Download Insurance company subject to statutory accounting policies with

Insurance company subject to statutory accounting policies with notes and opinion letter.
CONSOLIDATED BALANCE SHEETS SICO, INC.
December 31
1988
1987
ASSETS
Investments—Note C:
Fixed maturities—(market: 1988, $30,310,000; 1987, $27,109,000)
Equity securities—(cost: 1988, $734,087; 1987, $718,109)
Short-term investments
Cash
Receivables:
Agents' balances and uncollected premiums, less allowance (1988, $120,000; 1987,
$165,000)
Other notes and accounts, less allowance (1988 and 1987, $10,000)
Due from other insurance companies
Accrued investment income
Property and equipment, less allowance for depreciation (1988, $539,525; 1987,
$392,700)
Deferred policy acquisition costs
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves—Note H:
Losses and loss expenses
Unearned premiums
Due to other insurance companies
Accrued expenses and other liabilities
Mortgage note payable—Note D
Notes payable—Note D
Current federal income taxes—Note E
Deferred federal income taxes—Note E
TOTAL LIABILITIES
Shareholders' equity—Notes B, D, F and I:
Common Stock, par value $6.50 per share, authorized, 3,000,000 shares; issued and
outstanding, 1988, 670,595 shares; 1987, 718,597 shares
Additional paid-in capital
Unrealized appreciation (depreciation) of equity securities
Retained earnings
Less notes receivable from ESOP
$30,799,715
792,652
2,795,211
34,387,578
247,685
$27,266,967
695,281
6,806,287
34,768,535
265,521
4,275,672
3,974,711
607,452
229,014
757,722
5,869,860
4,481,602
376,774
222,471
658,582
5,232,538
4,539,224
2,900,000
$47,886,725
2,850,000
$47,655,818
$15,808,630
13,288,157
29,096,787
1,262,821
3,172,851
—
2,623,544
121,713
33,242
36,310,958
$14,294,401
12,245,950
26,540,351
1,448,048
3,194,361
1,921,149
3,160,760
1,610,586
9,330
37,884,585
4,358,868
4,670,881
2,303,276
38,653
7,749,316
(2,874,346)
11,575,767
$47,886,725
3,021,352
(22,828)
5,378,931
(3,277,103)
9,771,233
$47,655,818
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME SICO, INC.
Net premiums written—Note H
Year Ended December 31
1988
1987
1986
$38,783,507 $34,842,448 $33,727,755
Change in unearned premiums (deduction)
PREMIUMS EARNED
Investment income—Note C
(1,042,207)
37,741,300
2,851,660
40,592,960
(402,231)
34,440,217
2,723,587
37,163,804
1,516,360
35,244,115
2,419,703
37,663,818
Year Ended December 31
1988
1987
1986
Losses and expenses:
Losses and loss expenses
Commissions
Taxes, licenses and fees
Other underwriting and operating expenses
Change in deferred policy acquisition costs (deduction)
Minority interests in Statesman—Note B
INCOME BEFORE FEDERAL INCOME TAXES AND EXTRAORDINARY
CREDIT
Federal income taxes—Note E:
Current
Deferred (credit)
24,584,894 20,608,565 23,530,756
7,078,331 6,470,358 6,471,522
798,938
856,796
777,009
4,186,426 4,281,753 4,457,950
(50,000) (350,000) (400,000)
—
78,700
387,398
36,598,589 31,946,172 35,224,635
3,994,371 5,217,632 2,439,183
1,552,927
4,000
1,556,927
2,437,444
—
1,943,726
(192,053)
1,751,673
3,465,959
—
354,797
989,131
1,343,928
1,095,255
845,711
INCOME BEFORE EXTRAORDINARY CREDIT
Extraordinary credit—tax benefit arising from operating loss carryforwards—Note E
NET INCOME $2,437,444 $3,465,959 $1,940,966
Per share data based on weighted average number of shares of common stock
and common stock equivalents outstanding (1988, 698,523 shares; 1987,
713,250 shares; 1986, 620,667 shares)— Notes B and F:
Income before extraordinary credit
$3.49
$4.86
$1.77
Extraordinary credit
—
—
1.36
NET INCOME
$3.49
$4.86
$3.13
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS SICO, INC.
