<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR QUARTER ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
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 Identification No.)
incorporation or organization)
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: 7,831,690 shares of
Common Stock, $1 par value, at November 10, 2000.
--------------------------------------------------------------------------------
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<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS SHOWN IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments:
Debt securities, available-for-sale, at market (cost of $30,641 in
2000 and $32,180 in 1999)......................................... $ 30,495 $ 31,575
Equity securities, at market (cost of $6,331 in 2000 and $1,317 in
1999)............................................................. 6,247 1,317
Cash and short-term investments..................................... 7,381 26,722
-------- --------
Total cash and investments........................................ 44,123 59,614
Accrued investment income............................................. 578 835
Premiums and agents' balances receivable, net of allowance for
doubtful accounts of $5,809 in 2000 and $4,247 in 1999.............. 3,092 8,156
Premium notes receivable.............................................. 4,767 3,435
Reinsurance recoverable on paid losses and loss adjustment expenses... 18,562 18,528
Reinsurance recoverable on unpaid losses and loss adjustment
expenses............................................................ 53,285 74,017
Property and equipment, net........................................... 3,851 5,421
Prepaid reinsurance premiums--ceded business.......................... 43,619 56,724
Deferred policy acquisition costs..................................... 400 1,373
Goodwill.............................................................. 4,670 19,876
Other assets.......................................................... 5,268 6,824
-------- --------
Total assets...................................................... $182,215 $254,803
======== ========
LIABILITIES
Losses and loss adjustment expenses:
Reported and estimated losses and claims--retained business......... $ 31,562 $ 34,733
--ceded business................ 49,530 67,904
Adjustment expenses--retained business.............................. 5,375 5,100
--ceded business.................................. 3,755 6,113
Unearned premiums:
Property and casualty--retained business.............................. 9,599 5,796
--ceded business.................................... 43,619 56,724
Balances due other insurance companies................................ 11,401 20,460
Debt.................................................................. 13,766 14,986
Accrued restructuring charges......................................... 395 0
Other liabilities and deferred items.................................. 7,976 13,730
-------- --------
Total liabilities................................................. 176,978 225,546
-------- --------
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 7,831,690 shares in 2000 and 7,831,398 shares in 1999... 7,832 7,831
Additional paid-in-capital............................................ 61,989 61,988
Accumulated other comprehensive income................................ (230) (605)
Accumulated deficit................................................... (67,054) (42,657)
-------- --------
Total shareholders' equity........................................ 2,537 26,557
-------- --------
Total liabilities and shareholders' equity........................ $182,215 $254,803
======== ========
</TABLE>
1
<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,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Commission and service income.......................... $ 8,818 $11,595 $ 28,085 $33,354
Premiums earned........................................ 9,956 16,003 18,719 38,762
Net investment and other interest income............... 925 1,053 2,843 3,112
Realized gains (losses), net........................... 0 189 (227) 200
Policy fees and other income........................... 1,251 1,266 3,863 3,439
------- ------- -------- -------
Total revenue...................................... 20,950 30,106 53,283 78,867
------- ------- -------- -------
Expenses:
Losses & loss adjustment expenses.................... 8,133 12,689 18,945 29,443
Policy acquisition costs............................. 5,648 8,189 20,067 27,016
Interest expense..................................... 504 315 1,144 925
Other operating costs & expenses..................... 6,437 8,910 20,976 22,384
Restructuring charge................................. 0 0 16,421 0
------- ------- -------- -------
Total expenses..................................... 20,722 30,103 77,553 79,768
------- ------- -------- -------
Income (loss) from operations, before provision for
income taxes......................................... 228 3 (24,270) (901)
Provision for income taxes............................. 0 0 0 0
------- ------- -------- -------
Net income (loss)...................................... 228 3 (24,270) (901)
Other comprehensive income:
Change in value of marketable securities, less
reclassification adjustments of $0 and $4 for gains
included in net income for the three months ended
September 30, 2000 and 1999, respectively, and
$(236) and $(29) for losses included in net loss
for the nine months ended September 30, 2000 and
1999, respectively................................. 329 (176) 375 (1,228)
------- ------- -------- -------
Comprehensive net income (loss)........................ $ 557 $ (173) $(23,895) $(2,129)
======= ======= ======== =======
Basic earnings (loss) per share:
Net loss............................................. $ 0.02 $ 0.00 $ (3.12) $ (0.12)
Weighted average shares outstanding.................. 7,832 7,775 7,832 7,774
======= ======= ======== =======
Diluted earnings (loss) per share:
Net loss............................................. $ 0.02 $ 0.00 $ (3.12) $ (0.12)
Weighted average shares outstanding.................. 7,832 7,775 7,832 7,774
======= ======= ======== =======
</TABLE>
2
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS SHOWN IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(24,270) $ (901)
Adjustments to reconcile net loss to net cash used in
operating activities:
Restructuring charges and associated impairment of
long-lived assets..................................... 16,421 0
Amortization of deferred policy acquisition costs....... 20,066 27,016
Equity in earnings of unconsolidated subsidiaries....... (115) (77)
Provision for losses on premiums and agents' balances
receivable, net of recoveries......................... 1,562 1,217
Depreciation and amortization........................... 1,412 1,886
Net realized loss on sale of investments................ 236 29
Net realized gain on sale of property and equipment..... (9) (229)
Change in assets and liabilities:
Accrued investment income............................. 257 166
Premiums and agents' balances receivable, net......... 3,502 2,936
Premium notes receivable.............................. (1,332) 1,039
Reinsurance recoverable on losses and loss adjustment
expenses............................................ 20,698 (38,115)
Prepaid reinsurance premiums--ceded business.......... 13,105 11,746
Policy acquisition costs paid......................... (19,093) (29,445)
Unpaid losses and loss adjustment expenses............ (23,628) 34,764
Unearned premiums..................................... (9,302) (3,790)
Balances due other insurance companies................ (9,059) (16,240)
Accrued restructuring charge.......................... (289) 0
Other, net............................................ (4,394) 1,332
-------- --------
Net cash used in operating activities............... (14,232) (6,666)
-------- --------
Cash flows from investing activities:
Proceeds from investments sold or matured................. 10,311 12,635
Cost of investments acquired.............................. (13,872) (8,857)
Proceeds from property and equipment sold................. 9 493
Purchases of property and equipment....................... (212) (1,402)
-------- --------
Net cash (used in) provided by investing
activities........................................ (3,764) 2,869
-------- --------
Cash flows from financing activities:
Issuance of capital stock................................. 2 7
Net repayment of debt..................................... (1,220) (928)
Dividends paid............................................ (127) (127)
-------- --------
Net cash used in financing activities............... (1,345) (1,048)
-------- --------
Net decrease in cash and short-term investments............. (19,341) (4,845)
Cash and short-term investments, January 1.................. 26,722 23,141
-------- --------
Cash and short-term investments, September 30............... $ 7,381 $ 18,296
======== ========
Supplemental cash flow information:
Interest paid............................................. $ 763 $ 857
Income taxes paid......................................... 0 0
======== ========
</TABLE>
3
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS SHOWN IN THOUSANDS)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
The Seibels Bruce Group, Inc. (the Company) and its wholly owned subsidiaries
and have been prepared, without audit, in conformity with accounting principles
generally accepted in the United States (GAAP) pursuant to the rules and
regulations of the Securities and Exchange Commission. All significant
intercompany balances and transactions have been eliminated in consolidation
and, in the opinion of management, all adjustments necessary for the fair
presentation of the Company's unaudited interim financial position, results of
operations and cash flows have been recorded. 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, 1999
filed with the Securities and Exchange Commission. The results of operations for
the interim period are not necessarily indicative of the results for a full
year. Certain prior period amounts have been reclassified to conform to the
current period presentation.
