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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR QUARTER ENDED MARCH 31, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-8804
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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 incorporation or (I.R.S. Employer
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: 7,831,398 shares of
Common Stock, $1 par value, at May 5, 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>
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
ASSETS
Investments:
Debt securities, available-for-sale, at market (cost of
$33,213 in 2000 and $32,180 in 1999).................... $ 33,048 $ 31,575
Equity securities, at market (cost of $6,137 in 2000 and
$1,317 in 1999)......................................... 6,137 1,317
Cash and short-term investments........................... 7,437 26,722
-------- --------
Total cash and investments.............................. 46,622 59,614
Accrued investment income................................... 656 835
Premiums and agents' balances receivable, net............... 10,222 8,156
Premium notes receivable.................................... 3,870 3,435
Reinsurance recoverable on paid losses and loss adjustment
expenses.................................................. 14,169 18,528
Reinsurance recoverable on unpaid losses and loss adjustment
expenses.................................................. 62,220 74,017
Property and equipment, net................................. 5,152 5,421
Prepaid reinsurance premiums--ceded business................ 55,809 56,724
Deferred policy acquisition costs........................... 333 1,373
Goodwill.................................................... 19,746 19,876
Other assets................................................ 6,885 6,824
-------- --------
Total assets............................................ $225,684 $254,803
======== ========
LIABILITIES
Losses and loss adjustment expenses:
Reported and estimated losses and claims--retained
business................................................ $ 29,992 $ 34,733
--ceded business...... 57,420 67,904
Adjustment expenses--retained business.................... 5,452 5,100
--ceded business........................ 4,800 6,113
Unearned premiums--retained business........................ 5,988 5,796
--ceded business........................... 55,809 56,724
Balances due other insurance companies...................... 17,274 20,460
Debt........................................................ 14,579 14,986
Other liabilities and deferred items........................ 7,750 13,730
-------- --------
Total liabilities....................................... 199,064 225,546
-------- --------
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
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SHAREHOLDERS' EQUITY
Common stock, $1 par value, authorized 17,500,000 shares in
2000 and 1999, issued and outstanding 7,831,398 shares in
2000 and 1999............................................. 7,831 7,831
Additional paid-in-capital.................................. 61,988 61,988
Accumulated other comprehensive income...................... (287) (605)
Accumulated deficit......................................... (45,612) (42,657)
-------- --------
Total shareholders' equity.............................. 23,920 26,557
-------- --------
Total liabilities and shareholders' equity.............. $225,684 $254,803
======== ========
</TABLE>
2
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(AMOUNTS SHOWN IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Commission and service income............................... $11,353 $12,425
Premiums earned............................................. 4,464 10,530
Net investment income....................................... 753 745
Other interest income....................................... 279 343
Realized losses, net........................................ (103) --
Policy fees and other income................................ 1,444 1,183
------- -------
Total revenue......................................... 18,190 25,226
------- -------
Expenses:
Losses and loss adjustment expenses....................... 5,777 7,549
Policy acquisition costs.................................. 7,825 10,117
Interest expense.......................................... 322 276
Other operating costs & expenses.......................... 7,179 5,308
------- -------
Total expenses........................................ 21,103 23,250
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(Loss) income from operations, before provision for income
taxes..................................................... (2,913) 1,976
Provision for income taxes.................................. -- (61)
------- -------
Net (loss) income........................................... (2,913) 1,915
Other Comprehensive Income:
Change in value of marketable securities, less
reclassification adjustment of $112 and $0 for losses
included in net (loss) income in 2000 and 1999,
respectively.............................................. 318 (479)
------- -------
Comprehensive net (loss) income............................. $(2,595) $ 1,436
======= =======
Basic (loss) earnings per share:
Net (loss) income......................................... $ (0.37) $ 0.25
Weighted average shares outstanding....................... 7,831 7,773
======= =======
Diluted (loss) earnings per share:
Net (loss) income......................................... $ (0.37) $ 0.25
Weighted average shares outstanding....................... 7,831 7,774
======= =======
</TABLE>
3
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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(AMOUNTS SHOWN IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................... $ (2,913) $ 1,915
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Equity in earnings of unconsolidated subsidiary....... (43) (28)
Depreciation and amortization......................... 569 597
Net realized loss on sale of investments.............. 112 --
Net realized gain on sale of property and equipment... (9) --
Net change in assets and liabilities affecting cash
