Registration No. 333-________
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Filed with the Securities and Exchange Commission on July 29, 1996
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
SYMONS INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Indiana 6331 35-1707115
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code No.) Identification No.)
incorporation
or organization)
4720 Kingsway Drive Alan G. Symons
Indianapolis, Indiana 46205 4720 Kingsway Drive
(317) 259-6300 Indianapolis, Indiana 46205
(317) 259-6300
Copy to:
Catherine L. Bridge, Esq. Lars Bang-Jensen, Esq.
Barnes & Thornburg Robert S. Rachofsky, Esq.
1313 Merchants Bank Building LeBoeuf, Lamb, Greene & MacRae, L.L.P.
11 S. Meridian Street 125 West 55th Street
Indianapolis, Indiana 46204 New York, New York 10019-5389
Approximate date of commencement of proposed sale to the public: As promptly as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. ______________________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ___________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.
CALCULATION OF REGISTRATION FEE
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Proposed Proposed Maximum Amount of
Title of each Class of Amount to be Maximum Offering Aggregate Offering Registration
Securities to be Registered Registered Price Per Unit Price (1) Fee
<S> <C> <C> <C> <C>
Common Stock, without par value 3,450,000 $12.00 $41,400,000.00 $14,276.00
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(1) Estimated solely for the purpose of computing the registration fee.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
CROSS-REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
for Registration Statements on Form S-1
and Form of Prospectus
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Item in Form S-1 Caption in Prospectus
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1. Forepart of Registration Statement
and Outside Front Cover Page
of Prospectus........................................Forepart of Registration Statement; Outside
Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus............................Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information, Risk Factors,
and Ratio of Earnings to Fixed Charges..............."Prospectus Summary;" "Risk Factors;"
"The Company"
4. Use of Proceeds......................................"Use of Proceeds"
5. Determination of Offering Price......................Front Cover Page of Prospectus; "Underwriting"
6. Dilution............................................."Dilution"
7. Selling Security Holders.............................Not Applicable
8. Plan of Distribution.................................Outside Front Cover of Prospectus; "Prospectus
Summary;" "Underwriting"
9. Description of Securities to be Registered..........."Prospectus Summary;" "Description of Capital Stock;"
"Shares Eligible for Future Sale"
10. Interests of Named Experts and Counsel..............."Legal Matters;" "Experts"
11. Information with Respect to the Registrant..........."Organization Structure of SIG and Its Principal
Subsidiaries;" "Prospectus Summary;" "The
Company;" "Dividend Policy;" "Capitalization;"
"Unaudited Pro Forma Consolidated Financial
Statements;" "Selected Consolidated Historical
Financial Data of Symons International Group, Inc.;"
"Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company;"
"Selected Consolidated Historical Financial Data of
Superior Insurance Company;" "Management's Discussion
and Analysis of Financial Condition and Results of
Operations of Superior;" "Business;" "Management;"
"Certain Relationships and Related Transactions;"
"Securities Ownership of Management and Goran;"
"Shares Eligible for Future Sale;" Index to Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.......Not Applicable
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[RED LANGUAGE DOWN LEFT SPINE]
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY ____, 1996
Prospectus
3,000,000 Shares
SYMONS INTERNATIONAL GROUP, INC.
Common Stock
All 3,000,000 shares of Common Stock, no par value (the "Common Stock"),
are being offered by Symons International Group, Inc. ("SIG" or the "Company").
Prior to this offering (the "Offering"), there has been no public market
for the Common Stock. It is currently anticipated that the initial public
offering price will be between $_____ and $_____ per share of Common Stock. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
After giving effect to the Offering, Goran Capital Inc. ("Goran"), a
Canadian federally chartered corporation and presently the sole shareholder of
the Company, will own approximately 70% of the outstanding shares of Common
Stock, assuming no exercise of the Underwriters' over-allotment option. A
portion of the proceeds of the Offering will be used to repay certain
indebtedness to Goran and to pay a dividend to Goran. See "Use of Proceeds."
The Company intends to apply for listing of the Common Stock on The Nasdaq
Stock Market's National Market ("Nasdaq National Market") under the symbol
"SIGC." There can be no assurance that an active public market for the Common
Stock will develop or be maintained after the Offering.
See "Risk Factors" beginning on page 9 of this Prospectus for a discussion
of certain factors that should be considered by prospective investors in the
Common Stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-
MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Underwriting
Price to Discounts and Proceeds
Public Commissions (1) to Company (2)
<S> <C> <C> <C>
Per Share .................. $ ______ $ ______ $ ________
Total (3) .................. $ ___________ $ ___________ $ _____________
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(1) The Company and Goran have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $__________.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock from the Company at the Price to
Public less Underwriting Discounts and Commissions solely to cover
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $______, $______ and $______, respectively. See
"Underwriting."
The Common Stock is being offered severally by the Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain other conditions. It is expected that
delivery of the certificates representing the Common Stock will be made to the
Underwriters on or about September ____, 1996.
ADVEST, INC. MESIROW FINANCIAL, INC.
The date of this Prospectus is _______, 1996
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA
(THE "NORTH CAROLINA INSURANCE COMMISSIONER") NOR HAS THE NORTH CAROLINA
INSURANCE COMMISSIONER RULED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
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THE COMPANY IS A HOLDING COMPANY WHICH OWNS DIRECTLY OR INDIRECTLY
SHARES OF CAPITAL STOCK OF CERTAIN INSURANCE COMPANIES DOMICILED IN INDIANA AND
FLORIDA. THE INDIANA AND FLORIDA INSURANCE LAWS PROVIDE THAT NO PERSON MAY
ACQUIRE CONTROL OF THE COMPANY, AND THUS INDIRECT CONTROL OF THESE INSURANCE
COMPANY SUBSIDIARIES, UNLESS SUCH PERSON HAS GIVEN PRIOR WRITTEN NOTICE TO SUCH
INSURANCE COMPANY SUBSIDIARIES AND RECEIVED THE PRIOR APPROVAL OF THE
COMMISSIONER OF INSURANCE OF THE STATES OF INDIANA AND FLORIDA. ANY PURCHASER OF
10% OR MORE OF THE OUTSTANDING SHARES OF COMMON STOCK OF THE COMPANY WOULD BE
PRESUMED TO HAVE ACQUIRED CONTROL OF IGF (AS DEFINED HEREIN) UNLESS THE
COMMISSIONER OF INSURANCE OF THE STATE OF INDIANA, UPON APPLICATION, HAS
DETERMINED OTHERWISE. IN ADDITION, ANY PURCHASER OF APPROXIMATELY 19% OR MORE OF
THE OUTSTANDING SHARES OF THE COMPANY WILL BE PRESUMED TO HAVE ACQUIRED CONTROL
OF PAFCO (AS DEFINED HEREIN) AND SUPERIOR (AS DEFINED HEREIN) UNLESS THE
COMMISSIONERS OF INSURANCE OF THE STATES OF INDIANA AND FLORIDA, UPON
APPLICATION, HAVE DETERMINED OTHERWISE.
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (including any amendment,
exhibits and schedules thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered by this Prospectus. This Prospectus, which is part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, to which
reference is made. Statements made in this Prospectus regarding the contents of
any contract or any other document filed as an exhibit to the Registration
Statement are not necessarily complete and, in each instance, reference is
hereby made to the copy of such contract or other document filed as an exhibit
to the Registration Statement and the full text of such statement is qualified
in its entirety by reference to such contract or document. The Registration
Statement may be inspected at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and its Regional Offices located at 7 World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also maintains a Web site on the Internet that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including the Company.
The address of such site is: http://www.sec.gov.