Year Ended December 31
1988
1987
1986
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Change in receivables
Amortization of policy acquisition costs
Policy acquisition costs deferred
Change in reserves
Change in liability for federal income taxes
Change in other liabilities
Minority interest in Statesman, net of dividends paid
Net realized losses (gains) on investments
Provision for depreciation
Accrual of bond discounts and amortization of bond premiums
CASH PROVIDED BY OPERATING ACTIVITIES
$2,437,444
$3,465,959
$1,940,966
(637,322)
9,535,231
(9,585,231)
2,556,436
(1,484,878)
(206,730)
—
6,182
161,400
(9,778)
2,772,754
(831,930)
8,348,802
(8,698,802)
528,476
1,125,371
1,026,728
78,700
(20,065)
157,203
(2,676)
5,177,766
166,234
7,993,217
(8,393,217)
2,510,366
485,567
751,295
363,615
(14,239)
157,558
3,852
5,965,214
INVESTING ACTIVITIES
Purchases of investments
Sales or maturities of investments
Purchases of property and equipment
Sale of property and equipment
Purchase of subsidiary, net of cash acquired
CASH PROVIDED (USED) BY INVESTING ACTIVITIES
FINANCING ACTIVITIES
Proceeds from notes payable
Repayments of notes and mortgage payable
Proceeds from issuance of subsidiary preferred stock
Retirement of subsidiary's preferred and common stock
Proceeds from issuance of common stock
Dividends paid
Proceeds from notes receivable from ESOP
Loan made to ESOP
Investment in parent common stock by subsidiary
CASH PROVIDED (USED) BY FINANCING ACTIVITIES
INCREASE (DECREASE) IN CASH
Cash at beginning of year
CASH AT END OF YEAR
(5,872,360)
6,345,401
(111,440)
565
—
362,166
(6,482,693)
929,588
(52,135)
1,851
—
(5,603,389)
(8,489,603)
3,715,320
(59,466)
3,578
55,146
(4,775,025)
—
(2,458,365)
—
—
30,000
(67,059)
402,757
—
(1,060,089)
(3,152,756)
(17,836)
265,521
$247,685
3,269,851
(2,783,290)
250,802
(471,923)
251,001
(71,860)
3,811,973
(3,810,653)
—
445,901
20,278
245,243
$265,521
—
(991,321)
—
—
—
—
428,571
(706,994)
—
(1,269,744)
(79,555)
324,798
$245,243
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SICO, INC.
NOTE A—SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the accounts of SICO, Inc. (the Company), its
wholly owned property/casualty insurance subsidiary, Statesman Insurance Company (Statesman) and a premium
financing subsidiary, Timeco, Inc. (Timeco) wholly owned by Statesman. The financial statements of Statesman,
included in the consolidated financial statements, have been prepared on the basis of generally accepted accounting
principles, which differ in some respects from accounting practices prescribed or permitted by regulatory authorities
("statutory basis"). All significant intercompany accounts and transactions are eliminated in consolidation.
In November 1987, the Financial Accounting Standards Board (FASB) issued Statement No. 95 "Statement of Cash
Flows." The Company adopted the provisions of the Statement in its 1988 financial statements and restated previously
reported statements of changes in financial position of 1987 and 1986.
Investments: Fixed maturities (bonds) are stated at amortized cost and equity securities (common and nonredeemable
preferred stocks) are stated at current market value. Short-term investments are carried at cost which approximates
market value. Gains or losses on disposal of investments are determined on a specific identification basis and are
included in the statement of income. Unrealized appreciation (less deferred taxes) or depreciation of equity securities
is reflected directly in shareholders' equity.
