<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1999
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- ----------------
Commission file number 0-8804
THE SEIBELS BRUCE GROUP, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
South Carolina 57-0672136
- ------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1501 Lady Street (PO Box 1), Columbia, SC 29201(2)
- ----------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (803) 748-2000
Indicate by check mark whether the registrant(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date: 7,780,413 shares of
Common Stock, $1 par value, at November 12, 1999.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts shown in thousands, except share amounts)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Investments:
Debt securities, available-for-sale, at market (cost of
$35,109 in 1999 and $38,788 in 1998)............................ $ 34,788 $ 39,695
Equity securities, at market (cost of $1,336 in 1999 and
$1,306 in 1998)................................................. 1,336 1,306
Cash and short-term investments................................... 18,296 23,141
Other long-term investments....................................... 0 108
-------- --------
Total cash and investments...................................... 54,420 64,250
Accrued investment income........................................... 714 880
Premiums and agents' balances receivable, net....................... 10,575 14,728
Premium notes receivable............................................ 3,567 4,606
Reinsurance recoverable on paid losses and loss adjustment
expenses.......................................................... 34,944 29,972
Reinsurance recoverable on unpaid losses and loss adjustment
expenses.......................................................... 116,797 83,654
Property and equipment, net......................................... 5,810 6,028
Prepaid reinsurance premiums-ceded business......................... 47,873 59,619
Deferred policy acquisition costs................................... 4,901 2,472
Goodwill............................................................ 20,549 20,892
Other assets........................................................ 7,531 8,462
-------- --------
Total assets.................................................... $307,681 $295,563
-------- --------
-------- --------
LIABILITIES
Losses and loss adjustment expenses:
Reported and estimated losses and claims -- retained business..... $ 32,231 $ 28,950
-- ceded business........ 108,947 74,746
Adjustment expenses -- retained business.......................... 5,712 7,372
-- ceded business............................. 7,850 8,908
Unearned premiums:
Property and casualty -- retained business........................ 20,875 12,919
-- ceded business........................... 47,873 59,619
Balances due other insurance companies.............................. 22,784 39,024
Debt................................................................ 15,322 16,250
Other liabilities and deferred items................................ 10,048 9,487
-------- --------
Total liabilities............................................... 271,642 257,275
-------- --------
COMMITMENTS AND CONTINGENCIES
SPECIAL STOCK, no par value, authorized 5,000,000 shares
Issued and outstanding 220,000 shares of cumulative $0.62,
convertible, redeemable, nonvoting, special preferred stock,
redemption value $2,200.......................................... 2,200 2,200
Issued and outstanding 50,000 shares of cumulative $0.625
convertible, redeemable, nonvoting, special preferred stock,
redemption value $500............................................ 500 500
-------- --------
Total special stock............................................ 2,700 2,700
-------- --------
-------- --------
SHAREHOLDERS' EQUITY
Common stock, $1 par value, authorized 17,500,000 shares,
issued and outstanding 7,774,788 and 7,773,075 shares in
1999 and 1998, respectively..................................... 7,775 7,773
Additional paid-in-capital........................................ 61,866 61,861
Accumulated other comprehensive income............................ (321) 907
Accumulated deficit............................................... (35,981) (34,953)
-------- --------
Total shareholders' equity.................................... 33,339 35,588
-------- --------
-------- --------
Total liabilities and shareholders' equity.................... $307,681 $295,563
-------- --------
-------- --------
</TABLE>
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts shown in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Premiums earned $16,003 $ 6,901 $38,762 $13,871
Commission & service income 11,595 13,114 33,354 39,032
Net investment income 1,053 1,191 3,112 3,542
Policy fees 643 1,045 2,087 1,848
Realized gains 189 41 200 40
Other income 623 1,346 1,351 1,422
------- ------- ------- ------
Total revenue 30,106 23,638 78,866 59,755
------- ------- ------- ------
------- ------- ------- ------
Expenses:
Losses & loss adjustment expenses 11,424 7,482 26,392 17,425
Policy acquisition costs 6,652 1,046 15,312 6,404
Interest expense 315 377 925 756
Other operating costs & expenses 11,699 14,866 37,103 35,591