flows from operating activities..................... (10,367) 1,413
-------- -------
Net cash (used in) provided by operating
activities........................................ (12,651) 3,897
-------- -------
Cash flows from investing activities:
Proceeds from investments sold or matured................. 5,563 1,414
Cost of investments acquired.............................. (11,602) (5,569)
Proceeds from property and equipment sold................. 9 --
Purchase of property and equipment........................ (155) (774)
-------- -------
Net cash used in investing activities............... (6,185) (4,929)
-------- -------
Cash flows from financing activities:
Net repayment of debt..................................... (407) (316)
Special stock dividends paid.............................. (42) (42)
-------- -------
Net cash used in financing activities............... (449) (358)
-------- -------
Net decrease in cash and short-term investments............. (19,285) (1,390)
Cash and short-term investments, January 1.................. 26,722 23,141
-------- -------
Cash and short-term investments, March 31................... $ 7,437 $21,751
======== =======
Supplemental cash flow information:
Interest paid............................................. $ 423 $ 334
Income taxes paid......................................... -- 11
======== =======
</TABLE>
4
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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 Company and its wholly owned subsidiaries and have been prepared, without
audit, in conformity with generally accepted accounting principles 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 Company experienced net losses in 1999 and the first quarter of 2000,
primarily due to the Company's automobile business segment (see Note 6), which
includes the Company's Nashville and North Carolina operations, South Carolina
voluntary automobile operations, the South Carolina Reinsurance Facility (the
"SC Facility"), the South Carolina Associated Auto Insurers Plan (the "SCAAIP")
and the North Carolina Reinsurance Facility (the "NC Facility"). High loss and
expense ratios in the Company's Nashville operations, coupled with an
unsuccessful attempt to consolidate it with the Company's North Carolina
operations, caused losses for both operations in 1999. Furthermore, significant
growth and high loss ratios resulted in significant losses in the Company's
South Carolina voluntary automobile business in 1999. These losses continued in
the first quarter of 2000.
The Company is faced with a variety of challenges for the remainder of 2000.
The nonstandard automobile market continues to be intensely competitive, keeping
downward pressure on insurance rates. Further, the SC Facility will continue its
runoff which began in March 1999, and will have an adverse affect on the
Company's commission and service income opportunities. From a regulatory and
compliance standpoint, the Company's primary insurance subsidiary, South
Carolina Insurance Company, is subject to a minimum statutory capital and
surplus requirement placed by the South Carolina Department of Insurance.
Further, the Company's credit facility stipulates that the Company demonstrate
compliance with a number of affirmative and negative covenants on a quarterly
basis (see Note 3). The Company's statutory capital and surplus was in excess of
the required minimum and the Company was either in compliance with, or had
obtained waivers of non-compliance for, all credit facility covenants at
March 31, 2000 and December 31, 1999. However, the challenges facing the Company
for the remainder of 2000 have a significant impact on the Company's ability to
maintain its regulatory and debt compliance position.
To mitigate the losses experienced during 1999 and the first quarter of
2000, the Company has taken several significant actions. The North Carolina
operation has been moved back to Winston-Salem, North Carolina which, in the
opinion of management, has allowed the Company to repair damaged relationships
with agents and their clients who had suffered poor customer service during the
consolidation efforts. After the move back to North Carolina, the Nashville
operation was left with excess capacity and staffing. In the third quarter of
1999, the Company began cutting its payroll and renegotiated its facilities
lease to reduce excess space. Other cost control measures and activities
consolidations were also implemented to further reduce the Nashville operation's
expenses. Concurrent with these measures, the Company began a critical
profitability review of the Nashville operation's book of business that resulted
in a reduction of authorized independent agents and more stringent underwriting
guidelines. These measures were designed
5
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS SHOWN IN THOUSANDS)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION (CONTINUED)
to improve the profitability of a core book of business. Similar and further
actions have been taken in the first quarter of 2000. While the actions were
implemented in 1999 and the first quarter of 2000, the full benefit of the
changes and cost control measures will not be realized until later in 2000.
The losses experienced in the South Carolina operations are derived
primarily from two factors. First, the Company wrote approximately $22 million
in voluntary nonstandard automobile insurance during the ten months since the
runoff of the SC Facility began on March 1, 1999. This rapid growth negatively
affected earnings due to the front-end staffing and facilities growth required
for a growing premium base. Secondly, the South Carolina book of business
experienced higher than average loss ratios caused by the growing book's lower
earned premium base and acceptance of higher insurance risks. In the first
quarter of 2000, the Company began a critical profitability review of the South
Carolina operation's book of business that resulted in a reduction of authorized
independent agents and more stringent underwriting guidelines. These measures
are expected to improve the profitability of this book of business.