The preparation of financial statements in conformity with GAAP 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 reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates, although, in the opinion of management, such differences would not be
significant.
NOTE 2. REINSURANCE ARRANGEMENTS
Reinsurance contracts do not relieve the Company of its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvency.
Effective December 31, 1999, the Company reinsured 75% of its nonstandard
automobile business through a quota share reinsurance agreement. Effective
July 1, 2000, this agreement was canceled for South Carolina Insurance Company
in light of the decisions to discontinue the managing general agency operations
of Graward General Companies, Inc. (Graward) (see Note 6) and withdraw from the
voluntary nonstandard automobile insurance market in South Carolina (see Note
8). The Company's North Carolina subsidiary, Universal Insurance Company, is
still under a 75% quota share reinsurance agreement. From the end of the first
quarter of 1999 through March 31, 2000, 90% of the Company's commercial lines
business was reinsured through another quota share reinsurance agreement.
Effective April 1, 2000 the reinsured percentage was reduced to 70% in an effort
to capitalize on the favorable operating results of business written under that
agreement. Under quota share reinsurance arrangements the Company cedes a
portion of its premiums to the reinsurers, net of a ceding commission, and
collects the same portion of claims payments from the reinsurers. The reinsurers
for the automobile business were Scandinavian Re and NAC Re and the reinsurer
for the commercial lines business is Erie Insurance Exchange. The Company is
also party to a catastrophe cover reinsurance arrangement with a pool of
reinsurers to reduce its exposure to large individual risks and large
catastrophic occurrences.
4
<PAGE>
NOTE 3. PROPERTY AND CASUALTY UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE
The liability for property and casualty unpaid losses and loss adjustment
expenses includes:
- An accumulation of case estimates for losses reported prior to the close
of the accounting period.
- Estimates of incurred-but-not-reported losses based upon past experience
and current circumstances.
- Estimates of allocated, as well as unallocated, loss adjustment expense
liabilities determined by applying percentage factors to the unpaid loss
reserves, with such factors determined on a by-line basis based on past
results of paid loss expenses to paid losses.
- The deduction of estimated amounts recoverable from salvage, subrogation,
and second injury funds.
- Estimated losses for reinsurance ceded and assumed.
Management, in conjunction with the Company's consulting actuaries, performs
periodic reviews of the above components of the Company's loss reserves to
evaluate the adequacy of such reserves. Management believes the reserves are
sufficient to prevent prior years' losses from adversely affecting future
periods; however, establishing reserves is an estimation process and adverse
developments in future years may occur and would be recorded in the year so
determined.
NOTE 4. DEBT
In connection with its acquisition of Graward in Nashville, Tennessee, the
Company issued subordinated convertible notes payable (the Notes) in the 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. However, 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 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 expense on the Notes has been
neither accrued, nor paid, due to the current purchase price arbitration (see
Part II--Item 1).
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,
2000, December 31, 1999 and September 30, 1999 was 9.38%, 8.94% and 8.19%,
respectively. The Facility is secured by a lien on the assets of the Company. As
of September 30, 2000 and December 31, 1999, the outstanding balance under the
Facility was $11,066 and $12,286, 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, 2000, and due primarily to the charges
incurred as a result of the restructuring plan (see Note 6), the Company was not
in compliance with the debt to total capitalization ratio and the minimum
statutory surplus requirement for the Company's primary insurance subsidiary,
South Carolina Insurance Company. However, these instances of noncompliance have
been waived by the lending institution. The Company was in compliance with all
other covenants at September 30, 2000.
5
<PAGE>
NOTE 5. EARNINGS PER SHARE
In accordance with SFAS 128, "Earnings Per Share", the Company measures
earnings per share at two levels: basic earnings per share and diluted earnings
per share. Basic earnings per share is calculated by dividing (loss) income
available to common stockholders by the weighted average number of shares
outstanding during the reporting period. Diluted earnings per share is
calculated by dividing (loss) income available to common stockholders by the
weighted average number of shares outstanding during the reporting period, as
adjusted for the dilutive effect of stock options, warrants and convertible
preferred stock. For the nine and three months ended September 30, 2000, the
Company's outstanding stock options, warrants and convertible preferred stock
had an antidilutive effect on earnings per share.
NOTE 6. RESTRUCTURING CHARGES
The Company experienced significant net losses in 1999 and the first six
months of 2000 primarily due to the Company's automobile business segment. More
specifically, a substantial component of that segment's operating losses stemmed
from the operations of Graward. Upon completion of the Graward acquisition in
April 1998, the Company immediately began ramping up operations in preparation
for significant premium growth. By December 31, 1998, the Company had achieved
direct and assumed premium levels in excess of $191,400, a 68.2% increase over
1997, but at a consolidated net operating loss of $2,894. The losses continued
to mount throughout 1999. Beginning in the third quarter of 1999, Graward
implemented significant cost control measures in an attempt to make the
operation profitable. Concurrent with these measures, Graward began a critical
profitability review of its book of business that resulted in a reduction of
authorized independent agents and more stringent underwriting guidelines.
Despite these measures, and additional measures implemented in the first quarter
of 2000, Graward remained unprofitable. Since its acquisition in April 1998 and
continuing through May 31, 2000, Graward's operating losses had amounted to over
$6,935. During the second quarter of 2000, it was concluded that all available
actions and cost control measures that could reasonably be taken had been taken
and that Graward's operations would not generate profits.