Restructuring charge 0 0 0 546
------- ------- ------- ------
Total expenses 30,090 23,771 79,732 60,722
------- ------- ------- ------
------- ------- ------- ------
Income (loss) from operations, before provision for
income taxes and effect of change in accounting principle 16 (133) (866) (967)
Provision for income taxes (13) (9) (36) (9)
------- ------- ------- ------
Income (loss) before effect of change in accounting principle 3 (142) (902) (976)
Effect of change in accounting principle 0 0 0 (601)
------- ------- ------- ------
Net income (loss) 3 (142) (902) (1,577)
Other Comprehensive Income:
Change in value of marketable securities, less reclassification adjustment
of $4 and $3 for gains and losses included in net income (loss) for the nine months
ended September 30, 1999 and 1998, respectively (176) 878 (1,228) 1,023
------- ------- ------- ------
Comprehensive net (loss) income $ (173) $ 736 $(2,130) $ (554)
------- ------- ------- ------
------- ------- ------- ------
Basic earnings per share before change in accounting principle:
Net loss $0.00 $(0.02) $(0.12) $(0.13)
Weighted average shares outstanding 7,775 7,770 7,774 7,760
Diluted earnings per share before change in accounting principle:
Net loss $0.00 $(0.02) $(0.12) $(0.13)
Weighted average shares outstanding 7,775 7,770 7,774 7,760
Basic earnings per share after change in accounting principle:
Net loss $0.00 $(0.02) $(0.12) $(0.13)
Weighted average shares outstanding 7,775 7,770 7,774 7,760
Diluted earnings per share after change in accounting principle:
Net loss $0.00 $(0.02) $(0.12) $(0.13)
Weighted average shares outstanding 7,775 7,770 7,774 7,760
</TABLE>
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts shown in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (902) $ (1,577)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Equity in earnings of unconsolidated subsidiary (77) (228)
Depreciation and amortization 1,886 1,820
Realized gains (200) (40)
Net change in assets and liabilities affecting
cash flows from operating activities (8,411) 10,291
-------- ---------
Net cash (used in) provided by operating activities (7,704) 10,266
-------- ---------
Cash flows from investing activities:
Proceeds from investments sold or matured 12,633 27,674
Cost of investments acquired (8,857) (26,645)
Collections on (issuance of) premium notes receivable, net 1,039 (1,790)
Proceeds from property and equipment sold 493 0
Purchase of property and equipment (1,402) (1,337)
-------- ---------
Net cash provided by (used in) investing activities 3,906 (2,098)
-------- ---------
Cash flows from financing activities:
Net (repayment) issuance of debt (928) 10,514
Stock issued under stock option plans net of repurchase 5 99
Issuance of capital stock 2 0
Dividends paid on special stock (126) (163)
Cost of purchased subsidiary 0 (6,184)
-------- ---------
Net cash (used in) provided by financing activities (1,047) 4,266
-------- ---------
Net (decrease) increase in cash and short term investments (4,845) 12,434
Cash and short term investments, January 1 23,141 8,922
-------- ---------
Cash and short term investments, September 30 $18,296 $ 21,356
-------- ---------
-------- ---------
Supplemental cash flow information:
Interest paid $ 857 $ 639
Income taxes paid 0 9
-------- ---------
-------- ---------
Noncash investing activities:
Acquisitions-
Cash paid $0 $ (9,650)
Issuance of debt 0 (2,700)
Preferred stock issued 0 (500)
Assets acquired, at estimated fair value 0 21,675
Liabilities assumed 0 (27,248)
-------- ---------
$ 0 $(18,423)
-------- ---------
-------- ---------
</TABLE>
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts shown in thousands)
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of The
Seibels Bruce Group, Inc. (the "Company") and have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. These financial statements should be read
in conjunction with the financial statements and notes thereto contained in
the Company's annual report on Form 10-K for the year ended December 31, 1998
filed with the Securities and Exchange Commission. In the opinion of
management, all adjustments necessary for fair statement of the results of
operations for the interim period have been included. The results of
operations for the interim period is not necessarily indicative of the
results for the full year.
NOTE 2. ACQUISITIONS
Effective May 1, 1998, the Company acquired Graward General Companies, Inc.
("Graward") for a tentative purchase price of $10,250, consisting of $7,550
in cash and $2,700 in Convertible Subordinated Promissory Notes. The Company
accounted for the transaction as a purchase. The excess of the purchase price
over the fair value of the assets acquired was $16.2 million. The Company
has delivered to the Sellers of Graward a final balance sheet as required
under the purchase agreement (the "Final Balance Sheet"). The Final Balance
Sheet identified significant purchase price adjustments which the Company
believes are valid reductions of the purchase price and expects an eventual
reduction in the purchase price and a resulting reduction in recorded
goodwill. During the quarter ended June 30, 1999, the Company adjusted the
estimated contingent purchase price which affected the recorded goodwill.