Effective January 21, 2000, three of the Company's insurance subsidiaries
collectively acquired a 30.625% equity ownership interest in QualSure Holding
Corporation, 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.
While the Company does face considerable challenges for the remainder of
2000, management is of the opinion that the actions taken to mitigate the losses
experienced in 1999 and the first quarter of 2000 will be effective and that it
will be able to maintain compliance with existing capital and surplus, debt and
operational requirements.
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 reinsurer to
minimize its exposure to significant losses from reinsurer insolvency. The
Company currently reinsures 75% of its nonstandard automobile business and 90%
of its commercial lines business through quota share reinsurance agreements
entered into during the fourth and first quarters of 1999, respectively. This
type of reinsurance is designed to increase the capacity of the Company to write
new and renewal business. The Company cedes a portion of the premiums to the
reinsurers, net of a ceding commission, and collects the same portion of claims
payments from the reinsurers. The reinsurers for the automobile business are
Scandinavian Re and NAC Re and the reinsurer for the commercial lines business
is Eerie 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.
6
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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS SHOWN IN THOUSANDS)
(UNAUDITED)
NOTE 3. DEBT
In connection with acquiring Graward General Companies, Inc. ("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, however, that notice has been given of
such election at any time on or after the 45(th) day prior to the maturity date
of the Notes up to but not including the 15(th) day prior to the maturity date.
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 March 31, 2000 and
December 31, 1999 was 8.69% and 8.94%, respectively. The Facility is secured by
a lien on the assets of the Company. As of March 31, 2000 and December 31, 1999,
the outstanding balance under the Facility was $11,879 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 March 31, 2000, the Company
was in compliance with all covenants.
NOTE 4. 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 per share data is calculated by dividing (loss) income
allocable to common stockholders by the weighted average number of shares
outstanding during the year. Diluted per share data is calculated by dividing
(loss) income allocable to common stockholders by the weighted average number of
shares outstanding during the year, as adjusted for the potentially dilutive
effects of stock options and/or convertible preferred stock, unless common
equivalent shares are antidilutive. For the three months ended March 31, 2000
and 1999, potentially dilutive stock options representing 881 and 508 shares of
the Company's common stock, respectively, were exercisable and outstanding.
However, the options outstanding at March 31, 2000 are excluded from the
dilutive earnings per share calculation as they yield an antidilutive effect.
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
During the first quarter of 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal use." SOP 98-1 requires
capitalization of computer software costs that meet certain criteria. The
statement is effective for fiscal years beginning after December 15, 1998. The
company adopted SOP
7
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS SHOWN IN THOUSANDS)
(UNAUDITED)
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
98-1 effective January 1, 1999. SOP 98-1 did not have a material impact on the
Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This 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 No. 137 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.
NOTE 6. FINANCIAL REPORTING BY BUSINESS SEGMENTS
Reportable business segments were 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 NC Facility, SC Facility and 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
complementary homeowners product line. The Commercial segment includes all
commercial operations, as well as the commercial automobile activity for the NC
Facility and the SC Facility. The Adjusting Services segment contains the
catastrophe insurance claims handling for hurricanes, tornadoes, hailstorms,
earthquakes and floods; catastrophe claims supervision; and ordinary claims
adjusting for both the Company and external insurance companies. The All Other
segment includes
8
<PAGE>
THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS SHOWN IN THOUSANDS)
(UNAUDITED)
NOTE 6. FINANCIAL REPORTING BY BUSINESS SEGMENTS (CONTINUED)
the runoff operations of the Company. The results of the reportable segments are
included in the following table:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
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2000 1999
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<S> <C> <C>
Revenues:
Automobile.............................................. $10,834 $17,712
Flood................................................... 3,069 3,121
Commercial.............................................. 677 2,534
Adjusting Services...................................... 3,262 333
All Other............................................... 348 1,526
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Total revenue....................................... $18,190 $25,226
======= =======
Depreciation and amortization:
Automobile.............................................. $ 381 $ 438
Flood................................................... 67 58
Commercial.............................................. 43 48
Adjusting Services...................................... 40 2
All Other............................................... 38 51
------- -------