In June 2000, Graward's Board of Directors approved and the Company
announced a restructuring plan (the Plan) centering on the discontinuation of
its Graward operations. The Plan will be substantially completed over the next
twelve to fifteen months and included approximately $16,421 in special charges
related primarily to the impairment of long-lived assets associated with the
operation, employee severance, and the cancellation of contractual commitments.
Other nonrecurring charges of the Plan included a $1,800 additional reserve
against Graward's accounts receivable from insureds. Although every effort will
be made to collect outstanding receivables, in the opinion of management, the
discontinuation of the Graward operation significantly and adversely impacts the
effectiveness of Graward's collections efforts. During the quarter ended
September 30, 2000 the estimated additional reserve requirement was reduced to
$1,200 based upon actual collections experience during the quarter and revised
estimation assumptions. The cash requirements of the restructuring plan are
estimated to be approximately $684 and will be substantially expended by the end
of 2000.
Restructuring costs include all costs directly related to the Plan.
EITF No. 94-3 provides specific requirements as to the appropriate recognition
of costs associated with employee termination benefits and other exit costs.
Employee termination costs are recognized when benefit arrangements are
communicated to affected employees in sufficient detail to enable the employees
to determine the amount of benefits to be received upon termination. Other exit
costs resulting from an exit plan that are not associated with or that do not
benefit activities that will be continued are recognized at the date of
commitment to an exit plan subject to certain conditions. For a cost to be
accrued, it must not be associated with or incurred to generate revenues after
the commitment date, and it must be either: i) incremental to other costs
incurred prior to the commitment date, or ii) represent amounts under a
contractual obligation that existed prior to the commitment date that will
either continue after the exit plan is completed with no economic benefit or
which will result in a penalty to cancel the obligation. Other costs directly
related to the discontinuation of
6
<PAGE>
Graward's operations that are not eligible for recognition at the commitment
date, such as relocation costs and estimated operating costs to be incurred
during the runoff period, are expensed as incurred.
Of the $16,421 total restructuring charge, approximately $15,678 relates to
the impairment of long-lived assets, including $14,915 of goodwill, $580 of
fixed assets associated with the Graward operation and $183 of deferred
financing costs. The Company evaluates the recoverability of long-lived assets
in accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Accordingly, the Company evaluates the
recoverability of long-lived assets not held for sale by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. The Company evaluates the recoverability of long-lived
assets held for sale by comparing the asset's carrying amount with its estimated
fair value less costs to sell.
A summary of the accrued restructuring charges is as follows:
<TABLE>
<CAPTION>
IMPAIRMENT SEVERANCE CANCELLATION
OF LONG- AND OF CONTRACTUAL ALL
LIVED ASSETS BENEFITS COMMITMENTS OTHER TOTAL
------------ --------- -------------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial charge recorded.................... $15,678 $304 $304 $135 $16,421
Utilized by June 30, 2000.................. (15,678) -- -- (59) (15,737)
------- ---- ---- ---- -------
Balance, June 30, 2000..................... -- 304 304 76 684
Utilized during third quarter 2000......... -- (160) (63) (66) (289)
------- ---- ---- ---- -------
Balance, September 30, 2000................ $ -- $144 $241 $ 10 $ 395
======= ==== ==== ==== =======
</TABLE>
All charges associated with the Plan were determined based on the formal
plans of management, and approved by the Board of Directors, using the best
information available. The amounts ultimately incurred could change as the
operations are run off over the next twelve to fifteen months.
NOTE 7. ACQUISITIONS
Effective January 21, 2000, three of the Company's insurance subsidiaries
collectively acquired a 30.625% equity ownership interest in QualSure Holding
Corporation (QualSure) for $4,900. QualSure is the holding company parent of
QualSure Insurance Corporation, a homeowners take-out insurance company
domiciled in the state of Florida. In connection with this investment, one of
the Company's subsidiaries, Insurance Network Services, Inc. entered into a
Claims Administration Services Agreement with QualSure Insurance Corporation to
adjudicate all of its claims for a fee-based upon subject earned premium. The
Company believes this is an investment that capitalizes upon its considerable
experience in claims adjudication and provides a source of additional fee-based
income to supplement its risk bearing operations.
NOTE 8. FINANCIAL REPORTING BY BUSINESS SEGMENTS
Reportable business segments are determined based on management's internal
reporting approach, which is based on product line and complementary coverages.
The reportable business segments are comprised of Automobile, Flood, Commercial,
Adjusting Services and All Other. The Automobile segment includes all personal
lines components of retained risk nonstandard automobile operations as well as
the fee-based North Carolina Reinsurance Facility (the NCRF), South Carolina
Reinsurance Facility (the SCRF) and South Carolina Associated Automobile
Insurers Plan (the SCAAIP) operations. The Flood segment contains all flood
operations including the National Flood Insurance Program, flood zone
determinations, excess flood and flood compliance tracking, as well as the
runoff of the complementary homeowners product line. The Commercial segment
includes all commercial operations, as well as the commercial automobile
activity for the NCRF and SCRF. The Adjusting Services segment contains the
catastrophe insurance claims handling for hurricanes, tornadoes, hailstorms,
earthquakes and floods;
7
<PAGE>
catastrophe claims supervision; and ordinary claims adjusting for both the
Company and external insurance companies. The All Other segment includes the
runoff operations of the Company. The results of the reportable segments are
included in the following table:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Automobile........................................... $13,193 $23,060 $ 29,532 $60,097
Flood................................................ 4,424 4,830 11,592 11,687
Commercial........................................... 1,289 728 2,763 4,081
Adjusting Services................................... 1,900 1,061 8,719 1,539
All Other............................................ 144 427 677 1,463
------- ------- -------- -------
Total revenue...................................... $20,950 $30,106 $ 53,283 $78,867
======= ======= ======== =======
Expenses:
Automobile(a)........................................ $14,014 $25,188 $ 54,285 $65,455
Flood................................................ 4,152 3,545 11,557 10,586
Commercial........................................... 1,001 684 2,823 2,669
Adjusting Services................................... 1,135 681 7,120 1,212
All Other............................................ 420 5 1,768 (154)
------- ------- -------- -------
Total expenses..................................... $20,722 $30,103 $ 77,553 $79,768
======= ======= ======== =======
Net income (loss):
Automobile(a)........................................ $ (821) $(2,128) $(24,753) $(5,358)
Flood................................................ 272 1,285 35 1,101
Commercial........................................... 288 44 (60) 1,412
Adjusting Services................................... 765 380 1,599 327
All Other............................................ (276) 422 (1,091) 1,617
------- ------- -------- -------
Total net income (loss)............................ $ 228 $ 3 $(24,270) $ (901)
======= ======= ======== =======
</TABLE>
------------------------
(a) Includes a restructuring charge of $16,421 recorded in the quarter ended
June 30, 2000 (see Note 6).
