers of the
Company, public officials and letters from officials of the NASD and such
counsel may rely as to matters governed by the laws of South Carolina on the
opinion of Sinkler & Boyd, P.A., special South Carolina counsel to the Company.
Copies of such certificates of officers of the Company and other opinions shall
be addressed and furnished to the Underwriters and furnished to counsel for the
Underwriters.
(e) You shall have received an opinion, dated such Time of Delivery, of
Sinkler & Boyd, P.A., special South Carolina counsel to the Company, in form
and substance satisfactory to you and your counsel, to the effect that:
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of South
Carolina and has the corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement and the Prospectus and to enter into this Agreement and perform
its obligations hereunder.
(ii) Each of the South Carolina Subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of South Carolina and has the corporate power
and authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus.
(iii) The Company has authorized 12,500,000 shares of Common Stock,
$1.00 par value per share. All of the issued shares of Common Stock of
the Company conform to the description of the Common Stock contained in
the Prospectus. None of the issued shares of Common Stock of the Company
or capital stock of any of the South Carolina Subsidiaries has been
issued or is owned or held in violation of any preemptive or similar
rights arising out of statute, and, to such counsel' knowledge, no person
or entity (including any holder of outstanding shares of Common Stock of
the Company or capital stock of the South Carolina Subsidiaries) has any
statutory preemptive or other rights to subscribe for any of the Shares.
(iv) All of the issued shares of Common Stock of each of the South
Carolina Subsidiaries, to such counsel's knowledge, are owned by the
Company or the Subsidiaries, free and clear of all Encumbrances.
(v) Except as disclosed in the Prospectus, there are, to such
counsel's knowledge, no outstanding (A) securities or obligations of the
Company or any of the South Carolina Subsidiaries convertible into or
exchangeable for any capital stock of the Company or any Subsidiary, (B)
warrants, rights or options to subscribe for or purchase from the Company
or any of the South Carolina Subsidiaries any such capital stock or any
such convertible or exchangeable securities or obligations or (C)
obligations of the Company or any of the South Carolina
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Subsidiaries to issue any shares of capital stock, any such convertible
or exchangeable securities or obligations, or any such warrants, rights
or options.
(vi) When the Shares to be sold by the Company have been duly
delivered against payment therefor as contemplated by this Agreement, the
Shares will be duly authorized, validly issued and fully paid and
nonassessable, the holders thereof will not be subject to personal
liability solely by reason of being such holders and the Shares will
conform to the description of the Common Stock contained in the
Prospectus; the form of certificate evidencing the Shares that is
included as Exhibit 4.1 to the Registration Statement complies with all
applicable requirements of South Carolina law.
(vii) The sale of the Shares being sold at such Time of Delivery and
the performance of this Agreement and the consummation of the
transactions herein contemplated will not conflict with or violate any
provision of the articles of incorporation or bylaws of the Company or
any of the South Carolina Subsidiaries, in each case as amended to date,
or, subject to applicable qualifications, any existing law, statute, rule
or regulation in effect in the State of South Carolina.
(viii) To such counsel's knowledge, neither the Company nor any of
the South Carolina Subsidiaries is, or with the giving of notice or
passage of time or both would be, in violation of its articles of
incorporation or bylaws, in each case as amended to date, or in default
in any material respect under any agreement or instrument filed as an
exhibit to the Registration Statement to which the Company or any of the
South Carolina Subsidiaries is a party or to which any of their
respective properties or assets is subject.
(ix) To such counsel's knowledge, no consent, approval,
authorization, order or declaration of or from, or registration,
qualification or filing with, any court or governmental agency or body is
required for the sale of the Shares or the consummation of the
transactions contemplated by this Agreement, except such as have been
obtained and are in effect, and except the registration of the Shares
under the Act and such as may be required by the NASD or under state
securities or blue sky laws in connection with the offer, sale and
distribution of the Shares by the Underwriters.