In December 1987, the FASB issued Statement No. 97, "Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments." The Company
adopted the applicable provisions of this Statement in its 1988 financial statements and, accordingly, realized
investment gains have been reclassified and are now included in investment income rather than being reported after
federal income taxes for 1987 and 1986.
Property and Equipment: Property and equipment are reported at cost. Provisions for depreciation are computed on the
straight-line method for financial reporting and by accelerated methods for income tax purposes.
Deferred Policy Acquisition Costs: Commissions, premium taxes and certain other costs applicable to the acquisition
of business, to the extent recoverable, are deferred and amortized ratably over the period in which the related
premiums are earned.
Reserves: The reserves for losses and loss expenses are determined using case basis evaluations and statistical
analyses and represent estimates of the ultimate net costs of all incurred losses, reported and unreported, which remain
unpaid. These estimates are subject to the impact of future changes in claim severity, claim frequency and other
factors. Although variability is inherent in such estimates, management believes that the reserves for losses and loss
expenses are adequate. The method of making estimates for reserves are continually reviewed and updated, and as
adjustments to these amounts become necessary, such adjustments are reflected in current operations. These reserves
are stated net of reinsurance recoverable.
Unearned premium reserves are established to cover the unexpired portion of premiums written net of reinsurance
placed with other companies. Accordingly, premiums are earned over the terms of the related policies.
Federal Income Taxes: The Company, Statesman and Timeco each file separate federal income tax returns.
Earnings Per Share: Earnings per share is based on the weighted average number of common shares outstanding plus
incentive stock options which are deemed to be common stock equivalents; the convertible preferred stock of
Statesman was also deemed a common stock equivalent until it was exchanged for Company common stock in 1987.
NOTE B—ORGANIZATION AND ACQUISITION
The Company was incorporated in 1985 for the purpose of acquiring 84% of Statesman from The Statesman Group,
Inc. (Group). The acquisition, which was accounted for as a purchase, was accomplished through the formation of The
Statesman Insurance Company Employee Stock Ownership Plan (ESOP).
In 1986, the Company offered to the shareholders of Statesman to exchange one (1) share of the Company's common
stock for each one (1) share of Statesman's common stock not owned by the Company. The offer resulted in the
Company acquiring 51,512 shares of Statesman's common stock. As a part of the same transaction, the ESOP
exchanged 1,500 shares of Statesman's preferred stock for 36,750 shares of the Company's common stock. The
Company's stockholder's equity increased $1,147,406 as a result of this transaction.
In 1987, Statesman redeemed and cancelled 1,465 shares of the preferred stock for $300,000 and issued 465 shares of
its preferred stock to the ESOP at $539.36 a share ($250,801). The Company also issued to the ESOP 300,248 shares
of common stock in exchange for 13,965 shares of Statesman's preferred stock owned by the ESOP. The per share
prices and exchange ratio in these transactions were established by independent valuations. Statesman also declared a
reverse stock split on July 1, 1987. As a result of these transactions Statesman became a wholly owned subsidiary and
the Company's stockholder's equity increased $2,950,802. The 1986 and 1987 transactions were accounted for as
purchases.
At December 31, 1988 and 1987, the notes receivable from the ESOP represent capitalization of the Company and is
accounted for as a reduction of shareholders' equity. This balance will be reduced as the debt is reduced. At December
31, 1988, the ESOP owned 593,801 shares of the Company's common stock.
On November 24, 1986, the Company acquired all of the outstanding stock of Timeco from the Group for $222,000. In
connection with this acquisition, the Company acquired assets with a fair value of $223,717 and assumed liabilities of
$278,863. The liabilities included a debenture payable to Statesman of $270,000 which was paid in full in 1987.