During the quarter ended September 30, 1999, this adjustment was resolved and
eliminated from the recorded goodwill.
Effective March 31, 1998, the Company acquired America's Flood Services, Inc.
("AFS") for $2,600, consisting of $2,100 in cash and $500 in Cumulative,
Convertible, Redeemable, Nonvoting Special Preferred Stock. The Company
accounted for the transaction as a purchase. The excess purchase price over
the fair value of the assets was $2.3 million. AFS provides flood zone
determinations, flood insurance, and flood compliance tracking.
NOTE 3. DEBT
On May 1, 1998, in connection with the Graward acquisition, the Company
issued subordinated convertible notes (the "Notes") with a principal amount
of $2,700. The Notes bear interest at a rate equal to 5% per annum. The
entire principal amount due under the Notes is payable in full on
December 31, 2004, provided however, that if certain outstanding debt is paid
in full and upon 60 days prior written notice, the Notes will become payable
six months after such debt is paid in full provided, however, that in no
event will the Notes become payable earlier than April 1, 2003. At the
election of the holder of the Notes, the Notes may be converted into 300,000
shares of Common Stock on the maturity date, provided, however, that notice
has been given of such election at any time on or after the 45th day prior to
the maturity date of the Notes up to but not including the 15th day prior to
the maturity date. Interest accruals and payments on the Notes were suspended
after the delivery of the final balance sheet pending the outcome of
arbitration (See Part II-Item I).
On March 31, 1998, the Company entered into a $15,000 Credit Facility (the
"Facility") with a major lending institution for the purpose of financing its
acquisition activity and other general corporate purposes. Quarterly
principal payments began in March 1999. The final payment of all remaining
principal and accrued interest is due in June 2004. Accrued interest is
payable monthly on the outstanding balance under the Facility and is
calculated, at the Company's discretion, using a pre-determined spread over
LIBOR or the prime interest rate of the lending institution. The effective
interest rate as of September 30, 1999, June 30, 1999 and March 31, 1999 was
8.19%, 8.00% and 7.75%, respectively. The Facility is secured by a lien on
the assets of the Company. As of September 30, 1999, June 30, 1999 and March
31, 1999, the outstanding balance under the Facility was $12,602, $12,918 and
$13,234 respectively. The Credit Agreement stipulates that the Company
demonstrate compliance with a number of affirmative and negative covenants on
a quarterly basis. Significant financial covenants include minimum statutory
surplus levels, ratios of debt to total capitalization and cash flow
coverage. As of September 30, 1999, the Company was either in compliance with
or had obtained waivers for all covenants.
<PAGE>
NOTE 4. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1998, the Company adopted the provisions of SOP 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments", and recorded it as a cumulative effect of a change in accounting
principle of $601. As a result, the Company's participation in the North
Carolina Reinsurance Facility (the "NC Facility") is no longer being treated as
assumed reinsurance and all amounts assumed from the NC Facility have been
eliminated. The NC Facility is now treated as an assessment organization. The
effect of the change in accounting principle was $.08 per share on both a basic
and diluted basis.
NOTE 5. RESTRUCTURING CHARGE
During the second quarter of 1998, the Company recorded a pre-tax restructuring
charge of $546 related to the consolidation of its automobile and claims
operations. The charges relate to employee severance and other termination
benefits from moving the processing of the Company's automobile insurance
business from Winston-Salem, North Carolina to Nashville, Tennessee and from the
consolidation of claims management and staff positions in the Columbia, South
Carolina office.