The Company's primary operations have historically centered around its
Automobile segment, which includes its retained risk nonstandard automobile
operations in North and South Carolina as well as its fee-based NCRF, SCRF and
SCAAIP operations. In July 2000, the Company announced it is withdrawing from
the voluntary nonstandard automobile insurance market in South Carolina due to
that operation's higher than acceptable loss ratios and continued strains on the
Company's consolidated earnings and resources. The Company continues to operate
the other components of its Automobile segment.
NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. This statement could increase volatility in
earnings and other comprehensive income. The effective date of this statement
was amended by SFAS Nos. 137 and 138 and, as amended, is effective for all
fiscal quarters beginning after June 15, 2000. The Company will adopt SFAS
No. 133 effective January 1, 2001. SFAS No. 133 is not expected to have a
material impact on the Company's financial position or results of operations.
8
<PAGE>
10. SUBSEQUENT EVENTS
On November 13, 2000, the Nasdaq Stock Market notified the Company that its
common stock was delisted from the Nasdaq National Market effective with the
close of business on November 13, 2000. The delisting was the result of the
Company's failure to meet the minimum bid price, market value of public float
and net tangible assets requirements as set forth in the Nasdaq Marketplace
Rules. Effective November 14, 2000, the Company was listed on the NASD
Over-the-Counter Bulletin Board under the symbol "SBIG."
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table indicates the more significant financial comparisons
with the applicable prior periods (dollars shown in thousands, except per share
amounts):
FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
<S> <C> <C>
Total cash and investments.................................. $ 44,123 $ 59,614
Total assets................................................ 182,215 254,803
Total liabilities........................................... 176,978 225,546
Special stock............................................... 2,700 2,700
Shareholders' equity........................................ 2,537 26,557
Per share................................................. 0.32 3.39
</TABLE>
OVERVIEW
(AMOUNTS SHOWN IN THOUSANDS)
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Commission and service income.......................... $ 8,818 $11,595 $ 28,085 $33,354
Premiums earned........................................ 9,956 16,003 18,719 38,762
Net investment and other interest income............... 925 1,053 2,843 3,112
Realized gains (losses), net........................... -- 189 (227) 200
Policy fees and other income........................... 1,251 1,266 3,863 3,439
------- ------- -------- -------
Total revenue........................................ $20,950 $30,106 $ 53,283 $78,867
======= ======= ======== =======
Income (loss) from operations, before provision for
income taxes......................................... $ 228 $ 3 $(24,270) $ (901)
Provision for income taxes............................. -- -- -- --
------- ------- -------- -------
Net income (loss)...................................... $ 228 $ 3 $(24,270) $ (901)
======= ======= ======== =======
Weighted average shares outstanding.................... 7,832 7,775 7,832 7,774
======= ======= ======== =======
</TABLE>
RECENT DEVELOPMENTS
The Company historically has been a provider of automobile, commercial lines
and other property and casualty insurance products. In addition, the Company
receives fee-based income through the National Flood Insurance Program, various
state-sponsored insurance plans and claims administration and other insurance
services.
In the second and third quarters of 2000, the Company undertook a review of
all aspects of the Company's business. As a result of this review, the Company
announced a discontinuation of the Graward General Companies, Inc. voluntary
nonstandard automobile insurance business and the Company's withdrawal from the
South Carolina voluntary nonstandard automobile insurance business.
The Company's current strategy is to focus on generating fee-based, rather
than risk-bearing, revenue opportunities. Consistent with this strategy, the
Company began offering managing general agency and servicing carrier
opportunities to insurance companies in the South Carolina nonstandard personal
automobile market. The Company expects to offer these services to insurance
providers in other property and casualty insurance lines.
9
<PAGE>
In furtherance of its strategy to focus on fee-based business opportunities,
the Company is also examining possible dispositions of certain non-core assets
and business lines. No agreements have been reached with respect to any
dispositions, and no assurance can be given as to when or if any dispositions
may occur.
RESULTS OF OPERATIONS
(DOLLARS SHOWN IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
COMMISSION AND SERVICE INCOME
Commission and service income decreased $5,269, or 15.8%, to $28,085 for the
nine months ended September 30, 2000 from $33,354 for the nine months ended
September 30, 1999. The automobile and commercial reporting segments accounted
for $10,589 and $400 of the overall net decrease, respectively, posting
commission and service income of $9,017 and $517, respectively, for the nine
months ended September 30, 2000, versus $19,606 and $917, respectively, for the
same period of 1999. These decreases are substantially the result of a decrease
in the number of policies in the SCRF, a residual market for automobile
insurance in the state of South Carolina. Effective March 1, 1999, no new
policies could be ceded to the SCRF, and no voluntary renewals could be ceded to
the SCRF after September 1999. Designated agents are able to renew in the SCRF
through 2001. The new SCAAIP provides insurance to drivers unable to obtain
coverage in the voluntary market. Although the Company has an arrangement with
the SCAAIP to handle 50% of the policies written, there has been very little
activity to date.
Offsetting these decreases in commission and service income was the $5,849
increase posted by the adjusting services reporting segment, which was
effectively begun late in the second quarter of 1999 for the purpose of
adjusting the losses of the Company's insurance subsidiaries. Over the last
fifteen months, the adjusting services reporting segment has focussed on
attracting and retaining external customers and, as a result, now boasts more
than 30 unaffiliated customers. In addition, concurrent with the Company's
January 21, 2000 investment in QualSure, the Company's adjusting services
reporting segment entered into a Claims Administration Services Agreement with
QualSure Insurance Corporation to adjudicate all of its claims for a fee-based
upon subject earned premium.
The remaining $129 decrease in commission and service income came from the
flood reporting segment.