(x) The statements in the Prospectus under "Business--Regulation,"
"Business--Legal Proceedings," "Description of Capital Stock" and "Shares
Eligible for Future Sale" have been reviewed by such counsel, and insofar
as they refer to statements of law, descriptions of statutes, licenses,
rules or regulations, or legal conclusions, are correct in all material
respects.
(xi) This Agreement has been duly authorized, executed and delivered
by each of the Company and the Significant Subsidiaries and, assuming due
execution by the Representatives of the Underwriters and assuming further
that New York law with respect to the matters in this Agreement is the
same as South Carolina law with respect to such matters, constitutes the
valid and binding agreement of each of the Company and the Significant
Subsidiaries, enforceable against each of the Company and the Significant
Subsidiaries in accordance with its terms, subject, as to enforcement, to
applicable bankruptcy, insolvency, reorganization and moratorium laws and
other laws relating to or affecting the enforcement of creditors' rights
generally and to general equitable principles and except as the
enforceability of rights to indemnity and contribution under this
Agreement may be limited under applicable securities laws or the public
policy underlying such laws.
The opinion of Sinkler & Boyd, P.A. shall additionally state that Matt P.
McClure, LeBoeuf, Lamb, Greene & MacRae, L.L.P. and King & Spalding may rely on
such opinion as to matters of South Carolina laws, for purposes of their
respective opinions rendered pursuant to paragraphs (d) and (g) hereunder.
(f) You shall have received from Venable, Baetjer, Howard & Civiletti,
LLP, counsel for the Selling Shareholders, in form and substance
satisfactory to you and your counsel, to the effect set forth herein below.
In giving such opinion, such counsel may rely, as to all matters governed by
laws of
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jurisdictions other than the District of Columbia and the Federal law of the
United States upon the opinions of Bruce Campbell & Co., Cayman Islands
counsel and [ ], Saudi Arabian counsel. Such counsel may also state that, in
so far as such opinion involves factual matters, such counsel has relied to
the extent deemed proper, upon certificates of the Selling Shareholders and
of public officials.
(i) This Agreement has been duly authorized, executed and delivered
by or on behalf of each of the Selling Shareholders.
(ii) The execution and delivery by each Selling Shareholder of, and
the performance by such Selling Shareholder of its obligations under,
this Agreement and the Custody Agreement and Power of Attorney of each
such Selling Shareholder will not conflict or violate any provision of
the articles of incorporation or bylaws or other organizational documents
of such Selling Shareholder (if such Selling Shareholder is a
corporation), or, to such counsel's knowledge, any existing law, statute,
rule or regulation, or in any material respect, conflict with, or (with
or without the giving of notice or the passage of time or both) result in
a breach or violation of any of the terms or provisions of, or constitute
a default under, any indenture, mortgage, deed of trust, loan agreement,
lease or other agreement or instrument known to such counsel to which
such Selling Shareholder is a party or, conflict with or violate any
judgment, order or decree known to such counsel, of any governmental
body, agency or court having jurisdiction over such Selling Shareholder,
and no consent, approval, authorization or order of, or qualification
with, any governmental body or agency is required for the performance by
such Selling Shareholder of its obligations under this Agreement or the
Custody Agreement or Power of Attorney of such Selling Shareholder,
except such as may be required by the securities or blue sky laws of the
various states in connection with offer and sale of the Firm Shares.
(iii) Each of the Selling Shareholders has valid title to the Shares
to be sold by such Selling Shareholder and the legal right and power, and
all authorization and approval required by law, to enter into this
Agreement and the Custody Agreement and Power of Attorney of such Selling
Shareholder and to sell, transfer and deliver the Shares to be sold by
such Selling Shareholder.
(iv) The Custody Agreement and the Power of Attorney of each Selling
Shareholder has been duly authorized, executed and delivered by such
Selling Shareholder and is a valid and binding agreement of such Selling
Shareholder.
(v) Delivery of the Shares to be sold by each Selling Shareholder
pursuant to this Agreement will pass title to such Shares free and clear
of any security interests, claims, liens, equities and other
encumbrances.