NOTE 6. FINANCIAL REPORTING BY BUSINESS SEGMENTS
The reportable segments were determined based on management's internal
reporting approach which is based on product line and complementary
coverages. The reportable segments are comprised of Automobile, Flood,
Commercial and All Other. The Automobile segment includes all personal lines
components of retained risk nonstandard automobile, NC Facility and South
Carolina Reinsurance Facility (the "SC Facility"). The Flood segment contains
all flood operations including NFIP, flood zone determinations, excess flood
and flood compliance tracking, as well as the complementary homeowners
product line and the Company's insurance adjusting business. The Commercial
segment includes all commercial operations, as well as the commercial
automobile activity for the NC Facility and the SC Facility. The All Other
segment includes the runoff operations of the Company. The results of the
reportable segments are included in the following tables:
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Automobile............................................ $23,225 $16,016 $59,732 $40,905
Flood................................................. 5,271 4,693 12,515 11,639
Commercial............................................ 700 1,688 3,957 3,624
All Other............................................. 910 1,241 2,662 3,587
------- ------- ------- -------
Total revenue....................................... $30,106 $23,638 $78,866 $59,755
======= ======= ======= =======
Depreciation and amortization:
Automobile............................................ $ 324 $ 447 $ 1,371 $ 1,353
Flood................................................. 83 68 202 148
Commercial............................................ 48 49 147 171
All other............................................. 61 145 166 148
------- ------- ------- -------
Total depreciation and amortization................. $ 516 $ 709 $ 1,886 $ 1,820
======= ======= ======= =======
Net income (loss):
Automobile............................................ $ (727) $ 878 $(4,424) $ 1,032
Flood................................................. 1,468 579 1,287 776
Commercial............................................ 51 (1,181) 1,356 (2,834)
All Other............................................. (789) (418) 879 (551)
------- ------- ------- -------
Total net income (loss)............................. $ 3 $ (142) $ (902) $(1,577)
======= ======= ======= =======
</TABLE>
<PAGE>
NOTE 7. SUBSEQUENT EVENT
Effective October 14, 1999, the Company sold one if its statutory insurance
subsidiaries to an unrelated party. The gain resulting from the transaction
will not have a significant impact on the Company's fourth quarter 1999
results of operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables indicate the more significant financial comparisons with
the applicable prior periods (amounts shown in thousands, except per share
amounts):
<TABLE>
<CAPTION>
September 30, December 31,
FINANCIAL CONDITION 1999 1998
------------- ------------
<S> <C> <C>
Total cash and investments...................... $ 54,420 $ 64,250
Total assets.................................... 307,681 295,563
Total liabilities............................... 271,642 257,275
Special stock................................... 2,700 2,700
Shareholders' equity............................ 33,339 35,588
Per share................................... 4.29 4.58
</TABLE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
RESULTS OF OPERATIONS September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Premiums earned....................................... $ 16,003 $ 6,901 $38,762 $13,871
Commission and service income......................... 11,595 13,114 33,354 39,032
Net investment and interest income.................... 1,053 1,191 3,112 3,542
Policy fees........................................... 643 1,045 2,087 1,848
Realized gains........................................ 189 41 200 40
Other income.......................................... 623 1,346 1,351 1,422
-------- ------- ------- -------
Total revenue............................. $30,106 $23,638 $78,866 $59,755
-------- ------- ------- -------
-------- ------- ------- -------
Income (loss) from operations, before provision for
income taxes and effect of change in accounting principle $16 ($133) ($866) ($967)
Provision for income taxes............................ (13) (9) (36) (9)
-------- ------- ------- -------
Income (loss) before effect of change in accounting
principle........................................... 3 (142) (902) (976)
Effect of change in accounting principle.............. 0 0 0 (601)
-------- ------- ------- -------
Net income (loss)..................................... $ 3 $ (142) $ (902) $ (1,577)
-------- ------- ------- -------
-------- ------- ------- -------
Weighted average shares outstanding................... 7,775 7,770 7,774 7,760
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
OVERVIEW
(Amounts shown in thousands)
Total revenues for the nine-month period increased $19,111 or 32.0% over the
same period last year. This increase is primarily due to increased premium
volume contributed by our auto operations. The loss of $866 for the nine
months ended September 30, 1999, before provision for income taxes and effect
of change in accounting principle represents a $101 decrease over the
corresponding period in 1998. The net loss for the nine-month period
decreased $675 after taxes, restructuring charges and effect of change in
accounting principle, which were recorded during the first and second
quarters of 1998.
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
PREMIUMS EARNED
Net premiums earned increased $24,891 or 179.4% to $38,762 for the nine
months ended September 30, 1999 from $13,871 for the nine months ended
September 30, 1998. The automobile business unit contributed $35,483 or 91.5%
of the 1999 to date earned premium. This is an increase of $25,067, or
240.7%, over the $10,416 earned in the first nine months of 1998. The
commercial lines unit contributed $3,029 or 7.8% of total earned premiums
compared to $2,040 during the period February 1, through September 30, 1998.
While the commercial lines unit's earned premium increased $989, this trend is
not expected to continue due to the fact that effective March 31, 1999, the
Company entered into a 90% quota share reinsurance arrangement to reinsure
its commercial book of business. This reinsurance agreement requires the
Company to cede 90% of its earned premiums to the reinsurer. The Company
believes that this arrangement will allow it to continue to offer commercial
lines as a complementary product to its automobile and flood product lines
while limiting the related risk. The remaining $250 in earned premiums came
from all other operations.