The Company will be subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will be required to file periodic reports and other
information with the Commission. Such information can be inspected and copied
after the Offering at the public reference facilities maintained by the
Commission. The Company plans to make application to list the Common Stock on
the Nasdaq National Market under the symbol "SIGC." Any such material will also
be available for inspection at the National Association of Securities Dealers,
Inc., 1735 K Street, Washington, D.C. 20006. In addition, the Company intends to
furnish its shareholders with annual reports containing consolidated financial
statements certified by an independent public accounting firm.
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ORGANIZATIONAL STUCTURE OF SIG AND ITS PRINCIPAL SUBSIDIARIES
[CHART]
[At the top of the chart there is a rectangular box with "Symons
International Group, Inc." and footnote number one noted inside. Coming from
this box are two lines; the left line has the figure of 100% while the right
line has the figure of 52%. The left line runs into a smaller rectangular box
with "IGF Holdings, Inc." inside. One line, with a 100% figure, runs from this
box to another rectangular box with "IGF Insurance" inside. The right line runs
into a smaller rectangular box with "GGS Management Holdings, Inc.," inside.
There is a line towards the right with a 48% figure running up from this box and
a line with a 100% figure running down from this box. The line running up runs
into another rectangular box with "Funds Affiliated with Goldman, Sachs & Co."
and footnote number two noted inside. The line running down from the GGS
Management Holdings box runs into a rectangular box with "GGS Management, Inc."
inside. There is one line running from this box with two branches each with a
100% figure. The left branch runs into a rectangular box with "Pafco General
Insurance Company" inside and the right branch runs into a rectangular box with
"Superior Insurance Company" inside. From this box runs one line with two
branches, each with a 100% figure. The left branch runs into a rectangular box
with "Superior American Insurance Company" inside and the right branch runs into
a rectangular box with "Superior Guaranty Insurance Company" inside.]
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(1) Symons International Group, Inc. is a wholly-owned subsidiary of Goran
Capital Inc., a Canadian federally chartered corporation. Goran's common
stock is traded on the Toronto Stock Exchange under the symbol "GNC" and on
the Nasdaq National Market under the symbol of "GNCNF."
(2) The ownership percentages of the funds affiliated with Goldman, Sachs & Co.
in GGS Management Holdings, Inc. are as follows: 30.1% by GS Capital
Partners II, L.P., a Delaware limited partnership, 12.0% by GS Capital
Partners II Offshore, L.P., a Cayman Islands limited partnership and 5.9%
collectively by the following investors: Stone Street Funds L.P., Bridge
Street Funds L.P., and Goldman Sachs & Co. Verwaltungs GmbH. These funds
are collectively referred to in this Prospectus as the "GS Funds."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and consolidated financial statements, and
the notes thereto, appearing elsewhere in this Prospectus. Unless the context
indicates otherwise, (i) the "Company" or "SIG" refers to Symons International
Group, Inc., an Indiana corporation, and its subsidiaries, (ii) the
"Subsidiaries" refer to the direct and indirect subsidiaries of the Company,
(iii) the "Insurers" refer to IGF Insurance Company, an Indiana property and
casualty insurance company and a wholly-owned subsidiary of the Company ("IGF"),
and, through the Company's 52% ownership interest in GGS Management Holdings,
Inc. ("GGS Holdings"), Pafco General Insurance Company, an Indiana property and
casualty insurance company ("Pafco"), and Superior Insurance Company, a Florida
property and casualty insurance company, together with its subsidiaries
("Superior") and (iv) "Goran" refers to Goran Capital and its subsidiaries,
other than the Company and the Subsidiaries. See "Glossary of Selected Terms"
for the definitions of certain insurance and other terms used herein.
Unless otherwise indicated, all data in this Prospectus assumes that
(i) a 7,000-to-1 stock split of the Company's Common Stock was effected, (ii)
the Underwriters' over-allotment option is not exercised and (iii) all financial
information and operating statistics applicable to the Company and Superior set
forth in this Prospectus are based on generally accepted accounting principles
("GAAP") and not statutory accounting practices ("SAP"). In conformity with
industry practice, data derived from A.M. Best Company, Inc. ("A.M. Best") and
the National Association of Insurance Commissioners ("NAIC") sources, generally
used herein for industry comparisons, are based on prescribed SAP.
The Company
Symons International Group, Inc. ("SIG" or the "Company"), a specialty
property and casualty insurer, underwrites and markets nonstandard private
passenger automobile insurance and crop insurance. The Company believes that it
has demonstrated an ability to acquire under-performing niche insurance
businesses and develop them toward their full potential. Through its
Subsidiaries, the Company writes business in the U.S. exclusively through
independent agencies and seeks to distinguish itself by offering high quality,
technology based services for its agents and policyholders. For the twelve
months ended March 31, 1996, the Company (excluding Superior) had consolidated
gross premiums written of approximately $137.8 million and Superior, which was
acquired on April 30, 1996, had consolidated gross premiums written of
approximately $105.1 million for the same twelve month period.
The Company writes nonstandard automobile insurance through
approximately 4,500 independent agencies in 18 states and writes crop insurance
through approximately 1,200 independent agencies in 29 states. Based on gross
premiums written as reported by A.M. Best, the Company believes that the
combination of Pafco and Superior makes the Company's nonstandard automobile
group the thirteenth largest underwriter of nonstandard automobile insurance in
the United States. Based on premium information compiled in 1995 by the Federal
Crop Insurance Corporation ("FCIC") and National Crop Insurance Services, Inc.
("NCIS"), the Company believes that IGF is the sixth largest crop insurer in the
United States.
Nonstandard automobile insurance products are designed for drivers who
are unable to obtain coverage from standard market carriers. These drivers are
normally charged higher premium rates than the rates charged for preferred or
standard risk drivers and generally purchase lower liability limits than
preferred or standard risk policyholders. Based on statistical information
derived from insurer annual statements compiled by A.M. Best, the Company
estimates that the nonstandard automobile market accounted for $15 billion in
annual premium volume for 1994.
In June, 1995, the Company entered into a letter of intent to acquire
Superior from Fortis, Inc. ("Fortis") and, in January, 1996, obtained a
commitment from the GS Funds to invest the equity capital needed to finance the
acquisition of Superior (the "Acquisition"). GGS Holdings, which is 52% owned by
the Company and 48% owned by the GS Funds, was formed (the "Formation
Transaction") to focus on the growth and development of the nonstandard
automobile insurance business. As part of this strategy, the Company contributed
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Pafco and its right to acquire Superior to GGS Holdings, which completed the
Acquisition on April 30, 1996. The Acquisition will allow the Company to expand
its nonstandard automobile business through wider geographic distribution and a
broader range of products. Pafco writes business primarily in the Midwest and
Colorado, and Superior writes business primarily in the Southeast (particularly
Florida) and in California. GGS Holdings plans to seek additional acquisition
opportunities to take advantage of a consolidation trend in the nonstandard
automobile insurance industry. There can be no assurance that any suitable
acquisition opportunities will arise.
IGF Insurance Company ("IGF") is a wholly-owned subsidiary of the
Company located in Des Moines, Iowa. IGF underwrites Multi-Peril Crop Insurance
("MPCI") and crop hail insurance. MPCI is a federally-subsidized program which
is designed to provide farmers who suffer an insured crop loss due to the
weather or other natural perils with the funds needed to continue operations and
plant crops for the next growing season. For the year ended December 31, 1995,
the Company wrote approximately $53.4 million in MPCI Premiums (as defined
herein) and $17.0 million in crop hail gross premiums. In addition to premium
revenues, for the same period, the Company received from the FCIC: (i) CAT
Coverage Fees (as defined herein) in the amount of $1.3 million, (ii) Buy-up
Expense Reimbursement Payments (as defined herein) in the amount of $16.4
million and (iii) CAT LAE Reimbursement Payments (as defined herein) and MPCI
Excess LAE Reimbursement Payments (as defined herein) in the aggregate amount of
$3.4 million. IGF uses proprietary software to write and service policies, and
the Company believes that IGF is a pioneer in the use of employee claims
adjusters in the MPCI business. Management believes that the innovative
approaches adopted by IGF's management team in information technology, claims
handling and the underwriting aspects of its business provide IGF with a
competitive advantage in the crop insurance industry. For a discussion of the
accounting treatment of MPCI and the Company's CAT business, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company -- Overview."