(vi) Although such counsel has not participated in the preparation of
the Registration Statement and the Prospectus or in conferences with
officers and other representatives of the Company, representatives of the
independent public accountants for the Company, or representatives of and
counsel to the Underwriters at which the contents of the Registration
Statement, the Prospectus and related matters were discussed and,
although such counsel has not passed upon or assumed any responsibility
for the accuracy, completeness or fairness of the statements contained in
the Registration Statement or the Prospectus, and although such counsel
has not undertaken to verify independently the accuracy or completeness
of the statements in the Registration Statement or Prospectus, such
counsel (A) has no reason to believe that (other than the financial
statements, the notes and schedules thereto and other financial and
statistical data included therein as to which such counsel need not
express any belief) the Registration Statement and the prospectus
included therein at the time the Registration Statement became effective
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading and (B) has no reason to believe that
(other than the financial statements, notes and schedules thereto and
other financial and statistical data included therein as to which such
counsel need not express any belief) the Prospectus contains any untrue
statement of a material fact or omits to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
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(g) LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel for the
Underwriters, shall have furnished to you such opinion or opinions, dated
such Time of Delivery, with respect to the incorporation of the Company, the
validity of the Shares being delivered at such Time of Delivery, the
Registration Statement, the Prospectus, and other related matters as you may
reasonably request, and the Company shall have furnished to such counsel
such documents as they request for the purpose of enabling them to pass upon
such matters. Such opinion or opinions may be rendered in reliance upon the
appropriate opinion of Sinkler & Boyd, P.A. as to matters governed by South
Carolina law.
(h) The Representatives shall have received, on each of the date hereof
and the Closing Date, as the case may be, in form and substance satisfactory
to the Representatives, from Arthur Andersen LLP, independent public
accountants, a letter or letters, as the case may be, containing statements
and information of the type ordinarily included in accountants' "comfort
letters" to Underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and
Prospectus; provided that the letter or letters, as the case may be,
delivered on the Closing Date shall use a "cut-off date" not earlier than
the date hereof.
(i) Since the date of the latest audited financial statements included
in the Prospectus, neither the Company nor any of the Subsidiaries shall
have sustained any change, or any development involving a prospective change
(including, without limitation, a change in management or control of the
Company), in or affecting the position (financial or otherwise), results of
operations, net worth or business prospects of the Company and the
Subsidiaries, otherwise than as disclosed in or contemplated by the
Prospectus, the effect of which, in either such case, is in your sole
judgment so material and adverse as to make it impracticable or inadvisable
to proceed with the purchase, sale and delivery of the Shares being
delivered at such Time of Delivery as contemplated by the Registration
Statement, as amended as of the date hereof.
(j) Subsequent to the date hereof, there shall not have occurred any of
the following: (i) any suspension or limitation in trading in securities
generally on the New York Stock Exchange, and/or the American Stock Exchange
or any setting of minimum prices for trading on such exchange, or in the
Common Stock of the Company by the Commission or the Nasdaq Stock Market
(except for suspensions or limitations that last only a portion of one
business day); (ii) a moratorium on commercial banking activities in New
York, South Carolina or Connecticut declared by either federal or state
authorities; or (iii) any outbreak or escalation of hostilities involving
the United States, declaration by the United States of a national emergency
or war or any other national or international calamity or emergency if the
effect of any such event specified in this clause (iii) in your sole
judgment makes it impracticable or inadvisable to proceed with the purchase,
sale and delivery of the Shares being delivered at such Time of Delivery as
contemplated by the Registration Statement, as amended as of the date
hereof.
(k) The Company shall have furnished to you at such Time of Delivery
certificates of the chief executive and chief financial officers of the
Company satisfactory to you, as to the accuracy in all material respects of
the respective representations and warranties of the Company herein at and
as of such Time of Delivery with the same effect as if made at such Time of
Delivery, as to the performance by the Company of all of its obligations
hereunder to be performed at or prior to such Time of Delivery, and as to
such other matters as you may reasonably request, and the Company shall have
furnished or caused to be furnished certificates of such officers as to such
matters as you may reasonably request.