COMMISSION & SERVICE INCOME
Commission and service income decreased $5,678 or 14.5%, to $33,354 for the
nine months ended September 30, 1999 from $39,032 for the nine months ended
September 30, 1998. This decrease is mainly caused by a decrease in the
number of policies in the SC Facility, a residual market for the automobile
insurance in the state of South Carolina. The commission and service income
attributable to the SC Facility is $10,788, which represents a decrease of
$10,435 over the same period last year. The SC Facility is currently being
phased out and the new South Carolina Associated Auto Insurers Plan
("SCAAIP") is intended to take its place. Effective March 1, 1999, no new
policies may be ceded to the SC Facility, and no voluntary renewals may be
ceded to the SC Facility after September 1999. Designated agents are able to
renew in the SC Facility through 2001. The new SCAAIP will provide insurance
to drivers unable to obtain coverage in the voluntary market. The rates in
the SCAAIP are expected to be approximately 150% of the SC Facility rates.
Although the Company has an arrangement with the SCAAIP to handle 50% of the
policies written, there has been very little activity to date. The Company
believes that this activity will increase after renewals cease in the SC
Facility. The Company also expects to attract certain of these policyholders
by offering rates below the SCAAIP rates.
The decrease in commission and service income from the SC Facility was
partially offset by increases in commission and service income produced by
the Company's North Carolina automobile operations. Over the same period last
year, commission and service income increased by $934 to $4,253 due to
increased premium activity and cessions to the North Carolina Reinsurance
Facility. America's Flood Service added $2,058 to commission and service
income representing an increase of $830 over the same period last year. The
Company acquired AFS March 31, 1998, thus only six months of activity are
included in the 1998 figures. The Company's Nashville operations produced
$3,899 in commission and service income for the nine months ended September
30, 1999 an increase of $3,135 compared to $764 for the period May 1 through
September 30, 1998. The Company purchased this operation in May of 1998. The
Company's flood unit produced $9,582 in commission and service income, which
is an increase of $359 over the same period in 1998. This increase is due to
an increase in both fees earned for policy processing and management of
claims. The commercial lines unit had commission and service income of $917
or a decrease of $618 over the period February 1, through September 30, 1999.
This decrease is due to the Company canceling a MGA agreement in early 1998
where the Company serviced commercial policies for another carrier. The
remaining amounts are made up on claims adjusting and homeowners income.
NET INVESTMENT AND INTEREST INCOME
Net investment and other interest income decreased $430 or 12.1% to $3,112
for the nine months ended September 30, 1999 from $3,542 for the nine months
ended September 30, 1998. The decrease is due in a large part to the negative
cash flow created by the SC Facility. As this business runs off, the Company
must use its working capital to pay these claims because it is only
reimbursed by the SC Facility on a quarterly basis. The Company has requested
that it be reimbursed on a monthly basis. While the Company is paid for the
time value of money, it is not equivalent to the amount the Company could
earn through independent investing.
<PAGE>
POLICY FEES
The Company had $2,087 in income from policy processing fees for the nine
months ended September 30, 1999 compared to $1,848 for May through September
1998. This income is associated with the Company's Nashville operations,
which was purchased in May 1998.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Losses and loss adjustment expenses increased $8,967 or 51.5% to $26,392 for
the nine months ended September 30, 1999 from $17,425 for nine months ended
September 30, 1998. The increase corresponds to the increased activity in all
risk operations over the same period last year and a change in the automobile
reinsurance program. Effective April 1, 1999 the Company ceased ceding on a
quota share basis to outside reinsurers. These quota share reinsurance
agreements allowed the Company to cede from 20 percent to 75 percent of its
losses. The Company replaced the quota share reinsurance agreement with an
aggregate excess of loss agreement, which allows the Company to retain more
of its earned premiums.
POLICY ACQUISITION COSTS
During the nine months ended September 30, 1999, $15,312 of policy
acquisition costs were expensed and $2,429 were deferred while during the
same period in 1998, $6,404 were expensed and $1,688 were deferred. Of the
$15,312 policy acquisition costs expensed in the first nine months of 1999,
$878 relate to costs previously deferred on the Company's commercial book of
business. These costs must now be expensed due to the Company's 90% quota
share reinsurance agreement.
INTEREST EXPENSE
Interest expense was $925 and $756 for the nine months ended September 30,
1999 and 1998, respectively. The increase is due to the Company's
acquisitions of AFS and Graward in March and May 1998, respectively, and the
increased debt associated with those acquisitions. For information about the
interest rates, see NOTE 3 in the notes to financial statements. Interest
expense on the $2.7 million notes related to the Graward acquisition has been
neither accrued nor paid due to the current purchase price arbitration.
OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses increased $1,512, or 4.2%, to $37,103 for
the nine months ended September 30, 1999 from $35,591 for the nine months
ended September 30, 1998. Salaries and fringe benefits for the Company
included in other operating costs and expenses were $12,316 and $11,886 for
the nine months ended September 30, 1999 and 1998, respectively. The increase
is attributable to increased staffing related to the increased production in
our automobile unit. Bad debt expense included in other operating costs and
expenses increased to $3,402 from $1,430 for the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998. This
increase is due to the Company's increase in premium writings for nonstandard
automobile, which generates a higher percentage of bad debt. Premium tax
expense increased to $2,581 from $2,337 due to an increase in premiums
written for the nine months ended September 30, 1999 compared to the same
period in 1998. Agent commissions included in other operating costs and
expenses were $8,216 and $7,922 for the nine months ended September 30, 1999
and 1998, respectively. The increase in agents' commissions is due to
increased premium writings during the nine months of 1999 and a change in the
automobile reinsurance program. The former reinsurance program provided the
Company a ceding commission, which partially offset commission expenses. The
remainder of the increase is spread across several expense classifications.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
(Amounts shown in thousands)
Liquidity relates to the Company's ability to produce sufficient cash to
fulfill contractual obligations, primarily to policyholders. Sources of
liquidity include service fee income, premium collections, investment income
and sales and maturities of investments. Principal uses of cash are payments
of claims, principal and interest payments on debt, operating expenses, and
purchases of investments. Cash outflows can be variable because of the
uncertainties regarding settlement dates for liabilities for unpaid losses
and because of the potential for large losses. Accordingly, the Company
maintains investment and reinsurance programs generally intended to avoid the
forced sale of investments to meet claims obligations.
Net cash used in operating activities totaled $7,704. Net change in assets
and liabilities used $8,411 of cash in operating activities. The net change
in assets and liabilities were impacted by an increase of $7,956 in unearned
premiums on retained business, a $16,240 decrease in balances due other
insurance companies, a $4,972 increase in reinsurance recoverable on paid
losses and loss adjustment expenses, a $1,039 decrease in premium notes
receivable, and a $4,153 decrease in premium and agents' balances receivable.
These relate primarily to the Company's continued growth in the retained risk
business.
Investing activities provided cash in the amount of $3,906 primarily due to
proceeds from investments sold or matured less the cost of investments
acquired and the purchase of processing and office equipment previously
leased. Net cash used in financing activities totaled $1,047 and related
primarily to the repayment of debt.
YEAR 2000 COMPLIANCE
--------------------
(Amounts shown in thousands)
In 1997, The Seibels Bruce Group, Inc., including its subsidiaries South
Carolina Insurance Company, Catawba Insurance Company, Consolidated American
Insurance Company, Kentucky Insurance Company, Universal Insurance Company,
Investors National Life Insurance Company of South Carolina and Graward
General Company initiated a company-wide program (the "Compliance Program")
to identify and address issues associated with the ability of its
date-sensitive information, policy and claims processing systems and other
equipment to properly recognize the Year 2000 in order that the Company will
not suffer any business interruptions as a result of the century change on
January 1, 2000. As well as reviewing internal compliance issues, a
program is actively in place to review all arrangements with third party
vendors as well as non IT providers with which the Company does business.
THE COMPANY FACES THE FOLLOWING MAJOR RISKS RELATED TO THE YEAR 2000
COMPLIANCE ISSUE:
The Company's internal transaction systems that process and issue policies
and changes to those policies, verify policyholder's coverage and process and
make claim payments must be Year 2000 compliant. Without compliance, system
recognition for appropriate renewal, expiration, coverage verification and
all other processing would be impaired.
Vendor systems that process policies and claims outside the Company's
internal system present the same exposure as above and an identical
impairment.
The Company's telecommunication systems, if not compliant, would impair the
ability to adequately communicate with policyholders and related constituency
at current service levels.
THE STATUS OF THE ABOVE BUSINESS RISKS IS AS FOLLOWS:
In regard to internal systems, the Compliance Program calls for full
conformity to meet all internal policy expiration dates. Work on the
Compliance Program began in 1997 since the Company issues three-year
commercial policies. All other internal systems processing policies with
expiration dates of shorter terms of one year and of six months are
currently on target for completion to process all policy contract
obligations. Remediation has been completed on the Company's Nashville,
Tennessee system and it has been issuing policies with expiration dates
beyond the year 2000 since November 30, 1998. The Company believes that
its Columbia, South Carolina processing system has been fully compliant since
mid December 1998 and the Company has been issuing policies with expiration
dates beyond the year 2000 on that system since that time. The processing
system in Winston-Salem, North Carolina has been remediated and has been
issuing policies with expirations beyond the year 2000 since May 15, 1999.