The Federal Crop Insurance Reform Act of 1994 (the "1994 Reform Act")
required farmers for the first time to purchase at least a basic level of MPCI
coverage ("CAT Coverage") in order to be eligible for other federally sponsored
farm benefits, including acreage "set aside" programs in which farmers are paid
to leave a portion of their land unplanted and crop price supports. The 1994
Reform Act also authorized for the first time the marketing and selling of CAT
Coverage by local United States Department of Agriculture ("USDA") offices.
Partly as a result of the increase in the size of the MPCI market resulting from
the 1994 Reform Act, the Company's MPCI Premiums increased to $53.4 million in
1995 from $44.3 million in 1994 and the fees and commissions received by the
Company from its MPCI business increased to $21.1 million in 1995 from $14.0
million in 1994. However, the Federal Agriculture Improvement and Reform Act of
1996 (the "1996 Reform Act"), recently signed into law by President Clinton,
eliminates the linkage between CAT Coverage and qualification for certain
federal farm program benefits and also limits the role of the USDA offices in
the delivery of MPCI coverage beginning in July, 1996, which is the commencement
of the 1997 crop year. The limitation of the USDA's role in the delivery system
for MPCI should provide the Company with the opportunity to realize increased
revenues from the distribution and servicing of its MPCI product. The Company
believes that any potential negative impact of the delinkage mandated by the
1996 Reform Act will be mitigated by, among other factors, the likelihood that
farmers will continue to purchase MPCI to provide basic protection against
natural disasters as ad hoc disaster relief programs are reduced or eliminated.
There can, however, be no assurance as to the ultimate effect which the 1996
Reform Act may have on the business or operations of the Company.
The Company has multiple strategies to achieve profitable growth
including the following:
o The Company will continue to develop its two niche product lines:
nonstandard automobile insurance and crop insurance.
o Through GGS Holdings, the Company intends to take advantage of
acquisition opportunities in the consolidating nonstandard
automobile insurance industry.
o The Company will use the Superior acquisition to market its
automobile insurance products to additional markets and to expand
the multi-tiered marketing approach currently employed by
Superior.
o The Company will continue to emphasize providing quality, cost
efficient services to its independent agencies together with a
commission structure designed to encourage those agencies to
place a high volume of profitable business with its insurance
subsidiaries.
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o The Company will continue to develop and enhance its relationship
with its crop agencies by using an electronic communications
network that enables agencies to communicate directly with the
Company's central computer system, thereby limiting agencies'
handling costs.
o The Company will seek to enhance the underwriting profits and
reduce the volatility of its crop insurance business through
geographic diversification and the effective use of federal and
third-party catastrophic reinsurance arrangements.
The Company is a wholly-owned subsidiary of Goran. The ordinary shares
of Goran are traded on the Toronto Stock Exchange under the symbol "GNC" and on
the Nasdaq National Market under the symbol "GNCNF." Following the Offering,
Goran will hold approximately 70% of the Common Stock, assuming no exercise of
the Underwriters' over-allotment option. Goran engages, through subsidiaries
other than the Company, in certain reinsurance and surplus lines underwriting
operations. These subsidiaries of Goran have certain business relationships with
the Company, which the Company expects will continue after consummation of the
Offering.
The Offering
Common Stock being
offered by the Company.............. 3,000,000 shares
Common Stock outstanding (1)
Before the Offering.................. 7,000,000 shares
After the Offering.................... 10,000,000 shares
Use of Proceeds............................ The Company intends to apply the
net proceeds from the Offering as
follows: (i) to contribute
approximately $9 million to IGF
Holdings to increase the statutory
surplus of IGF to provide support
for the writing of additional crop
insurance coverages; (ii) to repay
certain bank indebtedness of the
Company in the amount of $7.5
million; (iii) to retire a note in
the principal amount of
approximately $3.5 million issued
to Pafco by one of the Company's
wholly-owned Subsidiaries; (iv) to
apply $4.0 million to repay
indebtedness to Goran with an
aggregate outstanding principal
balance and accrued interest of
approximately $7.3 million (the
"Parent Indebtedness"); (v) to pay
a dividend to Goran in the amount
of $3.5 million; and (vi) to apply
the remainder of the net proceeds,
if any, to repay the remaining
balance of the Parent Indebtedness
and for general corporate purposes,
including acquisitions. See "The
Company" and "Use of Proceeds."
Proposed Nasdaq National Market Symbol...... SIGC
(1) Based on shares of Common Stock outstanding as of ____________, 1996 and
excluding _____ shares reserved for issuance pursuant to the Company's
Stock Option Incentive Plan. See "Management -- Executive Compensation --
Stock Option Plans -- SIG Stock Option Incentive Plan."
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SUMMARY COMPANY CONSOLIDATED FINANCIAL DATA
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Year Ended December 31,
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Pro Forma
for the
Transactions
and the
Offering
1991 1992 1993 1994 1995 1995(1)
(in thousands, except per share amounts and ratios)
Consolidated Statement
of Operations Data:
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Gross premiums written ........... $ 91,974 $ 109,219 $ 88,936 $ 103,134 $ 124,634 $ 214,275
Net premiums written ............. 31,543 35,425 31,760 35,139 53,447 142,978
Net premiums earned .............. 30,388 35,985 31,428 32,126 49,641 143,682
Net investment income ............ 1,370 1,319 1,489 1,241 1,173 8,262
Other income ..................... -- -- 886 1,622 2,174 6,345
Net realized capital gain (loss) . 381 486 (119) (159) (344) 1,610
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Total revenues ............... 32,139 37,790 33,684 34,830 52,644 159,889
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Income (loss) before
discontinued operations,
extraordinary item, cumulative
effect of an accounting
change and minority interest .. $ 1,904 $ 808 $ (1,389) $ 2,093 $ 4,825 $ 6,498
Net income (loss) ................ $ 1,770 $ 817 $ (323) $ 2,117 $ 4,821 $ 6,450
Per common share data:
Income (loss) before
discontinued operations,
extraordinary item, and
cumulative effect of
an accounting change ........ $ 0.27 $ 0.12 $ (0.20) $ 0.30 $ 0.69 $ 0.65
Net income (loss) ........... $ 0.25 $ 0.12 $ (0.05) $ 0.30 $ 0.69 $ 0.65
Weighted average
shares outstanding ........... 7,000 7,000 7,000 7,000 7,000 10,000
GAAP Ratios: (2)
Loss and LAE ratio ............... 76.1% 76.6% 79.8% 82.4% 72.5% 73.4%
Expense ratio .................... 20.8 23.4 31.5 21.7 18.6 31.2
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Combined ratio ................... 96.9% 100.0% 111.3% 104.1% 91.1% 104.6%
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Three Months
Ended March 31,
---------------------------------------
Pro Forma
for the
Transactions
and the
Offering
1995 1996 1996(1)
---- ---- -------
Consolidated Statement
of Operations Data:
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Gross premiums written ........... $ 28,272 $ 41,422 $ 73,711
Net premiums written ............. 10,300 18,730 50,857
Net premiums earned .............. 8,649 13,785 42,444
Net investment income ............ 319 558 2,365
Other income ..................... 592 977 2,450
Net realized capital gain (loss) . (45) (36) (7)
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Total revenues ............... 9,515 15,284 47,252
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Income (loss) before
discontinued operations,
extraordinary item, cumulative
effect of an accounting
change and minority interest .. $ 1,050 $ 1,586 $ 3,799
Net income (loss) ................ $ 1,066 $ 1,586 $ 2,517
Per common share data:
Income (loss) before
discontinued operations,