Total depreciation and amortization................. $ 569 $ 597
======= =======
Net (loss) income:
Automobile.............................................. $(2,395) $ 143
Flood................................................... (123) (178)
Commercial.............................................. (62) 1,248
Adjusting Services...................................... 119 99
All Other............................................... (452) 603
------- -------
Total net (loss) income............................. $(2,913) $ 1,915
======= =======
</TABLE>
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 prior reporting period (amounts shown in thousands, except per share
amounts):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
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<S> <C> <C>
FINANCIAL CONDITION
Total cash and investments............................ $ 46,622 $ 59,614
Total assets.......................................... 225,684 254,803
Total liabilities..................................... 199,064 225,546
Special stock......................................... 2,700 2,700
Shareholders' equity.................................. 23,920 26,557
Shareholders' equity per share........................ 3.05 3.39
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
-------- ----------
<S> <C> <C>
RESULTS OF OPERATIONS
Commission and service income......................... $11,353 $12,425
Premiums earned....................................... 4,464 10,530
Net investment income................................. 753 745
Other interest income................................. 279 343
Realized losses....................................... (103) --
Policy Fees and other income.......................... 1,444 1,183
------- -------
Total revenue....................................... $18,190 $25,226
======= =======
(Loss) income from operations, before provision for
income taxes........................................ $(2,913) $ 1,976
Provision for income taxes............................ -- (61)
------- -------
Net (loss) income..................................... $(2,913) $ 1,915
======= =======
Weighted average shares outstanding................... 7,831 7,773
======= =======
</TABLE>
OVERVIEW
(Amounts shown in thousands)
The Company is a provider of automobile, flood and other property and
casualty insurance products. The Company is committed to providing quality
customer service, building strong agent relationships, developing and
capitalizing on territorial knowledge and fostering the creativity and
innovation of its people.
The Company's primary business unit is its nonstandard automobile operation,
which includes its Nashville, North Carolina and South Carolina voluntary
automobile operations as well as its non-risk bearing activities as a servicing
carrier for the SC Facility, the SCAAIP and the NC Facility. In South Carolina,
the Company is the only insurance provider with a presence in all three
components of the nonstandard automobile market--the SC Facility, the SCAAIP and
the voluntary market.
In addition to the Company's nonstandard automobile operation is its Flood
and Adjusting Services operations, which now extend well beyond simply writing
flood insurance for the NFIP in 46 states. The Company also offers flood zone
determinations, excess flood insurance, flood compliance tracking services and
claims handling, supervision and adjusting services.
10
<PAGE>
Commercial lines insurance further complements the Company's other business
units by enabling its agents to bundle its products for a more complete
insurance portfolio.
The Company seeks to balance fee-based operations with selective risk
underwriting to increase the Company's value for its shareholders, agents and
employees by pursuing maximum growth with limited risk exposure.
RESULTS OF OPERATIONS
(Amounts shown in thousands)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
COMMISSION & SERVICE INCOME
Commission and service income decreased $1,072, or 8.6%, to $11,353 for the
three months ended March 31, 2000 from $12,425 for the three months ended
March 31, 1999. This decrease is substantially attributable to the Automobile
business segment and is a direct result of the SC Facility planned runoff that
began at the end of the first quarter of 1999. Effective March 1, 1999, no new
policies could be ceded to the SC Facility, and no voluntary renewals could be
ceded to the SC Facility after September 1999. Designated agents, of which the
Company is one, are able to renew in the SC Facility through 2001. The new
SCAAIP is intended to replace the SC Facility, providing insurance to drivers
unable to obtain coverage in the voluntary market. Although the Company has a
servicing arrangement with the SCAAIP to service the policies and claims of 50%
of the business, there has not been significant activity to date. The Company
believes that this activity will increase as the SC Facility business continues
to runoff and the nonstandard automobile market in South Carolina begins to
develop outside of the SC Facility.
PREMIUMS EARNED
Net premiums earned decreased $6,066, or 57.6%, to $4,464 for the three
months ended March 31, 2000 from $10,530 for the three months ended March 31,
1999. The Automobile business segment contributed $3,987, or 89.3%, of the 2000
earned premium, a decrease of $3,685, or 48.0%, over the $7,672 earned for the
same period of 1999. The most notable cause of this decrease relates to the 75%
quota share reinsurance agreement the Company effected in the fourth quarter of
1999 in which unearned premiums totaling $13,832 were ceded to the reinsurers.
Also contributing to the decrease, though on a much smaller scale, were the
early effects of the profitability review of the Nashville operation's book of
business that resulted in a reduction of authorized independent agents and more
stringent underwriting guidelines.