(l) The representations and warranties of each of the Company and the
Significant Subsidiaries in this Agreement and in the certificates delivered
by the Company pursuant to this Agreement shall be true and correct in all
material respects when made and on and as of each Time of Delivery as if
made at such time, and each of the Company and the Significant Subsidiaries
shall have performed, in all material respects, all covenants and agreements
and satisfied, in all material respects, all conditions
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contained in this Agreement required to be performed or satisfied by each of
the Company and the Significant Subsidiaries at or before such Time of
Delivery.
(m) The representations and warranties of the Selling Shareholders in
this Agreement shall be true and correct in all material respects when made
and on and as of each Time of Delivery as if made at such time.
(n) The Shares shall continue to be listed on the Nasdaq Stock Market.
10. INDEMNIFICATION AND CONTRIBUTION.
(a) Each of the Company, the Significant Subsidiaries and the Selling
Shareholders, jointly and severally, agrees to indemnify and hold harmless
each Underwriter against any losses, claims, damages or liabilities, joint
or several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon: (i) any untrue
statement or alleged untrue statement made by the Company or the Significant
Subsidiaries in Section 1 of this Agreement; (ii) any untrue statement or
alleged untrue statement of any material fact contained in (A)the
Registration Statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or (B) any
application or other document, or amendment or supplement thereto, executed
by the Company or based upon written information furnished by or on behalf
of the Company filed in any jurisdiction in order to qualify the Shares
under the securities or blue sky laws thereof or filed with the Commission
or any securities association or securities exchange (each an
"Application"); or (iii) the omission of or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus,
the Prospectus or any amendment or supplement thereto, or any Application of
a material fact required to be stated therein or necessary to make the
statements therein not misleading; and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating, defending against or appearing as a
third-party witness in connection with any such loss, claim, damage,
liability or action; PROVIDED, HOWEVER, that none of the Company, the
Significant Subsidiaries or any Selling Shareholder shall be liable in any
such case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement
or any amendment thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto or any Application in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter through you expressly for use therein (which information is
solely as set forth in Section 1(c) hereof). The liability of each Selling
Shareholder under this Section 10(a) shall not exceed an amount equal to the
aggregate number of Shares sold by such Selling Shareholder hereunder
multiplied by the purchase price per share set forth in Section 3 hereof.
None of the Company, the Significant Subsidiaries or any Selling Shareholder
will, without the prior written consent of the Representatives of the
Underwriters, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding (or related
cause of action or portion thereof) in respect of which indemnification may
be sought hereunder (whether or not any Underwriter is a party to such
claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of each Underwriter from all
liability arising out of such claim, action, suit or proceeding (or related
cause of action or portion thereof).
(b) Each Underwriter, severally but not jointly, agrees to indemnify and
hold harmless the Company, the Significant Subsidiaries and the Selling
Shareholders against any losses, claims, damages or liabilities to which the
Company, the Significant Subsidiaries and the Selling Shareholders may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto, or any
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Application or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company, the
Significant Subsidiaries or the Selling Shareholders by such Underwriter
through you expressly for use therein (which information is solely as set
forth in Section 1(c) hereof); and will reimburse the Company, the
Significant Subsidiaries and the Selling Shareholders for any legal or other
expenses reasonably incurred by the Company, the Significant Subsidiaries
and the Selling Shareholders in connection with investigating or defending
any such loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve the indemnifying party from any
liability which it may have to any indemnified party otherwise than under
such subsection. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party (who shall not, except
with the consent of the indemnified party, be counsel to the indemnifying
party); PROVIDED, HOWEVER, that if the defendants in any such action include
both the indemnified party and the indemnifying party and the indemnified
party shall have been advised by counsel in writing that there are one or
more legal defenses available to it or other indemnified parties which are
different from or additional to those available to the indemnifying party,
the indemnifying party shall not have the right to assume the defense of
such action on behalf of such indemnified party and such indemnified party
shall have the right to select separate counsel (which shall be limited to a
single law firm, not including local counsel) to defend such action on
behalf of such indemnified party. After such notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof and approval by such indemnified party of counsel appointed to
defend such action, the indemnifying party will not be liable to such
indemnified party under this Section 10 for any legal or other expenses,
other than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof. Nothing in this
Section 10(c) shall preclude an indemnified party from participating at its
own expense in the defense of any such action so assumed by the indemnifying
party.