extraordinary item, and
cumulative effect of
an accounting change ........ $ 0.15 $ 0.23 $ 0.25
Net income (loss) ........... $ 0.15 $ 0.23 $ 0.25
Weighted average
shares outstanding ........... 7,000 7,000 10,000
GAAP Ratios: (2)
Loss and LAE ratio ............... 65.3% 65.0% 67.1%
Expense ratio .................... 26.8 28.4 30.7(3)
----- ------ ------
Combined ratio ................... 92.1% 93.4% 97.8%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, March 31, 1996
-------------------------------------------------------------- Pro Forma for
the Transactions
1991 1992 1993 1994 1995 Actual and the Offering (1)
---- ---- ---- ---- ---- ------ --------------------
(in thousands, except per share amounts)
Consolidated Balance Sheet Data: (2)
<S> <C> <C> <C> <C> <C> <C> <C>
Investments ....................... $ 26,049 $ 27,941 $ 21,497 $ 18,572 $ 25,902 $ 27,180 $170,758
Total assets ...................... 78,749 75,001 81,540 66,628 110,516 140,813 335,774
Losses and loss
adjustment expenses........... 38,607 38,616 54,143 29,269 59,421 50,009 95,709
Total liabilities ................. 77,799 73,753 79,321 62,357 100,981 129,775 277,036
Minority interest ................. 466 55 -- 16 -- -- 21,200
Total shareholders' equity ........ 484 1,193 2,219 4,255 9,535 11,038 37,538
Book value per share .............. $ 0.07 $ 0.17 $ 0.32 $ 0.61 $ 1.36 $ 1.58 $ 3.75
-------- -------- -------- -------- -------- -------- --------
Statutory Capital
and Surplus:
Pafco (4) ......................... $ 8,251 $ 10,363 $ 8,132 $ 7,848 $ 11,875 $ 13,423 $ 13,423
IGF ............................... $ 5,277 $ 6,400 $ 2,789 $ 4,512 $ 9,219 $ 10,488 $ 19,488
Superior ........................... $ 51,681
</TABLE>
- ----------
(1) The pro forma consolidated statement of operations data for the year ended
December 31, 1995 and three months ended March 31, 1996 present results for
the Company as if the Formation Transaction, the Acquisition, and the other
transactions described in "The Company -- Formation of GGS Holdings;
Acquisition of Superior" (collectively, the "Transactions") and the
Offering had occurred as of January 1, 1995 and January 1, 1996,
respectively. The pro forma consolidated balance sheet data as of March 31,
1996 gives effect to the Transactions and the Offering as if they had
occurred as of March 31, 1996. See "Unaudited Pro Forma Consolidated
Financial Statements" for a discussion of such adjustments.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company -- Overview" for a discussion of the
accounting treatment accorded to the crop insurance business and
nonstandard automobile business.
(3) The pro forma expense ratios have increased primarily as a result of the
additional interest and other expenses associated with the Acquisition of
Superior.
(4) The statutory surplus of Pafco includes Pafco's share of IGF's statutory
surplus. Pafco owned the following percentages of IGF at December 31 for
each of the following years: 1991, 87.9%; 1992, 98.2%; 1993, 98.2%; 1994,
98.8%; 1995, 100%. At April 30, 1996, Pafco transferred IGF to SIG. Prior
to the transfer, IGF also paid a dividend to Pafco in the form of cash of
$7,500,000 and a promissory note of $3,500,000. At April 30, 1996, Pafco's
statutory and capital surplus was $11,873,000. See "The Company --
Formation of GGS Holdings; Acquisition of Superior."
-7-
<PAGE>
SUMMARY SUPERIOR CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
----------------------------------- ---------------------
1993 1994 1995 1995 1996
(in thousands, except ratios)
Consolidated Statement
of Operations Data:
<S> <C> <C> <C> <C> <C>
Gross premiums written................... $115,660 $112,906 $94,756 $21,954 $ 32,289
Net premiums written..................... 115,294 112,515 94,070 21,954 32,126
Net premiums earned...................... 118,136 112,837 97,614 25,666 28,659
Total revenues........................... 135,744 123,005 110,832 28,880 31,968
Net income (loss)........................ 10,958 (4,475) 4,135 559 2,814
GAAP Ratios:
Loss and LAE ratio....................... 72.7% 81.9% 74.1% 75.4% 68.1%
Expense ratio............................ 30.7 34.5 33.5 34.5 28.6
Combined ratio........................... 103.4% 116.4% 107.6% 109.9% 96.7%
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------- March 31,
1993 1994 1995 1996
--------- -------- --------- --------
(in thousands, except ratios)
Consolidated Balance Sheet Data:
<S> <C> <C> <C> <C>
Investments...................................... $132,060 $107,346 $116,362 $120,778
Total assets .................................... 180,395 161,864 160,130 166,376
Losses and loss adjustment expenses ............. 52,610 54,577 47,112 45,700
Total liabilities ............................... 106,639 109,986 98,514 103,623
Total shareholders' equity ...................... 73,756 51,878 61,616 62,753
Statutory Capital
and Surplus: .................................... $ 56,656 $ 43,577 $ 49,277 $ 51,681
</TABLE>
-8-
<PAGE>
RISK FACTORS
There are certain risks involved in an investment in the Common Stock.
Accordingly, prospective purchasers of the Common Stock should consider
carefully the factors set forth below as well as the other information contained
in this Prospectus.
Pricing and Profitability
One of the distinguishing features of the property and casualty
industry is that its products generally are priced before its costs are known,
because premium rates usually are determined before losses are reported. Premium
rate levels are related in part to the availability of insurance coverage, which
varies according to the level of surplus in the industry. Increases in surplus
have generally been accompanied by increased price competition among property
and casualty insurers. The nonstandard automobile insurance business in recent
years has experienced very competitive pricing conditions and there can be no
assurance as to the Company's ability to achieve adequate pricing. Changes in
case law, the passage of new statutes or the adoption of new regulations
relating to the interpretation of insurance contracts can retroactively and
dramatically affect the liabilities associated with known risks after an
insurance contract is in place. New products also present special issues in
establishing appropriate premium levels in the absence of a base of experience
with such products' performance.
The number of competitors and the similarity of products offered, as
well as regulatory constraints, limit the ability of property and casualty
insurers to increase prices in response to declines in profitability. In states
which require prior approval of rates, it may be more difficult for the Company
to achieve premium rates which are commensurate with the Company's underwriting
experience with respect to risks located in those states. In addition, the
Company does not control rates on its MPCI business, which are instead set by
the FCIC. Accordingly, there can be no assurance that these rates will be
sufficient to produce an underwriting profit.
The reported profits and losses of a property and casualty insurance
company are also determined, in part, by the establishment of, and adjustment
to, reserves reflecting estimates made by management as to the amount of losses
and loss adjustment expenses ("LAE") that will ultimately be incurred in the
settlement of claims. The ultimate liability of the insurer for all losses and
LAE reserved at any given time will likely be greater or less than these
estimates, and material differences in the estimates may have a material adverse
effect on the insurer's financial position or results of operations in future
periods.
Nature of Nonstandard Automobile Insurance Business
The nonstandard automobile insurance business is affected by many
factors which can cause fluctuations in the results of operations of this
business. Many of these factors are not subject to the control of the Company.
The size of the nonstandard market can be significantly affected by, among other
factors, the underwriting capacity and underwriting criteria of standard
automobile insurance carriers. In addition, an economic downturn in the states
in which the Company writes business could result in fewer new car sales and
less demand for automobile insurance. Severe weather conditions could also
adversely affect the Company's business through higher losses and LAE. These
factors, together with competitive pricing and other considerations, could
result in fluctuations in the Company's underwriting results and net income.