PREMIUMS EARNED
Net premiums earned decreased $20,043, or 51.7%, to $18,719 for the nine
months ended September 30, 2000 from $38,762 for the nine months ended
September 30, 1999. The automobile reporting segment accounted for $18,814 of
the overall decrease, posting premiums earned of $16,743 for the nine months
ended September 30, 2000 versus $35,557 for the same period of 1999. The primary
reason for the decrease centers on the Company's 75% quota share reinsurance
agreement that was effective December 31, 1999. Under the agreement, 75% of all
automobile premiums written between January 1, 2000 and June 30, 2000 were ceded
to the reinsurers. No such reinsurance arrangement was in effect for the nine
months ended September 30, 1999. Secondarily, in the third quarter of 1999
continuing through the first quarter of 2000, the Company performed a critical
profitability review of its automobile book of business that resulted in a
reduction of authorized independent agents and more stringent underwriting
guidelines. These actions had a negative impact on premiums written for the nine
months ended September 30, 2000. Furthermore, other results of the
aforementioned profitability reviews were the discontinuation of the Graward
operations and the withdrawal from the retained risk nonstandard automobile
market in South Carolina. Each of these actions had a negative impact on
premiums written for the nine months ended September 30, 2000. Finally, during
the quarter ended September 30, 2000, premium refunds totaling $344 were issued
by the Company as required under a settlement between the North Carolina
Department of Insurance (the NCDOI) and the North Carolina Rate Bureau (the
Bureau). On certain policies issued or renewed during the period January 1, 1995
through January 14,
10
<PAGE>
1997, the Bureau established insurance rates higher than rates approved by the
NCDOI. The refunds represent the difference between the rates approved by the
NCDOI and the those originally charged as allowed by the Bureau.
The commercial reporting segment accounted for $888 of the overall decrease,
posting premiums earned of $2,141 for the nine months ended September 30, 2000
versus $3,029 for the same period of 1999. Effective March 31, 1999, the Company
entered into a 90% quota share reinsurance agreement that remained in place
through March 31, 2000. Effective April 1, 2000, the 90% quota share reinsurance
agreement was amended to become a 70% quota share reinsurance agreement. The
amendment was made to capitalize upon the favorable underwriting results of the
commercial book of business. The existence of a quota share reinsurance
agreement for all nine months of 2000 versus only six months of 1999 accounts
for a portion of the decrease in premiums earned by the commercial reporting
segment. Furthermore, in accordance with a mandate from the NCDOI, the Company
ceased writing new commercial business in the state of North Carolina at the
beginning of the third quarter of 2000. The Company may, however, continue
renewing existing commercial business at its discretion.
The remaining $341 decrease in premiums earned came from the Company's
runoff operations.
NET INVESTMENT AND OTHER INTEREST INCOME
Net investment and other interest income decreased $269, or 8.6%, to $2,843
for the nine months ended September 30, 2000 from $3,112 for the nine months
ended September 30, 1999. Total cash and investments decreased $15,491 from
December 31, 1999 to September 30, 2000, primarily to fund the acquisition of
QualSure, to settle liabilities created through the 75% quota share reinsurance
agreement for the Company's automobile reporting segment, and to fund the
Company's operations. However, the most significant piece of the overall
decrease in total cash and investments came from the lower yielding cash and
short-term investments rather than from the higher yielding bond portfolio.
Therefore, the impact on net investment and other interest income from the sharp
decrease in total cash and investments was somewhat insulated. Partially
offsetting that decrease in net investment and other interest income were higher
yields on the Company's bond portfolio due to interest rate increases over the
last twelve to fifteen months and the implementation of a monthly reimbursement
policy with the SCRF which substantially improved the Company's cash flows.
REALIZED GAINS (LOSSES), NET
Net realized losses amounted to $227 for the nine months ended
September 30, 2000 versus a net realized gain of $200 for the same period in
1999. Sales of fully depreciated property and equipment during 2000 resulted in
realized gains of $9, while realized losses on the sale of investments amounted
to $236 and resulted from the liquidation of a portion of the Company's
investment portfolio to fund operations and investing activities. The gains
realized in 1999 are substantially due to the sale of one of the Company's idle
facilities and its related parking lot and the sale of certain other property
and equipment.
POLICY FEES AND OTHER INCOME
Policy fees and other income increased $424, or 12.3%, to $3,863 for the
nine months ended September 30, 2000 from $3,439 for the nine months ended
September 30, 1999. A significant source of policy fees for the Company is
derived from its Graward operation and is directly correlated with its premium
writings. In the third quarter of 1999, the Company implemented significant cost
control measures at Graward in an attempt to make the operation profitable.
Concurrent with these measures, the Company began a critical profitability
review of Graward's book of business that resulted in a reduction of authorized
independent agents and more stringent underwriting guidelines. Additional
underwriting measures were implemented in the first quarter of 2000. Finally, in
June 2000 it was announced that the Graward operation would be discontinued. As
Graward's written premium fell during the nine months ended September 30, 2000
as compared to the same period in 1999, policy fees and other income followed
11
<PAGE>
suit. Graward's policy fees and other income was $1,272 for the nine months
ended September 30, 2000 versus $2,322 for the same period in 1999, a $1,050
decrease.
More than offsetting this decrease were the policy fees and other income
generated by a division of the adjusting services reporting segment. This
division was formed in the third quarter of 1999 and has experienced rapid
growth with a customer base containing both affiliated and unaffiliated
companies. Policy fees and other income generated by this unit amounted to
$1,641 for the nine months ended September 30, 2000, an increase of $1,294 over
the $347 generated for the same period of 1999.
Also contributing to the overall increase in policy fees and other income is
the Company's $38 increase in equity in earnings of its unconsolidated
subsidiaries, Sunshine State Holding Corporation and QualSure from $77 for the
nine months ended September 30, 1999 to $115 for the nine months ended
September 30, 2000.
The remaining increase in policy fees and other income of $142 came from all
other operations and includes recovery of approximately $49 of unclaimed
property from various states.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Losses and loss adjustment expenses decreased $10,498, or 35.7%, to $18,945
for the nine months ended September 30, 2000 from $29,443 for the nine months
ended September 30, 1999. The automobile reporting segment accounted for $11,816
of the overall decrease, posting incurred losses and loss adjustment expenses of
$17,879 for the nine months ended September 30, 2000 versus $29,695 for the same
period of 1999. The primary reason for the decrease centers on the Company's 75%
quota share reinsurance agreement that was effective December 31, 1999. Under
the agreement, 75% of losses incurred between January 1, 2000 and June 30, 2000
were ceded to the reinsurers. No such reinsurance arrangement was in effect for
the nine months ended September 30, 1999. Further driving the decrease in losses
and loss adjustment expenses was the discontinuation of Graward's operations and
the withdrawal from the retained risk nonstandard automobile market in South
Carolina (see prior discussion). Partially offsetting the overall decrease in
losses and loss adjustment expenses of the automobile reporting segment was the
$1,261 increase relating to the Company's runoff operations due to adverse loss
development and general reserve strengthening. The remaining increase of $57
came from all other operations.
POLICY ACQUISITION COSTS
Policy acquisition costs decreased $6,949, or 25.7%, to $20,067 for the nine
months ended September 30, 2000 from $27,016 for the nine months ended
September 30, 1999. Fluctuations in policy acquisition costs are directly
correlated to fluctuations in direct written premium. Direct written premium for
the nine months ended September 30, 2000 amounted to $100,333, a $34,749, or
25.7%, decrease from the $135,082 written during the same period in 1999. See
PREMIUMS EARNED for discussion concerning the decrease in premium volume for the
nine months ended September 30, 2000 versus the same period of 1999.