The Commercial business segment, contributed $451, or 10.1% of the 2000
earned premium, a decrease of $1,725, or 79.3%, over the $2,176 earned in the
first quarter of 1999. Effective March 31, 1999, the Company entered into a 90%
quota share reinsurance agreement to reinsure its commercial book of business.
Therefore, the operation benefited from a full quarter's worth of earned premium
in the first quarter of 1999 that it did not have for the same period in 2000.
The remaining 0.6% of 2000 earned premium resulted from all other
operations.
NET INVESTMENT AND OTHER INTEREST INCOME
Net investment and other interest income decreased $56 or 5.1%, to $1,032
for the three months ended March 31, 2000 from $1,088 for the three months ended
March 31, 1999 due to the decrease in cash and short term investments.
11
<PAGE>
REALIZED LOSSES
There were no realized gains or losses on investments or property and
equipment for the three months ended March 31, 1999 compared to a net loss of
$103 for the three months ended March 31, 2000. Realized losses on the sale of
investments amounted to $112 and resulted from the liquidation of a small
portion of the Company's investment portfolio to fund its operations and
investing activities. These losses were partially offset by a realized gain on
the sale of property and equipment of $9.
POLICY FEES AND OTHER INCOME
Policy fees and other income increased $261, or 22.1%, to a balance of
$1,444 for the quarter ended March 31, 2000 from a balance of $1,183 for the
corresponding period of 1999. Effective January 21, 2000, three of the Company's
insurance subsidiaries collectively acquired a 30.625% equity ownership interest
in QualSure Holding Corporation, 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, INS 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. Fee
income under this agreement amounted to $503 for the first quarter of 2000.
Partially offsetting this increase in policy fees and other income were the
early effects of the profitability review of the Nashville operation's book of
business that resulted in a reduction of authorized independent agents and more
stringent underwriting guidelines.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Losses and loss adjustment expenses decreased $1,772, or 23.5% to $5,777 for
the three months ended March 31, 2000 from $7,549 for the three months ended
March 31, 1999. The primary cause of the decrease relates to the Company's 75%
quota share reinsurance agreement for its Automobile business segment and its
90% quota share reinsurance agreement for its Commercial business segment.
Neither of these agreements existed during the first quarter of 1999.
POLICY ACQUISITION COSTS
Policy acquisition costs decreased $2,292, or 22.7%, to $7,825 for the first
quarter of 2000 from $10,117 for the first quarter of 1999. The fluctuation of
policy acquisition costs is directly correlated to the fluctuation of direct
written premium. Direct written premiums for the first three months of 2000
amounted to $39,125, a $11,463, or 22.7%, decrease from the $50,588 written
during the same period of 1999. The vast majority of the decrease is
attributable to the Automobile business segment and is a result of a critical
profitability review of the Nashville and South Carolina operations' books of
business that resulted in a reduction of authorized independent agents and more
stringent underwriting guidelines.
INTEREST EXPENSE
Interest expense was $322 and $276 for the three months ended March 31, 2000
and 1999, respectively. The increase is due to the interest rate fluctuation of
the Company's $15 million credit facility. The interest rate in effect at
March 31, 2000 was 8.69% versus 7.75% at March 31, 1999. 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 (see Part II--Item 1).
OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses increased $1,871, or 35.2%, to $7,179 for
the three months ended March 31, 2000 from $5,308 for the three months ended
March 31, 1999. Fiscal year 1999 was a significant period of premium growth for
the Company. The beginnings of the growth correlate with the planned runoff of
the SC Facility, which began in March 1999. The Company spent the balance of
1999 building the
12
<PAGE>
capacity and the staffing to underwrite and service the planned increase in
written premium. Furthermore, the Company moved its North Carolina operations
back to Winston-Salem, North Carolina in the first and second quarters of 1999
after an attempt to consolidate it with the Nashville operations in 1998. As a
result of the growth and the movement of the North Carolina operations back to
Winston-Salem, North Carolina, the Company was left with excess capacity and
staffing large enough to handle a $70 million premium base while the operation
was producing only $24 million in written premiums. In the third quarter of
1999, the Company began cutting its payroll and renegotiated its Nashville,
Tennessee facilities lease to reduce approximately 10,000 square feet of space.
Other cost control measures and activities consolidations were also implemented
to further reduce the Company's expense ratios. A significant portion of the
effects of the 1999 written premium growth and the North Carolina operations'
move back to Winston-Salem, North Carolina had a much more significant impact on
the last three quarters of 1999 than it did on the first quarter of 1999.