(d) If the indemnification provided for in this Section 10 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other hand from the
offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (c)
above, then each indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company and the Selling Shareholders on the one hand and the Underwriters on
the other hand in connection with the statements or omissions that resulted
in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Shareholders on
the one hand and the Underwriters on the other hand shall be deemed to be in
the same proportion as the total net proceeds from the
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offering (before deducting expenses) received by the Company and the Selling
Shareholders bear to the total underwriting discounts and commissions
received by the Underwriters. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the Selling
Shareholders on the one hand or the Underwriters on the other hand and the
parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company and the
Selling Shareholders and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this subsection (d) were
determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this subsection (d) shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), no Underwriter shall
be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f)
of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations
in this subsection (d) to contribute are several in proportion to their
respective underwriting obligations and not joint.
(e) The obligations of the Company and the Selling Shareholders under
this Section 10 shall be in addition to any liability which the Company or
the Selling Shareholders may otherwise have and shall extend, upon the same
terms and conditions, and to each officer, director and employee of the
Underwriters and to each person, if any, who controls any Underwriter within
the meaning of the Act or the Exchange Act; and the obligations of the
Underwriters under this Section 10 shall be in addition to any liability
which the respective Underwriters may otherwise have and shall extend, upon
the same terms and conditions, to each officer, trustee and director of the
Company and to each person, if any, who controls the Company or the Selling
Shareholders or within the meaning of the Act or the Exchange Act.
11. DEFAULT OF UNDERWRITERS.
(a) If any Underwriter defaults in its obligation to purchase Shares at
a Time of Delivery, you may in your discretion arrange for you or another
party or other parties to purchase such Shares on the terms contained herein
within thirty-six (36) hours after such default by any Underwriter. In the
event that, within the respective prescribed period, you notify the Company
that you have so arranged for the purchase of such Shares, you shall have
the right to postpone a Time of Delivery for a period of not more than seven
(7) days in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus, or in any other documents
or arrangements, and the Company agrees to file promptly any amendments to
the Registration Statement or the Prospectus that in your opinion may
thereby be made necessary. The cost of preparing, printing and filing any
such amendments shall be paid for by the Underwriters. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you as provided in
subsection(a) above, if any, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh (1/11) of the aggregate
number of Shares to be purchased at such Time of Delivery, then the Company
and the Selling
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Shareholders shall have the right to require each non-defaulting Underwriter
to purchase the number of Shares which such Underwriter agreed to purchase
hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the
number of Shares which such Underwriter agreed to purchase hereunder) of the
Shares of such defaulting Underwriter or Underwriters for which such
arrangements have not been made.
12. TERMINATION.
(a) This Agreement may be terminated with respect to the Firm Shares or
any Optional Shares in the sole discretion of the Representatives by notice
to the Company given prior to the First Time of Delivery or any Subsequent
Time of Delivery, respectively, in the event that (i) any condition to the
obligations of the Underwriters set forth in Section 9 hereof has not been
satisfied, or (ii) the Company or Selling Shareholders shall have failed,
refused or been unable to deliver such party's respective Shares or the
Company or Selling Shareholders shall have failed, refused or been unable to
perform all obligations and satisfy all conditions on their respective parts
to be performed or satisfied hereunder at or prior to such Time of Delivery,
in either case other than by reason of a default by any of the Underwriters.