During 1988, Statesman purchased 50,135 shares of the Company's common stock from employees for $1,060,089. In
connection with an employee exercising stock options, the Company also acquired 100 shares valued at $3,029. These
shares are considered to be authorized and unissued shares and common stock and additional paid-in capital have been
reduced.
NOTE C—INVESTMENTS
Investment income is summarized as follows:
Fixed maturities
Equity securities
Short-term investments
Other
Realized gains (losses):
Fixed maturities
Equity securities
Other
1988
$2,445,546
25,725
287,593
98,978
1987
$2,207,645
17,261
342,932
135,684
915
11,247
8,189
629
20,065
$2,723,587
—
(7,097)
(6,182)
$2,851,660
1986
$1,810,571
11,766
529,245
53,882
13,045
—
1,194
14,239
$2,419,703
The net changes in unrealized appreciation (depreciation) before minority interest in investments are summarized as
follows:
Fixed maturities
Equity securities
Deferred income (tax) benefit
1988
$(331,748)
81,393
(19,912)
$(270,267)
1987
$(1,302,394)
(88,497)
18,386
$(1,372,505)
1986
$927,749
21,733
(18,386)
$931,096
Unrealized appreciation in equity securities at December 31, 1988, included unrealized gains of $64,411 and
unrealized losses of $5,846, less deferred federal income taxes of $19,912.
NOTE D—NOTES AND MORTGAGE PAYABLE
On December 15, 1987, the Company refinanced a note payable to a bank. Under the terms of the new note,
installments of $114,459 are payable quarterly plus interest based on 88.6% of the prime rate (9.303% at December
31, 1988). The unpaid principal balance is due on September 30, 1992. This note is collaterized by all of the assets of
the Company. The Company is restricted, among other things, as to the creation or assumption of debt, liens and
guarantees, acquisition or disposal of certain assets, consolidation or merger with others, loans to or investments in
others and acquisitions of its common stock. Further, the agreement requires Statesman to maintain statutory
shareholders' equity of $8,000,000 and statutory net premiums written to surplus ratio of 4 to 1 or less. The proceeds of
the loan have been loaned to the ESOP; therefore, the interest expense incurred by the Company relating to this note is
recorded as a reduction to interest earned on the amount loaned to the ESOP.
Timeco established a $300,000 revolving loan agreement with a bank in 1987. Interest on the outstanding balance is
payable monthly at the prime rate plus 3/4%. No balance was outstanding at December 31, 1988.
Aggregate maturities by year of all debt are as follows: 1989 through 1991—$457,836, 1992—$1,250,036.
During 1988, 1987 and 1986, respectively, the Company paid $259,849, $370,041 and $441,468 for interest on all
debt.
NOTE E—FEDERAL INCOME TAXES
The 1986 Tax Reform Act (Act), among other provisions, resulted in reducing deductions by discounting loss and loss
expense reserves and taxing 20% of unearned premiums. These provisions of the Act created more taxable income
than financial reporting income resulting in a deferred income benefit in 1988 that has not been recognized and an
effective tax rate that is higher than the federal corporate tax rate on ordinary income. The Act also provided for a
phase in of the December 31, 1986 loss reserve (fresh start) which produced an aggregate tax benefit of approximately
$1,500,000. Federal income tax provisions have been determined based on the laws in effect during each period. A
reconciliation of the differences between income tax expense and the amount computed by applying the statutory
federal income tax rate (1988, 34%; 1987, 40%; 1986, 46%) to income before income taxes follows:
Computed income tax at statutory rate
Tax effect of:
Amortization of fresh start
Minority interests in Statesman
Deferred tax benefit not recognized
Other
1988
$1,358,086
1987
$2,087,053
1986
$1,122,024
(89,901)
—
281,961
6,781
$1,556,927
(350,899)
31,480
—
(15,961)
$1,751,673
—
178,203
—
43,701
$1,343,928
Deferred income tax expense (credit) resulting from timing differences in the recognition of revenue and expense for
income tax and financial statement purposes is as follows:
Capitalization of deferred policy acquisition costs net of amortization
Statutory premium adjustment
Allowance for doubtful accounts receivable
Adjustment to statutory premiums and losses
Loss reserve discounting
20% unearned premium provision
Deferred tax benefit not recognized
Other items
Deferred income tax expense (benefit)
1988
1987
1986
$17,000 $140,000 $184,000
49,372
58,085
66,798
4,845
102,341 (146,069)
—
—
798,933
(213,024) (380,721)
—
(194,390) (177,496)
—
281,961
—
—
58,236
65,738
85,469
$4,000 $(192,053) $989,131
At December 31, 1985, Statesman had tax return loss carryforwards of approximately $126,000 which were fully
utilized during 1986. Additionally, Statesman had deferred tax benefits of approximately $1,700,000 at December 31,
1985, associated with the recognition of revenue and expense in different periods for income tax and financial
statement purposes, which were recognized during 1986.