All of the policy processing systems went through a testing phase where the
dates were run beyond January 1, 2000.
<PAGE>
The Company also tested other critical dates during the testing phase such as
February 29, 2000 to make sure that the systems could handle such dates.
With regard to the third party vendor, which processes the Company's flood
policies, processing systems; the Company has reviewed the compliance status
of this company. The vendor has been processing three-year policy contracts
beginning in 1997 on a Year 2000 compliant basis and is currently on target
to process policies of shorter terms. This company has completed remediation
and is currently in the testing phase. Testing ran through the end of the
second quarter 1999 and the remediated software moved into production on
July 1, 1999. The Company's overall Year 2000 plan includes procedures for
assessing all third party vendors. While not processing policies on their
systems, the Company must submit statistical data to several reporting
bureaus, which, if not Year 2000 compliant, could impede the Company's
ability to collect funds owed to it by the agencies for which these bureaus
collect data. The largest of these bureaus believes that it has been
compliant since June, 1998 and the other government agency bureau is not
issuing any statements as to its readiness. The Company has no plans to
conduct independent testing of these bureaus. The Company is also in the
process of surveying all of its major reinsurers to evaluate their Year 2000
compliance.
In accordance with the Compliance Program, the Company completed an upgrade of
its Columbia and Nashville phone systems in November 1999. This date is four
months later than originally planned due to the Company's decision to put the
equipment contract out for competitive bid and the subsequent scheduling of
the contractor. The Winston-Salem phone system which handles the calls for
Universal Insurance Company and South Carolina Insurance Company's business
written in North Carolina has been year 2000 compliant since June 7, 1999.
Work on any other mission critical equipment that is not Year 2000 compliant
is scheduled to be completed by November 1999. An inventory has been taken
of all software, equipment and facilities related items that may be date
sensitive, such as elevators, alarm systems and heating and cooling systems,
and a log is kept showing the Year 2000 compliance status. The Company
anticipates successful remediation in accordance with the Compliance Plan.
The Company expects to spend between $850,000 and $1,100,000 on Year 2000
compliance covering both external and internal costs through out the
remediation process, of which a significant portion, approximately $650,000,
was allocated as an expense in 1998. This is an increase in the estimate
from year-end of approximately $100,000. The increase is related to lease
expenses the Company will incur related to telephone equipment in its
Winston-Salem, North Carolina location. Of the 1998 portion of such
expenses, approximately $520,000 was paid to outside providers. The Company
also spent approximately $25,000 in 1997. All charges in 1998 were to modify
software; all 1997 charges were paid to consultants to identify Year 2000
issues. All charges related to Y2K are expensed when they are incurred.
The Company also believes that the completed and planned modifications of its
internal systems and equipment will allow it to be Year 2000 compliant in a
timely manner; however, there can be no assurance that the Company's internal
systems or equipment, or those of third parties on which the Company relies,
will be Year 2000 compliant in a timely manner or that contingency plans of
any third parties will mitigate the effects of noncompliance. The failure of
systems or equipment of the Company or third parties could have a material
adverse effect on the Company's business and consolidated financial statement.
The Audit Committee of the Company's Board of Directors is updated at least
quarterly as to the status of the Company's readiness. In addition, the
Company's Vice President of Planning and Budgeting monitors the status of all
Year 2000 projects and has direct access to all Information Systems personnel
and the Audit Committee of the Board of Directors.
CONTINGENCY PLANS
While the Company has no contingency plan which deals specifically with the
Year 2000 issue, the Company does have a comprehensive Business Continuation
Plan in place, which it plans to put into effect should the Company
experience any Year 2000 related problems. In the plan, the Company has an
alternative site from where it can process its policies and claims. The site
can be fully operational within 48 hours. Other critical functions, such as
accounting, would operate manually until such a time as the Year 2000 problem
could be fixed. The Company has taken steps to ensure that it has supplies on
site that would allow the accounting, accounts payable and payroll functions
to continue to operate.