If this Agreement is terminated pursuant to this Section 12(a), the Sellers
will reimburse the Underwriters severally upon demand for all reasonable
out-of-pocket expenses (including counsel fees and disbursements) that shall
have been incurred by them in connection with the proposed purchase and sale
of the Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you as provided in
Section 11(a), the aggregate number of such Shares which remains unpurchased
exceeds one-eleventh (1/11) of the aggregate number of Shares to be
purchased at such Time of Delivery, then this Agreement (or, with respect to
a Subsequent Time of Delivery, the obligations of the Underwriters to
purchase and of the Company and the Selling Shareholders to sell the
Optional Shares) shall thereupon terminate, without liability on the part of
any non-defaulting Underwriter or the Company or the Selling Shareholders,
except for the expenses to be borne by the Company, the Selling Shareholders
and the Underwriters as provided in Section8 hereof and the indemnity and
contribution agreements in Section10 hereof; but nothing herein shall
relieve a defaulting Underwriter from liability for its default.
13. SURVIVAL. The respective indemnities, agreements, representations,
warranties and other statements of the Company, its officers, the Significant
Subsidiaries, the Selling Shareholders and the several Underwriters, as set
forth in this Agreement or made by or on behalf of them, respectively, pursuant
to this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person referred to in Section 10(e) or the
Company, or any officer, trustee or director or controlling person of the
Company referred to in Section 10(e), and shall survive delivery of and payment
for the Shares. The respective agreements, covenants, indemnities and other
statements set forth in Sections8 and 10 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.
14. NOTICES. All communications hereunder shall be in writing and, if sent
to any of the Underwriters, shall be mailed, delivered or telegraphed and
confirmed in writing to you in care of Advest, Inc., 90 State House Square,
Hartford, CT 06103, Attention: David Minot (with a copy to LeBoeuf, Lamb, Greene
& MacRae, L.L.P., 125 West 55th Street, New York, NY 10019-5389, Attention: Lars
Bang-Jensen, Esquire); if to the Company shall be sufficient in all respects if
mailed, delivered or telegraphed and confirmed in writing to The Seibels Bruce
Group, Inc., 1501 Lady Street, Columbia, SC 29201, Attention: Matt P. McClure,
Esquire (with a copy to King & Spalding, 191 Peachtree Street, Atlanta, GA
30303, Attention: Alan J. Prince, Esquire); if to the Selling Shareholders,
shall be sufficient in all respects if mailed, delivered or telegraphed and
confirmed in writing to Venable, Baetjer, Howard & Civiletti, LLP, Suite 1000,
1201 New York Avenue N.W., Washington, D.C. 20005, Attention: David J. Levenson.
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15. BINDING EFFECT. This Agreement shall be binding upon, and inure solely
to the benefit of, the Underwriters, the Company and the Selling Shareholders
and to the extent provided in Sections 10 and 12 hereof, the officers, trustees,
directors and employees and controlling persons referred to therein and their
respective heirs, executors, administrators, successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement. No purchaser of any of the Shares from any Underwriter shall be
deemed a successor or assign by reason merely of such purchase.
16. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to any
provisions regarding conflicts of laws.
17. COUNTERPARTS. This Agreement may be executed by any one or more of the
parties hereto in any number of counterparts, each of which shall be deemed to
be an original, but all such counterparts shall together constitute one and the
same instrument.
27
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us one of the counterparts hereof, and upon the
acceptance hereof by Advest, Inc., on behalf of each of the Underwriters, this
letter will constitute a binding agreement among the Underwriters, the Company
and the Selling Shareholders. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in the Agreement among Underwriters, a copy of which shall be submitted to
the Company and the Selling Shareholders for examination, upon request, but
without warranty on your part as to the authority of the signers thereof.
<TABLE>
<S> <C>
Very truly yours,
THE SEIBELS BRUCE GROUP, INC.
By:
------------------------------------------
Name: Ernst N. Csiszar
Title: President and Chief
Executive Officer
SOUTH CAROLINA INSURANCE COMPANY
By:
------------------------------------------
Name: Ernst N. Csiszar
Title: President and Chief
Operating Officer
SEIBELS, BRUCE & COMPANY
By:
------------------------------------------
Name: Ernst N. Csiszar
Title: President and Chief
Operating Office
CATAWBA INSURANCE COMPANY
By:
------------------------------------------
Name: Ernst N. Csiszar
Title: President and Chief
Operating Officer
The Selling Shareholders named in Schedule II
hereto, acting severally
By:
------------------------------------------
Attorney-in-Fact
</TABLE>
<PAGE>
<TABLE>
<S> <C>
The foregoing Agreement is hereby confirmed
and accepted as of the date first written
above at Hartford, Connecticut.