-9-
<PAGE>
Nature of Crop Insurance Business
The Company's operating results from its crop insurance program can
vary substantially from period to period as a result of various factors,
including timing and severity of losses from storms and other natural perils and
crop production cycles. Therefore, the results for any quarter or year are not
necessarily indicative of results for any future period. The underwriting
results of the crop insurance business primarily are recognized in the second
half of the calendar year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company -- Overview -- Crop
Insurance Operations -- Recent Developments Affecting MPCI Underwriting Results"
for examples of recent events that could adversely affect the Company's
operating results.
The Company expects that for the foreseeable future a majority of its
crop insurance business will continue to be derived from MPCI business. The MPCI
program is federally regulated and supported by the federal government by means
of premium subsidies to farmers, expense reimbursement and federal reinsurance
pools for private insurers. As such, legislative or other changes affecting the
MPCI program could impact the Company's business prospects. The MPCI program has
historically been subject to modification at least annually since its
establishment in 1980, and some of these modifications have been significant. No
assurance can be given that future changes will not significantly affect the
MPCI program and the Company's crop insurance business.
The 1994 Reform Act also reduced the expense reimbursement rate payable
to the Company for its costs of servicing MPCI policies that exceed the basic
CAT Coverage level (such policies, "Buy-up Coverage") for the 1997, 1998 and
1999 crop years to 29%, 28% and 27.5%, respectively, of the MPCI Premium
serviced, a decrease from the 31% level established for the 1994, 1995 and 1996
crop years. Although the 1994 Reform Act directs the FCIC, the federal agency
that administers the MPCI program, to alter program procedures and
administrative requirements so that the administrative and operating costs of
private insurance companies participating in the MPCI program will be reduced in
an amount that corresponds to the reduction in the expense reimbursement rate,
there can be no assurance that the Company's actual costs will not exceed the
expense reimbursement rate.
Total MPCI Premium for each farmer depends upon the kind of crops
grown, acreage planted and other factors determined by the FCIC. Each year, the
FCIC sets, by crop, the maximum per unit commodity price ("Price Selection") to
be used in computing MPCI Premiums. Any reduction of the Price Selection by the
FCIC will reduce the MPCI Premium charged per policy, and accordingly will
adversely impact MPCI Premium volume.
The 1994 Reform Act also directs the FCIC to establish adequate
premiums for all MPCI coverages at such rates as the FCIC determines are
actuarially sufficient to attain a targeted loss ratio. Since 1980, the average
MPCI loss ratio has exceeded this target ratio. There can be no assurance that
the FCIC will not increase rates to farmers in order to achieve the targeted
loss ratio in a manner that could adversely affect participation by farmers in
the MPCI program above the CAT Coverage level.
The 1996 Reform Act, recently signed into law by President Clinton,
provides that, effective for 1996 spring-planted crops, MPCI coverage is not
required for federal farm program benefits if producers sign a written waiver
that waives eligibility for emergency crop loss assistance. The 1996 Reform Act
also provides that, effective for the 1997 crop year, the Secretary of
Agriculture may continue to offer CAT Coverage through USDA offices only if the
Secretary of Agriculture determines that the number of approved insurance
providers operating in a state is insufficient to adequately provide
catastrophic risk protection coverage to producers. There can be no assurance as
to the ultimate effect which the 1996 Reform Act may have on the business or
operations of the Company.
The Company's crop insurance business is affected by market conditions
in the agricultural industry which vary depending on such factors as federal
legislation and administration policies, foreign country policies relating to
agricultural products and producers, demand for agricultural products, weather,
natural disasters, technological advances in agricultural practices,
international agricultural markets and general economic conditions both in the
United States and abroad. For example, the number of MPCI policies written has
historically tended to increase after a year such as 1993, in which many natural
disasters adversely affecting crops occurred, and decrease following a year such
as 1994, in which favorable weather conditions prevailed. For further
information about the Company's MPCI business, see "Business -- Crop Insurance
- -- Products."
Competition
Both the nonstandard automobile insurance and crop insurance businesses
are highly competitive. Many of the Company's competitors in both the
nonstandard automobile insurance and crop insurance business segments have
substantially greater financial and other resources than the Company, and there
can be no assurance that the Company will be able to compete effectively against
such competitors in the future.
In its nonstandard automobile business, the Company competes with both
large national writers and smaller regional companies. The Company's competitors
include other companies which, like the Company, serve the independent agency
market, as well as companies which sell insurance directly to customers. Direct
writers may have certain competitive advantages over agency writers, including
increased name recognition, loyalty of the customer base to the insurer rather
than an independent agency and, potentially, reduced acquisition costs. In
addition, certain competitors of the Company have from time to time decreased
their prices in an apparent attempt to gain market share. Also, in certain
states, state assigned risk plans may provide nonstandard automobile insurance
products at a lower price than private insurers. See "Business -- Nonstandard
Automobile Insurance --Competition."
In the crop insurance business, the Company competes against other crop
insurance companies and, with respect to CAT Coverage, USDA field service
offices in certain areas. In addition, the crop insurance industry has become
increasingly consolidated. From the 1985 crop year to the 1995 crop year, the
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<PAGE>
number of insurance companies that have entered into agreements with the FCIC to
sell and service MPCI policies has declined from 50 to 17. The Company believes
that to compete successfully in the crop insurance business it will have to
market and service a volume of premiums sufficiently large to enable the Company
to continue to realize operating efficiencies in conducting its business. No
assurance can be given that the Company will be able to compete successfully if
this market consolidates further. See "Business -- Crop Insurance --
Competition."
A.M. Best has currently assigned Superior an A- (Excellent) rating and
Pafco a B- (Adequate) rating. Subsequent to the Acquisition, these ratings have
been confirmed by A.M. Best. Notwithstanding this confirmation, however,
Superior's rating remains "under review with potential negative implications."
An "A-" and a "B-" rating are A.M. Best's fourth and eighth highest rating
classifications, respectively, out of 15 ratings. An "A-" rating is awarded to
insurers which, in A.M. Best's opinion, "have demonstrated excellent overall
performance when compared to the standards established by the A.M. Best Company"
and "have a strong ability to meet their obligations to policyholders over a
long period of time." A "B-" rating is awarded to insurers which, in A.M. Best's
opinion, "have demonstrated adequate overall performance when compared to the
standards established by the A.M. Best Company" and "generally have an adequate
ability to meet their obligations to policyholders, but their financial strength
is vulnerable to unfavorable changes in underwriting or economic conditions."
IGF recently received an "NA-2" rating (a "rating not assigned" category for
companies that do not meet A.M. Best's minimum size requirement) from A.M. Best.
IGF intends to seek a revised rating after the infusion of capital from the
proceeds of the Offering. See "Use of Proceeds." A.M. Best bases its ratings on
factors that concern policyholders and agents and not upon factors concerning
investor protection. Such ratings are subject to change and are not
recommendations to buy, sell or hold securities. One factor in an insurer's
ability to compete effectively is its A.M. Best rating. There can be no
assurance that such ratings or future changes therein will not affect the
Company's competitive position. See "Business -- Ratings."
Access to Capital
Property and casualty insurance is a capital intensive business. The
Company must maintain minimum levels of surplus in the Insurers in order to
continue to write business and at the same time meet the standards established
by state insurance regulatory authorities and insurance rating bureaus.
Historically, the Company has achieved premium growth as a result of
both acquisitions and internal growth. It intends to continue to pursue
acquisition and new internal growth opportunities. Among the factors which may
restrict the Company's future growth is the availability of capital. Such
capital will likely have to be obtained through debt or equity financing or
retained earnings. There can be no assurance that the Insurers will have access
to sufficient capital to support future growth and also satisfy the capital
requirements of rating agencies and regulators. In addition, the Company will
require additional capital to finance future acquisitions. If the Company's
representatives on the Board of Directors of GGS Holdings cause GGS Holdings to
decline acquisition opportunities because the Company is unable to raise
sufficient capital to fund its pro rata share of the purchase price, the GS
Funds may be able to force a sale by the Company of its interest in GGS
Holdings. The ability of each of the Company and GGS Holdings to raise capital
through an issuance of voting securities may be affected by conflicts of
interest between each of them and their respective control persons and other
affiliates. See "--Control by Goran; Certain Continuing Relationships with Goran
and its Affiliates; Conflicts of Interest" and "--Certain Rights of the GS Funds
to Cause A Sale of GGS Holdings" below. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company --
Liquidity and Capital Resources."