<PAGE>
FORWARD LOOKING STATEMENTS
This form contains various forward-looking statements which represent the
Company's beliefs or expectations regarding future events. When used herein,
the words "believes", "anticipates" and "expects" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements
regarding Year 2000 compliance include, without limitation, the Company's
expectations as to when it will complete the remediation and testing phases
of its Year 2000 program and those of its third party vendors; its estimated
cost of achieving Year 2000 compliance; and the Company's belief that its
internal systems and equipment will be Year 2000 compliant in a timely
manner. All forward-looking statements involve a number of risks and
uncertainties that could cause actual results to differ materially from the
projected results. Factors regarding Year 2000 compliance that may cause
these differences include, but are not limited to, the availability of
qualified personnel and other information technology resources; the ability
to identify and remediate all the date sensitive lines of computer code or to
replace embedded computer chips in affected systems of equipment; and the
actions of third parties with respect to Year 2000 compliance. In connection
with the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, the Company cautions investors that future financial and
operating results may differ materially from those projected
in forward-looking statements made by, or on behalf of, the Company. Such
forward-looking statements involve known and unknown risks, uncertainties,
and other factors that 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. In addtion, investors are cautioned not to place
undue reliance on forward-looking statemtns contained in this report because
they speak only as of the date hereof. The Company undertakes no obligation
to release publicly any modifications or revisions to forward-looking
statements contained in this report to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of
unanticipated events.
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On May 1, 1998, the Company completed its acquisition of Graward. In
completing the Final Balance Sheet in accordance with the related purchase
agreement, the Company identified certain purchase price adjustments which it
believes were known to certain of the sellers, but were not disclosed to the
Company during its due diligence process. The purchase agreement with Graward
provides methods for resolving the differences as to the appropriate
adjustments to the Final Balance Sheet. On December 7, 1998, the sellers
notified the Company that they intended to submit to arbitration two matters
currently in dispute between the parties. Management believes that the
purchase price will be adjusted appropriately under the purchase agreement.
Seibels, Bruce & Company ("SB&C"), a subsidiary of the Company, was served
with a complaint dated November 19, 1997 by Norwest Financial Resources, Inc.
("Norwest") that claimed indemnification against SB&C pursuant to the Asset
Purchase Agreement dated as of July 2, 1993 by and among Premium Service
Corporation of Columbia ("Premium"), SB&C and Norwest. The indemnification
claim relates to certain loans, which later were discovered to be incorrectly
recorded as realizable assets. Management believes neither SB&C nor the
Company has any liability in the case.
Catawba Insurance Company ("Catawba"), a subsidiary of the Company, was
served with a complaint dated November 7, 1997 by the Municipal Association
of South Carolina which claimed it has potential deficiency of approximately
$1.75 million with respect to certain South Carolina municipality taxes.
Management and legal counsel believe Catawba has basis for non-payment of
such amounts.
The Company and its subsidiaries are parties to various other lawsuits
generally arising in the normal course of their insurance and ancillary
businesses. The Company does not believe that the eventual outcome of such
suits will have a material effect on the financial condition or results of
operations of the Company.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Financial Data Schedule
(b) No reports on Form 8-K were filed during the nine months ended
September 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE SEIBELS BRUCE GROUP, INC.
-----------------------------
(Registrant)
Date: November 15, 1999 /s/ R. Thomas Savage, Jr.
----------------- ----------------------------------
R. Thomas Savage, Jr.
President and Chief Executive Officer
Date: November 15, 1999 /s/ Matthew P. McClure
----------------- ----------------------------------
Matthew P. McClure
General Counsel and Corporate Secretary
Date: November 15, 1999 /s/ Bryan D. Rivers, CPA
----------------- ----------------------------------
Bryan D. Rivers, CPA
Controller (Principal Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 34,788
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,336
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 36,124
<CASH> 18,296
<RECOVER-REINSURE> 34,944
<DEFERRED-ACQUISITION> 4,901
<TOTAL-ASSETS> 307,681
<POLICY-LOSSES> 154,740
<UNEARNED-PREMIUMS> 68,748
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 15,322
2,700
0
<COMMON> 7,775
<OTHER-SE> 25,564
<TOTAL-LIABILITY-AND-EQUITY> 307,681
38,762
<INVESTMENT-INCOME> 3,112
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 36,992
<BENEFITS> 26,392
<UNDERWRITING-AMORTIZATION> 15,312
<UNDERWRITING-OTHER> 38,028
<INCOME-PRETAX> (866)
<INCOME-TAX> 36
<INCOME-CONTINUING> (902)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (902)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
<RESERVE-OPEN> 36,322
<PROVISION-CURRENT> 29,421
<PROVISION-PRIOR> 653
<PAYMENTS-CURRENT> (18,202)
<PAYMENTS-PRIOR> (10,251)
<RESERVE-CLOSE> 37,943
<CUMULATIVE-DEFICIENCY> (210)
</TABLE>