INTEREST EXPENSE
Interest expense was $1,144 and $925 for the nine months ended
September 30, 2000 and 1999, respectively. The majority of the increase is due
to the $182 of interest paid with the North Carolina premium refunds as required
under the settlement between the NCDOI and the Bureau (see prior discussion).
The remainder of the increase is due to higher average interest rates on the
Company's debt due to the series of market interest rate increases over the past
twelve to fifteen months. The Company's Facility bears interest at a
pre-determined spread over LIBOR or the prime interest rate of the lending
institution, at the Company's discretion. Partially offsetting the increased
interest cost, was interest saved by paying down approximately $1,220 of the
outstanding debt during the nine months ended September 30, 2000.
12
<PAGE>
OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses decreased $1,408, or 6.3%, to $20,976 for
the nine months ended September 30, 2000 from $22,384 for the nine months ended
September 30, 1999. The largest causes of the decrease are a wide array of
expense reductions directly associated with the cost savings initiatives begun
in the third quarter of 1999 and continued through the third quarter of 2000,
the decision to discontinue the Graward operations and the decision to withdraw
from the retained risk nonstandard automobile market in South Carolina. Expense
reductions from reductions in force associated with these initiatives and
decisions amounted to over $1,423 for the nine months ended September 30, 2000
as compared to the same period of 1999. The Company also experienced significant
general expense reductions associated with the greatly reduced business volume
in 2000 as compared to 1999, including printing and travel cost reductions of
over $520. Amortization expense of the Company's goodwill decreased $117 for the
nine months ended September 30, 2000 as compared to the same period of 1999 due
to the impairment of the goodwill associated with the Graward acquisition taken
in the second quarter of 2000. Offsetting these expense reductions were general
expense increases of $1,244 associated with the division of the adjusting
services reporting segment that was formed in the third quarter of 1999. As
previously noted, this division has experienced rapid growth since its inception
and has developed a customer base containing both affiliated and unaffiliated
companies.
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
COMMISSION AND SERVICE INCOME
Commission and service income decreased $2,777, or 23.9%, to $8,818 for the
three months ended September 30, 2000 from $11,595 for the three months ended
September 30, 1999. The automobile reporting segment accounted for $2,973 of the
overall net decrease, posting commission and service income of $2,908 for the
three months ended September 30, 2000, versus $5,881 for the same period of
1999. This decrease is substantially the result of a decrease in the number of
policies in the SCRF, a residual market for automobile insurance in the state of
South Carolina (see prior discussion).
The flood reporting segment contributed another $401 of the overall net
decrease in commission and service income, posting $4,409 for the three months
ended September 30, 2000 versus $4,810 for the same period of 1999. This
decrease is directly attributable to the lower revenues generated under the
Company's contract with the National Flood Insurance Program due to the
relatively quiet hurricane season experienced in 2000 as compared to that of
1999.
Offsetting the automobile and flood reporting segments' decreases in
commission and service income was the $633 increase posted by the adjusting
services reporting segment (see prior discussion).
The remaining $36 decrease in commission and service income came from all
other operations.
PREMIUMS EARNED
Net premiums earned decreased $6,047, or 37.8%, to $9,956 for the three
months ended September 30, 2000 from $16,003 for the nine months ended
September 30, 1999. The automobile reporting segment accounted for $6,494 of the
overall decrease, posting premiums earned of $9,080 for the three months ended
September 30, 2000 versus $15,574 for the same period of 1999. The primary
reason for the decrease centers on the Company's 75% quota share reinsurance
agreement that was effective December 31, 1999 (see prior discussion).
Furthermore, the decisions to discontinue the Graward operations (announced in
June 2000) and to withdraw from the retained risk nonstandard automobile market
in South Carolina (announced in July 2000) had a significant, but expected,
negative impact on premiums written and earned during the three months ended
September 30, 2000. Finally, during the quarter ended September 30, 2000,
premium refunds totaling $344 were issued by the Company as required under a
settlement between the NCDOI and the Bureau. On certain policies issued or
renewed during the period January 1, 1995 through January 14, 1997, the Bureau
established insurance rates higher
13
<PAGE>
than rates approved by the NCDOI. The refunds represent the difference between
the rates approved by the NCDOI and the those originally charged as allowed by
the Bureau.
Offsetting the automobile reporting segment's decrease in premiums earned
was the $686 increase posted by the commercial reporting segment. Effective
March 31, 1999, the Company entered into a 90% quota share reinsurance agreement
that remained in place through March 31, 2000. Effective April 1, 2000, the 90%
quota share reinsurance agreement was amended to become a 70% quota share
reinsurance agreement to capitalize upon the favorable underwriting results of
the commercial book of business. Although the NCDOI mandated that the Company
cease writing new commercial business in the state of North Carolina beginning
in the third quarter of 2000, the impact of this action on earned premiums will
not fully materialize until the fourth quarter of 2000 and the first quarter of
2001 when the lower written premium volume begins to earn out.
The remaining $239 decrease in premiums earned came from the Company's
runoff operations.
NET INVESTMENT AND OTHER INTEREST INCOME
Net investment and other interest income decreased $128, or 12.2%, to $925
for the three months ended September 30, 2000 from $1,053 for the three months
ended September 30, 1999. This decrease is directly related to decreases in the
Company's cash and short-term investments and bond portfolio. The average cash
and short-term investments and bond portfolio for the three months ended
September 30, 2000 and 1999 was $17,918 and $27,400, respectively. The most
notable causes of the decrease are the acquisition of QualSure, the settling of
liabilities created through the 75% quota share reinsurance agreement for the
Company's automobile reporting segment, and the funding of the Company's
operations. Partially offsetting the overall decrease in net investment and
other interest income were higher yields on the Company's bond portfolio due to
interest rate increases over the last twelve to fifteen months and the
implementation of a monthly reimbursement policy with the SCRF which
substantially improved the Company's cash flows.
REALIZED GAINS (LOSSES), NET
Net realized gains amounted to $189 for the three months ended
September 30, 1999 versus no realized gains or losses for the same period in
2000. The gains realized for the three months ended September 30, 1999 are
substantially due to the sale of one of the Company's idle facilities and its
related parking lot.
POLICY FEES AND OTHER INCOME
Policy fees and other income decreased $15, or 1.2%, to $1,251 for the three
months ended September 30, 2000 from $1,266 for the three months ended September
30, 1999. Graward's policy fees and other income was $248 for the three months
ended September 30, 2000 versus $697 for the same period in 1999, a $449
decrease (see prior discussion).