In December 1987, the FASB issued Statement No. 96, "Accounting for Income Taxes." In December 1988,
Statement No. 100 was issued to postpone the effective date of Statement 96 for one year to no later than 1990. Under
this Statement, the liability method is used in accounting for income taxes. Under this method, deferred tax liabilities
are determined based on differences between financial reporting and tax basis of assets and liabilities and are
measured using tax rates and laws that will be in effect when the differences are scheduled to reverse. Currently,
income tax expense is determined using the deferred method. Deferred tax expense is based on items of income and
expense that were reported in different years in the financial statements and tax returns and is measured at the tax rate
in effect in the year the difference originated. The Company has not completed all of the complex analyses required to
estimate the impact of the new Statement, and it has not decided whether it will implement the Statement early or
restate any periods.
The Company made income tax payments of $3,041,800, $626,300 and $12,650 during 1988, and 1987 and 1986,
respectively.
NOTE F—SHAREHOLDERS' EQUITY AND RESTRICTIONS
As a result of exercising stock options, 2,233 shares of common stock were issued to former employees of Statesman
during 1988.
On April 16, 1987, the Articles of Incorporation were amended to increase authorized common stock from 1,000,000
to 3,000,000 shares. In 1987, the Company sold to principal agents and employees of the Company or Statesman
25,149 shares of its common stock at $13.00 per share and issued to the ESOP 300,248 shares of its common stock in
exchange for 100% of the Statesman preferred stock owned by the ESOP (see Note B).
The net assets of Statesman available for transfer to the Company are generally limited to the amounts by which
Statesman's net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory
capital requirements; however, payments of such amounts as dividends may require approval by regulatory
authorities. Statesman's net income, as determined in accordance with statutory accounting practices, was $2,119,304,
$2,304,100 and $591,368 for 1988, 1987 and 1986, respectively, and its statutory shareholders' equity was
$12,038,292 and $10,014,857 at December 31, 1988 and 1987, respectively.
NOTE G—PENSION PLAN
The ESOP provides a uniform noncontributory retirement program covering all eligible employees of Statesman.
Contributions to the ESOP are equal to approximately 25% of eligible compensation of all participants plus such
additional amounts, as determined annually by the Board of Directors. Costs of this plan charged to operations
amounted to $786,603, $800,393 and $904,362 for 1988, 1987 and 1986, respectively.
Upon retirement or termination of employment of eligible employees, Statesman may be required to repurchase the
shares of the Company allocated to the employee at their appraised value. Statesman purchased 50,135 shares from
retired and terminated employees in 1988 (see Note B).
NOTE H—REINSURANCE
Under the reinsurance agreement in effect at December 31, 1988, losses in excess of $100,000 per occurrence are
ceded to an unaffiliated company, up to a maximum of $5,000,000 on casualty lines and $10,000,000 on worker's
compensation losses. Net retention on property business is $100,000 with excess of loss coverage up to $700,000 on
homeowners property and $500,000 on all other property. The property treaties are supplemented by automatic and
specific facultative arrangements. Net retention on catastrophe coverage is $900,000 per occurrence with a 95% cover
for losses in excess of $900,000 up to $14,100,000.