Adequacy of Liability for Unpaid Losses and LAE
The liability for unpaid losses and LAE established by the Company are
estimates of amounts needed to pay reported and unreported claims and related
LAE based on facts and circumstances then known. These liabilities are based on
estimates of trends in claims severity, judicial theories of liability and other
factors.
Although the nature of the Company's insurance business is primarily
short-tail, the establishment of adequate liabilities is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
materially exceed the Company's liability for losses and LAE and not have a
material adverse effect on the Company's results of operations and financial
condition. Due to the inherent uncertainty of estimating these amounts, it has
been necessary, and may over time continue to be necessary, to revise estimated
liabilities as reflected in the Company's liability for losses and LAE. The
historic development of liability for losses and LAE may not necessarily reflect
future trends in the development of these amounts. Accordingly, it may not be
appropriate to extrapolate redundancies or deficiencies based on historical
information. See "Business -- Liability for Losses and Loss Adjustment
Expenses."
-11-
<PAGE>
Reliance Upon Reinsurance
In order to reduce risk and to increase its underwriting capacity, the
Company purchases reinsurance. Reinsurance does not relieve the Company of
liability to its insureds for the risks ceded to reinsurers. As such, the
Company is subject to credit risk with respect to the risks ceded to reinsurers.
Although the Company places its reinsurance with reinsurers, including the FCIC,
which the Company believes to be financially stable, a significant reinsurer's
insolvency or inability to make payments under the terms of a reinsurance treaty
could have a material adverse effect on the Company's financial condition or
results of operations.
The amount and cost of reinsurance available to companies specializing
in property and casualty insurance are subject, in large part, to prevailing
market conditions beyond the control of such companies. The Company's ability to
provide insurance at competitive premium rates and coverage limits on a
continuing basis depends upon its ability to obtain adequate reinsurance in
amounts and at rates that will not adversely affect its competitive position.
Due to continuing market uncertainties regarding reinsurance capacity,
no assurances can be given as to the Company's ability to maintain its current
reinsurance facilities, which generally are subject to annual renewal. If the
Company is unable to renew such facilities upon their expiration and is
unwilling to bear the associated increase in net exposures, the Company may need
to reduce the levels of its underwriting commitments.
Investments
The Company's results of operations depend in part on the performance
of its invested assets. On a pro forma basis after giving effect to the
Acquisition, as of March 31, 1996, 77.2% of the Company's investment portfolio
was invested in fixed maturities securities, 13.9% in equity securities, 6.9% in
short-term investments, and 2.0% in real estate and mortgage loans. Certain
risks are inherent in connection with fixed maturity securities including loss
upon default and price volatility in reaction to changes in interest rates and
general market factors. Equity securities involve risks arising from the
financial performance of, or other developments affecting, particular issuers as
well as price volatility arising from general stock market conditions.
Regulation
The Insurers are subject to comprehensive regulation by government
agencies in the states in which they operate. The nature and extent of that
regulation vary from jurisdiction to jurisdiction, but typically involve prior
approval of the acquisition of control of an insurance company or of any company
controlling an insurance company, regulation of certain transactions entered
into by an insurance company with any of its affiliates, limitations on
dividends, approval or filing of premium rates and policy forms for many lines
of insurance, solvency standards, minimum amounts of capital and surplus which
must be maintained, limitations on types and amounts of investments,
restrictions on the size of risks which may be insured by a single company,
limitation of the right to cancel or non-renew policies in some lines,
regulation of the right to withdraw from markets or agencies, requirements to
participate in residual markets, licensing of insurers and agents, deposits of
securities for the benefit of policyholders, reporting with respect to financial
condition, and other matters. In addition, state insurance department examiners
perform periodic financial and market conduct examinations of insurance
companies. For further information as to regulatory issues affecting the
Insurers, including the results of recent Insurance Regulatory Information
System ("IRIS") tests and risk-based capital ("RBC") requirements, see "Business
- -- Regulation." Such regulation is generally intended for the protection of
policyholders rather than security holders. No assurance can be given that
future legislative or regulatory changes will not adversely affect the Company.
See "Business -- Regulation."
Holding Company Structure; Dividend And Other Restrictions; Management Fees
The Company is a holding company whose principal asset is the capital
stock of the Subsidiaries. The Company relies primarily on dividends and other
payments from its Subsidiaries, including the Insurers, to meet its obligations
to creditors and to pay corporate expenses. The Insurers are domiciled in the
states of Indiana and Florida and each of these states limits the payment of
dividends and other distributions by insurance companies.
-12-
<PAGE>
No Indiana domiciled insurer may make payments in the form of dividends
or otherwise to its shareholders unless it possesses assets in the amount of
such payments in excess of its liabilities (including capital stock); provided,
that in no instance shall such dividend reduce the surplus below an amount equal
to 50% of the insurer's capital stock. A domestic insurer may not declare or pay
a dividend from any source of funds other than earned surplus without the prior
approval of the Indiana Department of Insurance ("Indiana Department"). Indiana
law defines as "extraordinary" any dividend or distribution which, together with
all other dividends and distributions to shareholders within the preceding
twelve months, exceeds the greater of: (i) 10% of statutory surplus as regards
policyholders as of the end of the preceding year or (ii) the prior year's net
income. Dividends which are not "extraordinary" may be paid ten days after the
Indiana Department receives notice of their declaration. "Extraordinary"
dividends and distributions may not be paid without the prior approval of the
Indiana Commissioner of Insurance (the "Indiana Commissioner") or until the
Indiana Commissioner has been given thirty days prior notice and has not
disapproved within that period. The Indiana Department must receive notice of
all dividends, whether "extraordinary" or not, within five business days after
they are declared.
Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its stockholders except out of surplus
which is derived from realized net operating profits and net realized capital
gains. A Florida domestic insurer may make dividend payments or distributions to
stockholders without prior approval of the Florida Department of Insurance
("Florida Department") if the dividend or distribution does not exceed the
larger of: (i) the lesser of 10% of surplus or net income, not including
realized capital gains, plus a 2-year carryforward, (ii) 10% of surplus with
dividends payable constrained to unassigned funds minus 25% of unrealized
capital gains, or (iii) the lesser of 10% of surplus or net investment income
plus a 3-year carryforward with dividends payable constrained to unassigned
funds minus 25% of unrealized capital gains. Alternatively, a Florida domestic
insurer may pay a dividend or distribution without the prior written approval of
the Florida Department if (1) the dividend is equal to or less than the greater
of: (i) 10% of the insurer's surplus as regards policyholders derived from
realized net operating profits on its business and net realized capital gains or
(ii) the insurer's entire net operating profits and realized net capital gains
derived during the immediately preceding calendar year; (2) the insurer will
have policyholder surplus equal to or exceeding 115% of the minimum required
statutory surplus after the dividend or distribution; (3) the insurer files a
notice of the dividend or distribution with the Florida Department at least ten
business days prior to the dividend payment or distribution; and (4) the notice
includes a certification by an officer of the insurer attesting that, after the
payment of the dividend or distribution, the insurer will have at least 115% of
required statutory surplus as to policyholders. Except as provided above, a
Florida domiciled insurer may only pay a dividend or make a distribution (i)
subject to prior approval by the Florida Department or (ii) 30 days after the
Florida Department has received notice of such dividend or distribution and has
not disapproved it within such time. In the Consent Order approving the
Acquisition, the Florida Department has prohibited Superior from paying any
dividends (whether extraordinary or not) for four years without the prior
written approval of the Florida Department.