ADVEST, INC.
SCOTT & STRINGFELLOW, INC.
By: ADVEST, INC.
By:
-------------------------------------------
Name: Philip M. Skidmore
Title: Group Vice President
On behalf of each of the Underwriters
</TABLE>
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF
OPTIONAL
SHARES TO BE
TOTAL NUMBER PURCHASED IF
OF FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
- ----------------------------------------------------------- --------------- ----------------
<S> <C> <C>
Advest, Inc.
Scott & Stringfellow, Inc.
</TABLE>
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF SHARES TO BE
SELLING SHAREHOLDER SOLD
- ------------------------------------------------------------------ --------------------------
<S> <C>
Saad. A. Alissa
General Investors Ltd.
Abdullatif Ali Alissa Est.
Financial Investors Ltd.
</TABLE>
<PAGE>
EXHIBIT A
SUBSIDIARIES
South Carolina Insurance Company
Seibels, Bruce & Company
Catawba Insurance Company
Kentucky Insurance Company
Consolidated American Insurance Company
Seibels Bruce Specialty, Inc.
Seibels Bruce Service Corporation
Agency Specialty of Kentucky, Inc.
Investors National Life Insurance Company of South Carolina
Policy Finance Company
[FLT Plus, Inc.]
<PAGE>
EXHIBIT B
STATES IN WHICH THE COMPANY
AND EACH SOUTH CAROLINA SUBSIDIARY
IS QUALIFIED TO TRANSACT BUSINESS
<PAGE>
SB EXHIBIT 4.1
<TABLE>
<CAPTION>
SHARES
--------------------
<S> <C>
[LOGO]
INCORPORATED UNDER THE LAWS OF THE STATE OF SOUTH CAROLINA SEE REVERSE FOR
THE SEIBELS BRUCE GROUP, INC. CERTAIN DEFINITIONS
COLUMBIA, SOUTH CAROLINA CUSIP 816006 20 9
</TABLE>
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF ONE DOLLAR ($1.00) EACH
OF THE COMMON STOCK OF THE SEIBELS BRUCE GROUP, INC. TRANSFERABLE ON THE BOOKS
OF THE COMPANY BY THE HOLDER HEREOF IN PERSON OR BY DULY AUTHORIZED ATTORNEY ON
SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID
UNTIL COUNTERSIGNED AND REGISTERED BY THE TRANSFER AGENT AND REGISTRAR. WITNESS
THE FACSIMILE SEAL OF THE COMPANY AND THE FACSIMILE SIGNATURES OF ITS DULY
AUTHORIZED OFFICERS.
DATED:
<TABLE>
<S> <C> <C>
Signature [SEAL] Signature
SECRETARY PRESIDENT
</TABLE>
<PAGE>
The Corporation will furnish to any shareholder upon request and without
charge a full statement of the designations, preferences, limitations, and
relative rights of the shares of each class authorized to be issued, the
variations in the relative rights and preferences between the shares of each
series so far as the same have been fixed and determined, and the authority of
the board of directors to fix and determine the relative rights and preferences
of other series.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C><C> <C> <C><C>
TEN COMM -- as tenants in common UNIF GIFT MIN ACT -- .......................... Custodian ..........................
TEN ENT -- as tenants by the (Cust) (Minor)
entireties
JT TEN -- as joint tenants with under Uniform Gifts to Minors
right of survivorship and Act ................................................................
not (State)
as tenants in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ______________________ hereby sell, assign and transfer unto
<TABLE>
<S> <C>
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
</TABLE>
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------- shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Company with full
power of substitution in the premises.