Partially offsetting this decrease were the policy fees and other income
generated by a division of the adjusting services reporting segment which was
formed in the third quarter of 1999 (see prior discussion). Policy fees and
other income generated by this unit amounted to $527 for the three months ended
September 30, 2000, an increase of $180 over the $347 generated for the same
period of 1999.
Also partially offsetting Graward's decrease in policy fees and other income
is the Company's $144 of equity in earnings of its unconsolidated subsidiary,
QualSure. The investment in QualSure was made in the first quarter of 2000.
The remaining increase in policy fees and other income of $110 came from all
other operations and includes recovery of approximately $49 of unclaimed
property from various states.
14
<PAGE>
LOSSES AND LOSS ADJUSTMENT EXPENSES
Losses and loss adjustment expenses decreased $4,556, or 35.9%, to $8,133
for the three months ended September 30, 2000 from $12,689 for the three months
ended September 30, 1999. The automobile reporting segment accounted for $4,396
of the overall decrease, posting incurred losses and loss adjustment expenses of
$8,128 for the three months ended September 30, 2000 versus $12,524 for the same
period of 1999. The primary reasons for the decrease center on the Company's 75%
quota share reinsurance agreement that was effective December 31, 1999, the
discontinuation of the Graward operations and the withdrawal from the retained
risk nonstandard automobile market in South Carolina (see prior discussion). The
remaining decrease of $160 came from all other operations.
POLICY ACQUISITION COSTS
Policy acquisition costs decreased $2,541, or 31.0%, to $5,648 for the three
months ended September 30, 2000 from $8,189 for the three months ended September
30, 1999. Fluctuations in policy acquisition costs are directly correlated to
fluctuations in direct written premium. Direct written premium for the three
months ended September 30, 2000 amounted to $28,239, a $12,705, or 31.0%,
decrease from the $40,944 written during the same period in 1999. See PREMIUMS
EARNED for discussion concerning the decrease in premium volume for the three
months ended September 30, 2000 versus that for the same period of 1999.
INTEREST EXPENSE
Interest expense was $504 and $315 for the three months ended September 30,
2000 and 1999, respectively. The majority of the increase is due to the $182 of
interest paid with the North Carolina premium refunds as required under the
settlement between the NCDOI and the Bureau (see prior discussion). The
remainder of the increase is due to higher average interest rates on the
Company's debt due to the series of market interest rate increases over the past
twelve to fifteen months. The Company's Facility bears interest at a
pre-determined spread over LIBOR or the prime interest rate of the lending
institution, at the Company's discretion. Partially offsetting the increased
interest cost, was interest saved by paying down approximately $407 of the
outstanding debt during the three months ended September 30, 2000.
OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses decreased $2,473, or 27.8%, to $6,437 for
the three months ended September 30, 2000 from $8,910 for the three months ended
September 30, 1999. The largest causes of the decrease are a wide array of
expense reductions directly associated with the cost savings initiatives begun
in the third quarter of 1999 and continued through the third quarter of 2000,
the decision to discontinue the Graward operations and the decision to withdraw
from the retained risk nonstandard automobile market in South Carolina. Expense
reductions from reductions in force associated with these initiatives and
decisions amounted to over $1,389 for the three months ended September 30, 2000
as compared to the same period of 1999. The Company also experienced significant
general expense reductions associated with the greatly reduced business volume
in 2000 as compared to 1999, including printing and travel cost savings of over
$255. Further, bad debt expenses decreased $968 for the three months ended
September 30, 2000 as compared to the same period of 1999 due primarily to the
substantially lower written premium volume during 2000 versus 1999 and a
revision of the estimate of the additional reserve required for the Graward
accounts receivable from insureds in light of the discontinuation of Graward's
operations. Offsetting these expense reductions were general expense increases
of $346 associated with the division of the adjusting services reporting segment
that was formed in the third quarter of 1999. As previously noted, this division
has experienced rapid growth since its inception and has developed a customer
base containing both affiliated and unaffiliated companies.
15
<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, payments for 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 through September 30, 2000 totaled
$14,232. Significant uses of cash flows from operating activities include
reductions in the liability for losses and loss adjustment expenses of $23,628
and the liability for unearned premiums of $9,302. Effective December 31, 1999,
the Company entered into a 75% quota share reinsurance agreement for its
nonstandard automobile business. As a result of the transaction, 75% of the
Company's written premium and 75% of its losses incurred between January 1, 2000
and June 30, 2000 are ceded to its reinsurers. Furthermore, the more stringent
underwriting and retention guidelines implemented in the first quarter of 2000,
coupled with the decisions to discontinue the Graward operations and to withdraw
from the retained risk nonstandard automobile market in South Carolina,
resulting in a $34,749 reduction of direct premium writings for the nine months
ended September 30, 2000 over the corresponding period for 1999. Furthermore, as
a result of implementing the 75% quota share reinsurance agreement, a $9,613
liability to the reinsurers was recorded at December 31, 1999 and settled in the
first quarter of 2000. Other significant uses of cash include reductions in
other liabilities and deferred items of $5,754, a substantial portion of which
relates to reductions in municipal and premium tax liabilities. In April 2000,
the Company settled its municipal license tax dispute for $1,525, resulting in a
gain of $902. Further, premium tax liabilities existing at December 31, 1999
were settled in the first and second quarters of 2000. Coupling this with the
aforementioned substantially reduced direct premium writings in 2000 has
resulted in a sharp decrease in premium tax liabilities since December 31, 1999.
Finally, in connection with the settlement between the NCDOI and the Bureau (see
prior discussion), the Company paid a total of $4,469 in premium refunds and
applicable interest. Of this total, $3,943 related to policies ceded to the
NCRF, who reimbursed the Company in the fourth quarter of 2000.
Significant sources of cash flows from operating activities include $20,698
from collections of reinsurance recoverable on losses and loss adjustment
expenses under the Company's quota share reinsurance agreements for its
automobile and commercial insurance programs. Furthermore, the aforementioned
underwriting and retention guidelines implemented in the first quarter of 2000,
and the resulting reduction in direct premium writings, provided a $13,105
reduction in reinsurance premiums prepaid to the Company's reinsurers.
Effective January 21, 2000, three of the Company's insurance subsidiaries
collectively acquired a 30.625% equity ownership interest in QualSure, the
holding company parent of QualSure Insurance Corporation, a homeowners take-out
insurance company domiciled in the state of Florida, for $4,900. The net cash
used in investing activities through September 30, 2000 of $3,764 is
substantially due to the liquidation of a portion of the Company's investment
portfolio to fund the acquisition of QualSure and to provide cash for
operations.