Under these laws, the maximum aggregate amounts of dividends permitted
to be paid to the Company in 1996 by IGF without prior regulatory approval is
$2,900,000, none of which has been paid, and Pafco cannot pay to the Company any
dividends in 1996 without prior regulatory approval. Although the Company
believes that funds required for it to meet its financial and operating
obligations will be available, there can be no assurance in this regard. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company -- Liquidity and Capital Resources." Further, there
can be no assurance that, if requested, the Indiana Department will approve any
request for extraordinary dividends from Pafco or IGF or that the Florida
Department will allow any dividends to be paid by Superior during the four year
period described above.
The maximum dividends permitted by state law are not necessarily
indicative of an insurer's actual ability to pay dividends or other
distributions to a parent company, which also may be constrained by business and
regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's competitive position, the amount of premiums that can
be written and the ability to pay future dividends. Further, state insurance
laws and regulations require that the statutory surplus of an insurance company
following any dividend or distribution by such company be reasonable in relation
to its outstanding liabilities and adequate for its financial needs.
The management agreement originally entered into between the Company
and Pafco has been assigned by the Company to GGS Management, Inc., a
wholly-owned subsidiary of GGS Holdings ("GGS Management"). This agreement
provides for an annual management fee equal to 15% of gross premiums written. A
similar management agreement with a management fee of 17% of gross premiums
written has been entered into between GGS Management and Superior. Employees of
the Company relating to the nonstandard automobile insurance business and all
Superior employees became employees of GGS Management effective April 30, 1996.
As part of the approval of the Formation Transaction, the Indiana Department has
required Pafco to resubmit its management agreement for review by the Indiana
Department no later than May 1, 1997 (the first anniversary of the Formation
Transaction), together with supporting evidence that management fees charged to
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<PAGE>
Pafco are fair and reasonable in comparison to fees charged between unrelated
parties for similar services. In the Consent Order approving the Acquisition,
the Florida Department has reserved, for a period of three years, the right to
reevaluate the reasonableness of fees provided for in the Superior management
agreement at the end of each calendar year and to require Superior to make
adjustments in the management fees based on the Florida Department's
consideration of the performance and operating percentages of Superior and other
pertinent data. There can be no assurance that either the Indiana Department or
the Florida Department will not in the future require a reduction in these
management fees.
Furthermore, a result of certain restrictive covenants with respect to
dividends and other payments contained in the GGS Senior Credit Facility (as
defined herein), GGS Holdings and its subsidiaries, Pafco and Superior, are not
expected to constitute a significant source of funds for the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company -- Liquidity and Capital Resources."
Control by Goran; Certain Continuing Relationships with Goran and its
Affiliates; Conflicts of Interest
The Company is a wholly-owned subsidiary of Goran, and after completion
of the Offering, Goran will own approximately 70% of the outstanding Common
Stock, assuming no exercise of the Underwriters' over-allotment option. Goran
will have the power to control the Company, to elect its Board of Directors and
to approve any action requiring shareholder approval, including adopting
amendments to the Company's articles of incorporation and approving or
disapproving mergers or sales of all or substantially all of the assets of the
Company. Because Goran has the ability to elect the Board of Directors of the
Company, it will be able to effectively control all of the Company's policy
decisions. As long as Goran is the majority shareholder of the Company, third
parties will not be able to obtain control of the Company through purchases of
Common Stock not owned by Goran.
G. Gordon Symons, Chairman of the Board of Goran, the Company and GGS
Holdings and the father of Alan G. Symons, Chief Executive Officer of the
Company, and Douglas H. Symons, President and Chief Operating Officer of the
Company, and members of the Symons family beneficially own in the aggregate
61.0% of the outstanding common stock of Goran. Accordingly, since G. Gordon
Symons and members of his family have the ability to elect the Board of
Directors of Goran, they will have the ability to elect the Board of Directors
of the Company and otherwise to influence significantly the Company's business
and operations. Further, directors and executive officers of SIG, including
members of the Symons family, beneficially own in the aggregate approximately
62.1% of the outstanding shares of Goran. See "Securities Ownership of
Management and Goran."
Of the seven directors of the Company, five are current directors of
Goran (three of whom are members of the Symons family and two of whom are
independent directors of Goran) and two are outside directors. Directors and
officers of the Company and Goran may have conflicts of interest with respect to
certain matters affecting the Company, such as potential business opportunities
and business dealings between the Company and Goran and its affiliated
companies. See "Management -- Directors and Executive Officers of the Company."
Goran's failure to maintain ownership of at least 50% of the Company's
voting securities will expose Goran to a risk that it will be characterized as
an investment company within the meaning of the Investment Company Act of 1940,
as amended (the "1940 Act"), unless Goran's remaining voting securities of the
Company, together with any other investment securities, represent not more than
40% of the total assets of Goran on an unconsolidated basis. In such event,
Goran would be required to comply with the registration and other requirements
of the 1940 Act, which would be significantly burdensome for Goran. This
constraint makes it unlikely that Goran would approve a stock issuance by the
Company that reduces Goran's ownership below 50% and therefore would likely
limit the amount of additional capital which can be raised by the Company
through the issuance of voting securities. Among other consequences, such a
limit could affect the Company's ability to raise funds for acquisition
opportunities which may become available to the Company or to GGS Holdings. In
addition, the stockholder agreement among the Company, the GS Funds, Goran and
GGS Holdings (the "Stockholder Agreement") establishes certain rights of the GS
Funds to cause a sale of GGS Holdings upon the occurrence of certain triggering
events, including the third separate occasion on which an equity financing or
acquisition transaction proposed by the GS Funds is rejected by the GGS Holdings
-14-
<PAGE>
Board of Directors, and the loss of voting control (defined as being direct or
indirect ownership of 40% of the outstanding voting stock if any other holder or
group holds in excess of 10% of the outstanding voting stock, and otherwise 25%
thereof) of the Company or Goran by Alan G. Symons or his family members or
affiliates. In any event, the Company will be unable to raise equity capital by
issuing additional shares of Common Stock unless Goran agrees to that issuance.
In addition, if Goran or the Company ever sold significant amounts of shares of
the Common Stock in the public market, those sales might have an adverse effect
on the market price of the Common Stock.
Currently, Goran does not market property and casualty insurance
products which compete with products sold by the Company. Although there are no
restrictions on the activities in which Goran may engage, management of the
Company does not expect that Goran and the Company will compete with each other
to any significant degree in the sale of property and casualty insurance
products. There can be no assurance, however, that the Company will not
encounter competition from Goran in the future or that actions by Goran or its
affiliates will not inhibit the Company's growth strategy. See "Certain
Relationships and Related Transactions -- Control by Goran; Potential Conflicts
with Goran."
Conflicts of interest between the Company and Goran could arise with
respect to business dealings between them, including potential acquisitions of
businesses or properties, the issuance of additional securities, the election of
new or additional directors and the payment of dividends by the Company. The
Company has not instituted any formal plan or arrangement to address potential
conflicts of interest that may arise between the Company and Goran. See "Certain
Relationships and Related Transactions -- Control by Goran; Potential Conflicts
with Goran."
Conflicts of interest similar to those which could arise between the
Company and Goran could also arise between the Company and GGS Holdings. Alan G.