Further, while the above expense reduction actions were implemented in 1999, the
full benefit of the changes and cost control measures will not be fully realized
until later in 2000.
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 and adjusting 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 $12,651. Net change in assets
and liabilities affecting cash flows from operating activities used $10,367 of
cash. Net collections of reinsurance recoverable on losses and loss adjusting
expenses provided the Company with $16,156, which was used to reduce the
Company's liabilities for losses and loss adjusting expenses by $16,186. The
bulk of the remaining net usage of cash in operations results from the $9,166
decrease in balances due other insurance companies and other liabilities and
deferred items. The most significant causes of the decrease are the Company's
settlement of liabilities resulting from its 75% automobile quota share
reinsurance agreement effected in the fourth quarter of 1999 and its settlement
of a municipal license tax dispute which resulted in a gain of approximately
$902 recorded in the first quarter of 2000.
Investing activities used cash in the amount of $6,185. The Company made an
investment in QualSure Holding Corporation during the first quarter totaling
$4,900. The remaining use of $1,285 was used during the normal course of
investing. Net cash used in financing activities totaled $449 and related
primarily to repayment of debt principal.
YEAR 2000 COMPLIANCE
(Amounts shown in thousands)
In 1997, the Company initiated a company-wide 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 would 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 was initiated to review all
arrangements with third party vendors, as well as non-information technology
providers, with which the Company does business.
13
<PAGE>
RESULTS OF THE YEAR 2000 COMPLIANCE PROGRAM:
The Company experienced no significant problems or business interruptions
resulting from Year 2000 or leap year issues. In addition, none of the Company's
significant vendors or reinsurers reported any significant problems or business
interruptions resulting from Year 2000 or leap year issues.
COSTS ASSOCIATED WITH THE YEAR 2000 COMPLIANCE PROGRAM:
The Company spent approximately $956 on its Year 2000 compliance remediation
efforts. These costs included approximately $571 in outside consultants,
approximately $150 in internal resources, approximately $135 for its AS/400 and
approximately $100 related to a new phone switch for the Company's
Winston-Salem, North Carolina location.
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 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;
- 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;
14
<PAGE>
- 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.
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
The Company has no material investments in market risk sensitive
instruments.
The Company has variable-rate debt based upon the LIBOR or the prime
interest rate, as described previously in Note 3 in Item I.
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 ("SBC")
pursuant to the Asset Purchase Agreement dated as of July 2, 1993 by and among
Premium, SBC 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.
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. This
complaint was filed in the state of South Carolina in the Richland County Court
of Common Pleas, Fifth Judicial Circuit. On April 6, 2000, a settlement was
reached whereby Catawba paid the Municipal Association of South Carolina
$1.53 million to resolve the dispute.
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 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. 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.
15
<PAGE>
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.
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 three months ended
March 31, 2000.
16
<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: May 15, 2000 /s/ R. THOMAS SAVAGE, JR.
------------------------------------------------
R. Thomas Savage, Jr.
CHIEF FINANCIAL OFFICER
Date: May 15, 2000 /s/ MATTHEW P. MCCLURE
------------------------------------------------
Matthew P. McClure
VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE
SECRETARY
Date: May 15, 2000 /s/ BRYAN D. RIVERS
------------------------------------------------
Bryan D. Rivers
CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 33,048
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 6,137
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 39,185
<CASH> 7,437
<RECOVER-REINSURE> 14,169
<DEFERRED-ACQUISITION> 333
<TOTAL-ASSETS> 225,684
<POLICY-LOSSES> 97,664
<UNEARNED-PREMIUMS> 61,797
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 14,579
2,700
0
<COMMON> 7,831
<OTHER-SE> 16,089
<TOTAL-LIABILITY-AND-EQUITY> 225,684
4,464
<INVESTMENT-INCOME> 753
<INVESTMENT-GAINS> (103)
<OTHER-INCOME> 13,076
<BENEFITS> 5,777
<UNDERWRITING-AMORTIZATION> 7,825
<UNDERWRITING-OTHER> 7,501
<INCOME-PRETAX> (2,913)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,913)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,913)
<EPS-BASIC> (0.37)
<EPS-DILUTED> (0.37)
<RESERVE-OPEN> 39,833
<PROVISION-CURRENT> 4,804
<PROVISION-PRIOR> 973
<PAYMENTS-CURRENT> (2,104)
<PAYMENTS-PRIOR> (8,063)
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<CUMULATIVE-DEFICIENCY> (571)
</TABLE>