Through a July 1, 1985 reinsurance contract, Statesman assumed 100% of the unearned premium of State Automobile
Insurance Association (SAIA), an affiliate of the Group, and SAIA assumed all unpaid losses of Statesman that were
unpaid and incurred prior to July 1, 1985. Claim liabilities incurred after July 1, 1985 became the responsibility of
Statesman. Included as a reduction to loss expenses is $30,000 and $515,000 for 1987 and 1986, respectively, that
SAIA paid Statesman for providing loss adjustment services to handle these claims. Statesman discontinued handling
these claims in March, 1987.
Statesman participated in a quota share reinsurance agreement, effective December 31, 1985, with an unaffiliated
reinsurance company. Under the terms of this agreement, Statesman ceded 40% of its retained business. As a result of
a ceding commission adjustment based upon the loss experience of such ceded business, this agreement was accounted
for as a financing transaction. This agreement was terminated effective October 1, 1986.
Reserves, premiums and expenses are stated after deductions of amounts related to reinsurance ceded to other
companies. Net premiums written include assumed premiums of approximately $156,000, $244,000 and $154,000 and
exclude ceded premiums of approximately $3,017,000, $3,024,000 and $2,714,000 for 1988, 1987 and 1986,
respectively. Loss reserves have been reduced by approximately, $1,404,000 and $1,600,000 at December 31, 1988
and 1987, respectively, of which $436,000 and $1,046,000, respectively, are estimated to be recoverable from SAIA.
A contingent liability exists in the event the reinsurer should be unable to meet obligations assumed under the
reinsurance contracts.
NOTE I—STOCK OPTIONS AND MANAGEMENT INCENTIVE PLANS
On December 11, 1986, the Company adopted an Incentive Stock Option Plan which allows for grants up to 125,000
shares of the Company's common stock. The options are exercisable only in the sequence in which they are granted to
an employee and expire ten years after date of the grant or 30 days after the termination of employment, whichever is
earlier. Outstanding stock options were granted at prices equal to market prices for minority shareholder at dates of
grant. Information summarizing stock options outstanding follows:
Outstanding at beginning of year
Granted ($13.00 to $15.00 per share)
Exercised ($13.00 to $15.00 per share)
Cancelled
Outstanding at end of year
Shares available for future options
Year Ended
December 31
1988 1987 1986
48,0 23,0 —
00 00
21,0 27,0 23,0
00 00 00
(2,23 — —
3)
(3,76 (2,00 —
7) 0)
63,0 48,0 23,0
00 00 00
62,0 75,0 102,
00 00 000
Statesman's Management Incentive Plan provides for a bonus to the executive officers and certain key employees
based on the degree to which annual growth in Statesman's net income, as defined, meets certain performance
objectives. The aggregate bonus included in the consolidated statements of income is $185,000, $180,000 and $87,000
for 1988, 1987 and 1986, respectively.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
SICO, Inc.
Indianapolis, Indiana
We have audited the consolidated financial statements and related schedules of SICO, Inc. and subsidiaries listed in
Item 14(a)(1) and (2) of the annual report of Form 10-K of SICO, Inc. for the year ended December 31, 1988. These
financial statements and related schedules are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and related schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements and related schedules
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and related schedules. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects the consolidated
financial position of SICO, Inc. and subsidiaries at December 31, 1988 and 1987 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended December 31, 1988 in conformity with
generally accepted accounting principles. Further, it is our opinion that the schedules referred to above present fairly,
in all material respects, the information set forth therein in compliance with the applicable accounting regulation of the
Securities and Exchange Commission.
ERNST & WHINNEY
Indianapolis, Indiana
March 3, 1989