Net cash used in financing activities through September 30, 2000 totaled
$1,345 and related primarily to repayment of debt principal and payment of
dividends on the Company's Special Stock.
16
<PAGE>
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Some of the statements discussed or incorporated by reference in this
quarterly report on Form 10-Q are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements regarding management's current knowledge, expectations, estimates,
beliefs and assumptions. All forward-looking statements included in this
document or incorporated by reference are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements. Results may differ materially because of both
known and unknown risks and uncertainties which the Company faces. Factors which
could cause results to differ materially from our forward-looking statements
include, but are not limited to:
- the ability to secure additional sources of revenue;
- the ability to secure and maintain long-term relationships with customers
and agents;
- the effects of economic conditions and conditions which affect the market
for property and casualty insurance, including, but not limited to,
interest rate fluctuations and flood zone determination services;
- the effects and impact of laws, rules and regulations which apply to
insurance companies;
- geographic concentrations of loss exposure, causing revenues and
profitability to be subject to prevailing regulatory, demographic and
other conditions in the area in which the Company operates;
- the availability of reinsurance and the ability of the Company's
reinsurance arrangements to balance the geographical concentrations of the
Company's risks;
- the impact of competition from new and existing competitors, which
competitors may have superior financial and marketing resources than the
Company;
- the impact of the decisions to exit the Graward and South Carolina
nonstandard automobile operations;
- the ability to successfully implement the restructuring plan and the risk
that current initiatives may not be successful;
- restrictions on the Company's ability to declare and pay dividends;
- the fact that the Company has experienced, and can be expected in the
future to experience, storm and weather-related losses, which may result
in a material adverse effect on the Company's results of operations,
financial condition and cash flows;
- the uncertainty associated with estimating loss reserves, and the adequacy
of such reserves, capital resources and other financial items;
- the outcome of certain litigation and administrative proceedings involving
the Company;
- control of the Company by a principal shareholder, which shareholder has
the ability to exert significant influence over the policies and affairs
of the Company;
- the possibility that the Company will be unable to meet its cash flow
requirements; the Company has suffered losses in recent years and the
Company may continue to experience losses in the future;
- risks the Company faces in diversifying the services it offers and
entering new markets; and
- other risk factors listed from time to time in the Company's Securities
and Exchange Commission filings.
17
<PAGE>
Accordingly, there can be no assurance that the actual results will conform
to the forward-looking statements discussed or incorporated by reference in this
quarterly report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest income on the Company's cash and investments is affected by
fluctuations in the general level of U.S. interest rates. The Company uses
sensitivity analysis to determine its exposure to changes in interest rate
market risk. Currently, and because the majority of the Company's cash and
investments earns a fixed rate of interest while a small portion earns interest
at a variable rate, changes in U.S. interest rates would not have a material
effect on the interest earned on the Company's cash and investments.
The Company's Facility bears interest at a predetermined spread over LIBOR
or the prime interest rate of the lending institution, at the Company's
discretion. The amount of interest expense incurred by the Company fluctuates
proportionately with changes in LIBOR and the general level of U.S. interest
rates.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company was served with a complaint dated November 19, 1997 by Norwest
Financial Resources, Inc. (Norwest) that claimed indemnification from Premium
Service Corporation of Columbia (Premium) and Seibels, Bruce & Company (SB&C)
pursuant to the Asset Purchase Agreement dated as of July 2, 1993 by and among
Premium, SB&C and Norwest. The indemnification claim relates to certain loans of
Premium which later were discovered to be incorrectly recorded as realizable
assets. Management is vigorously defending this complaint and believes the
Company has no liability in the case. This complaint was filed in the state of
South Carolina in the Richland County Court of Common Pleas.
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 purchase price adjustments totaling
approximately $6 million that it believes were known to certain of the sellers,
but not all of which were disclosed to the Company during its due diligence
process. The purchase agreement provides methods for resolving the differences
as to the appropriate adjustments to the purchase price. On December 18, 1998,
the sellers filed a demand for arbitration regarding the parties' dispute over
the purchase price adjustments. Thereafter, the parties reached tentative
agreement regarding some, but not all, of the disputed purchase price
adjustments. The parties then agreed to limit the scope of the arbitration to a
determination of whether an adjustment was required for the way in which the
sellers had previously accounted for loss adjustment expenses (LAE) at Graward.
On February 7, 2000, the arbitration panel ruled that the Company was not
entitled to the requested $1.08 million purchase price adjustment on the LAE
issue, although the panel left open the question of whether a new independent
audit of Graward's 1997 financial statements could result in such an adjustment.
On May 5, 2000, the Company filed a motion to vacate the arbitration award. This
motion was filed in the state of South Carolina in the Richland County Court of
Common Pleas, Fifth Judicial Circuit. Subsequently, the sellers of Graward filed
for a removal of the motion to the United States District Court for the District
of South Carolina, Columbia Division. On August 17, 2000, the Company filed a
demand for arbitration against the sellers based on violations of South Carolina
Blue Sky law, fraud, negligent misrepresentation, breach of contract and
warranties and violation of the South Carolina Unfair Trade Practices Act. The
demand seeks compensatory damages including, but not limited to, the refund of
the entire purchase price of $10.25 million as well as punitive damages, treble
damages and attorneys fees. Management continues to believe that the purchase
price will be adjusted in its favor based on subsequent negotiation and/or
litigation with the sellers of Graward.
On March 1, 2000, the Company received a demand from Generali-U.S. Branch
(Generali) for arbitration of claims arising under the April 1995 Agency
Agreement between Generali and Graward. Generali seeks to recover approximately
$7.64 million plus interest, costs, disbursements, and attorneys' fees. The
Company has not yet responded to this demand.
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.
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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) Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed with the Securities and Exchange Commission on July 5,
2000 to report the discontinuation of the Company's Nashville, Tennessee
nonstandard automobile Managing General Agency operations, Graward
General Companies, Inc.
Form 8-K filed with the Securities and Exchange Commission on
November 14, 2000 to report the delisting of the Company's common stock
from the Nasdaq National Market effective with the close of business on
November 13, 2000.
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<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.
<TABLE>
<S> <C>
THE SEIBELS BRUCE GROUP, INC.
(Registrant)
Date: November 14, 2000 /s/ JOHN E. NATILI
------------------------------------------------
John E. Natili
EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING
OFFICER
Date: November 14, 2000 /s/ BRYAN D. RIVERS, CPA
------------------------------------------------
Bryan D. Rivers, CPA
CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
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