Dated
- --------------------------------------
<TABLE>
<C> <S>
NOTICE: --------------------------------------------------------------
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE TO EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED: --------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
</TABLE>
<PAGE>
EXHIBIT 5.1
KING & SPALDING
191 PEACHTREE STREET
ATLANTA, GEORGIA 30303-1763
TELEPHONE: 404/873-4600
FACSIMILE: 404/872-5100
DIRECT DIAL: DIRECT FAX:
June 6, 1997
The Seibels Bruce Group, Inc.
1501 Lady Street
Columbia, South Carolina 29201
Re: The Seibels Bruce Group, Inc.--Registration Statement
on Form S-2 Relating to 3,281,052 Shares of Common Stock
Ladies and Gentlemen:
We have acted as counsel for The Seibels Bruce Group, Inc., a South Carolina
corporation (the "Company"), in connection with the preparation of a
Registration Statement on Form S-2 (the "Registration Statement") filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
The Registration Statement relates to 3,281,052 shares of Common Stock of the
Company, par value $1.00 per share ("Common Stock"), to be sold by the Company
and certain shareholders of the Company (the "Selling Shareholders") to the
underwriters named in the Registration Statement pursuant to an Underwriting
Agreement, the form of which has been filed as an Exhibit to the Registration
Statement (the "Underwriting Agreement"). Such 3,281,052 shares of Common Stock
include (i) 1,000,000 shares to be sold by the Company and (ii) 1,853,089
outstanding shares of Common Stock to be sold by the Selling Shareholders. In
addition, such shares include 427,963 shares that may be purchased by the
underwriters upon the exercise of an over-allotment option granted to the
underwriters by the Company.
As such counsel, we have examined and relied upon the accuracy of original,
certified, conformed or photographic copies of such records, agreements,
certificates and other documents as we have deemed necessary or appropriate to
enable us to render the opinion set forth below. In all such examinations, we
have assumed the genuineness of signatures on original documents and the
conformity to such original documents of all copies submitted to us as
certified, conformed or photographic copies, and as to certificates of public
officials, we have assumed the same to have been properly given and to be
accurate.
The opinions expressed herein are limited in all respects to the federal
laws of the United States of America and the laws of the State of South
Carolina, and no opinion is expressed with respect to the laws of any other
jurisdiction or any effect which such laws may have on the opinions expressed
herein. With respect to all matters in this opinion that are governed by the
laws of the State of South Carolina, we have, with your approval, relied solely
on the opinion of Sinkler & Boyd, P.A., a copy of which has been delivered to
you today, and the opinions expressed herein with respect to the laws of the
State of South Carolina are subject to the same qualifications, assumptions and
limitations as are set forth therein. This opinion is limited to the matters
stated herein, and no opinion is implied or may be inferred beyond the matters
expressly stated herein.
Based upon the foregoing, we are of the opinion that:
(i) The Company is a corporation incorporated and validly existing in
good standing under the laws of the State of South Carolina;
<PAGE>
(ii) The shares of Common Stock to be issued and sold by the Company
pursuant to the Underwriting Agreement have been duly authorized and, when
issued in accordance with the terms set forth in the Underwriting Agreement,
will be validly issued, fully paid and nonassessable; and
(iii) The outstanding shares of Common Stock to be sold by the Selling
Shareholders have been duly authorized and are validly issued, fully paid
and nonassessable.
This opinion is furnished by us for your benefit solely in connection with
the transactions described herein, and it is not to be quoted in whole or in
part or otherwise referred to, nor is it to be filed with any governmental
agency or any other person, and no person or entity other than you shall be
entitled to rely upon this opinion for any purpose without our express written
consent. This opinion is given as of the date hereof, and we assume no
obligation to advise you after the date hereof of facts or circumstances that
come to our attention or changes in law that occur which could affect the
opinions contained herein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Prospectus that is included in the Registration Statement.
Very truly yours,
/s/ KING & SPALDING
KING & SPALDING
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm), included in or made a part of this
registration statement. It should be noted that we have not audited any
financial statements of the Company subsequent to December 31, 1996 or performed
any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Columbia, South Carolina
June 5, 1997