Symons, Chief Executive Officer of the Company, and Douglas H. Symons, President
and Chief Operating Officer of the Company, also serve as the Chief Executive
Officer and President, and Vice President, respectively, of GGS Holdings. Such
individuals have entered into employment agreements with GGS Holdings requiring
them to devote substantially all of their working time and attention to the
business and affairs of GGS Holdings. Further, Alan G. Symons and certain other
members of management of the Company are entitled, under certain circumstances,
to receive options to purchase shares of common stock of GGS Holdings. See
"Management -- Executive Compensation -- Employment Contracts and Termination of
Employment -- GGS Holdings." In addition, in the event that the Company does not
continue to own at least 50% of the outstanding voting securities of GGS
Holdings and the voting securities of GGS Holdings owned by the Company,
together with any other investment securities, represent over 40% of the total
assets of the Company on an unconsolidated basis, the Company will be exposed to
a risk that it would be characterized as an investment company within the
meaning of the 1940 Act. This consideration will limit the amount of additional
capital which can be raised through the issuance by GGS Holdings of its voting
securities.
Certain Rights of the GS Funds to Cause A Sale of GGS Holdings
The Stockholder Agreement establishes certain rights of the GS Funds to
cause a sale of GGS Holdings upon the occurrence of certain triggering events,
including (i) the failure to consummate a registered initial public offering of
GGS Holdings stock representing at least 20% of all such stock issued and
outstanding, and generating at least $25 million in net proceeds, by April 30,
2001, (ii) the third separate occasion on which an equity financing or
acquisition transaction proposed by the GS Funds is rejected by the GGS Holdings
Board of Directors, and the loss of voting control (defined as being direct or
indirect ownership of 40% of the outstanding voting stock if any other holder or
group holds in excess of 10% of the outstanding voting stock and otherwise, 25%
thereof) of the Company or Goran by Alan G. Symons or his family members or
affiliates or (iii) the cessation of Alan G. Symons' employment as CEO of GGS
Holdings for any reason. Upon the occurrence of any of such events, and at any
time or from time to time thereafter, the GS Funds may, by notifying the Company
in writing, initiate the process of seeking to effect a sale of GGS Holdings on
terms and conditions which are acceptable to the GS Funds. However, within
thirty days after the Company receives notice of the GS Funds' intention to
initiate the sale of GGS Holdings, the Company may provide written notice to the
GS Funds that it wishes to acquire or combine with GGS Holdings. The Company's
notice to the GS Funds must include the proposed purchase price and other
material terms and conditions with such specificity as is necessary to permit
the GS Funds to evaluate the Company's offer. If, within 90 days of delivery of
the notice by the Company, the GS Funds accept the Company's offer, the Company
will be obligated to acquire or combine with GGS Holdings. In the event the GS
Funds reject the Company's proposal, (i) any sale to a third party effected
within 180 days after receipt of such proposal must not contain terms that are
in the aggregate less favorable to the GGS Holdings stockholders than those set
forth in the Company's proposal, (ii) any sale must provide for the same
consideration to be paid to each stockholder, and (iii) no sale may constitute
an acquisition by or a combination with an affiliate of the GS Funds.
Accordingly, under certain circumstances, the GS Funds may have the ability to
force the Company to divest itself of its nonstandard automobile operations.
Further, a forced sale of GGS Holdings may also cause the Company to be
characterized as an investment company within the meaning of the 1940 Act unless
the proceeds are redeployed into other business operations or another exemption
from registration under the 1940 Act is available.
-15-
<PAGE>
Dependence on Key Personnel
The future success of the Company depends significantly upon the
efforts of certain key management personnel including G. Gordon Symons, Chairman
of the Board of the Company, Alan G. Symons, Chief Executive Officer of the
Company, Douglas H. Symons, President and Chief Operating Officer of the Company
and Pafco, Dennis G. Daggett, President of IGF, and Roger C. Sullivan, Jr.,
Executive Vice President of Superior. A loss of any of these officers could
adversely affect the Company's business. See "Management -- Directors and
Executive Officers of the Company."
Possible Liabilities Relating to Transactions
Prior to the Offering, the Company entered into a number of
transactions, including the Formation Transaction, the Acquisition, the
Transfer, the Distribution, the Dividend (as defined herein) and the other
transactions described under "The Company -- Formation of GGS Holdings;
Acquisition of Superior" (collectively, the "Transactions"). The application of
the tax laws to the factual circumstances relating to certain aspects of the
Transactions is uncertain. In particular, while the Company believes that there
is substantial authority for treating Pafco's contribution of IGF to IGF
Holdings in exchange for all of the capital stock of IGF Holdings (the
"Contribution") as a tax-free transaction under Section 351 of the Internal
Revenue Code of 1986, as amended (the "Code"), and therefore that no tax
penalties would in any event be payable, there can be no assurance that the
Internal Revenue Service (the "IRS") would agree with the foregoing tax
treatment. Among other things, the IRS could attempt to recharacterize the
Contribution and the Dividend which could result in a material liability to the
Company. See "The Company -- Formation of GGS Holdings; Acquisition of
Superior." The Company cannot predict with certainty whether or when any such
liabilities might arise. Accordingly, the Company's results of operations in one
or more future periods could be materially adversely affected by liabilities
related to the Transactions.
No Prior Public Market for the Common Stock; Possible Volatility of Stock Price
Prior to the Offering, there has been no public market for the Common
Stock. Although the Company plans to make application to list the Common Stock
on the Nasdaq National Market under the symbol "SIGC," there can be no assurance
that an active trading market will develop or be sustained. The initial public
offering price of the Common Stock will be determined solely through
negotiations among the Company, Goran and representatives of the Underwriters
based on several factors and will not necessarily reflect the price at which
Common Stock may be sold in the public market after this Offering. The market
price of the Common Stock may be significantly affected by trading in the shares
of Goran common stock on the Toronto Stock Exchange and the Nasdaq National
Market, since as of March 31, 1996, on a pro forma basis after giving effect to
the Transactions, SIG constituted approximately 83% of the consolidated total
assets of Goran, and for the year ended December 31, 1995 and the three months
ended March 31, 1996, on a pro forma basis after giving effect to the
Transactions, SIG contributed approximately 70% and 78%, respectively, to the
consolidated net income of Goran. In addition, factors such as quarterly
variations in the Company's financial results, announcements by the Company or
others and developments affecting the Company could cause the market price of
the Common Stock to fluctuate significantly. See "Underwriting."
Shares Eligible For Future Sale
Upon completion of the Offering, 7,000,000 shares of Common Stock held
by Goran will continue to be "restricted securities" as defined in Rule 144
under the Securities Act. Such shares may not be resold in the absence of
registration under the Securities Act or exemptions from such registration,
including, among others, the exemption provided by Rule 144 under the Securities
Act. As an affiliate of the Company, Goran is subject to certain volume
restrictions on the sale of shares of Common Stock. The Company and Goran have
agreed not to sell or otherwise dispose of any shares of Common Stock or
securities convertible into or exercisable for Common Stock for a period of 180
days after the date of this Prospectus without the prior written consent of the
representatives of the Underwriters. See "Underwriting."
No prediction can be made as to the effect, if any, that future sales
of shares, or the availability of shares for future sale, will have on the
market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock in the public market, or the perception that
such sales could occur, could adversely affect prevailing market prices for the
Common Stock. If such sales reduce the market price of the Common Stock, the
Company's ability to raise additional capital in the equity markets could be
adversely affected.
-16-
<PAGE>
Dilution
Based on an assumed initial public offering price per share of $11.00
and after deduction of estimated underwriting discounts and expenses payable by
the Company in connection with the Offering, the Company's net tangible book
value per share of Common Stock as of March 31, 1996, after giving effect to the
Transactions and Offering, would be $2.05. Accordingly, purchasers of Common
Stock offered hereby would suffer immediate dilution in net tangible book value
per share of $8.95. See "Dilution."
-17-
<PAGE>
THE COMPANY
Formation and Early Years
The Company was incorporated on March 30, 1987 as a wholly-owned
subsidiary of Goran, a Canadian federally chartered corporation, the shares of
Common Stock of which are traded on the Toronto Stock Exchange and the Nasdaq
National Market. The Company was formed as the holding company for Pafco which
acquired in 1987 a book of nonstandard automobile insurance business located in
several Midwestern states. In 1990, the Company entered the crop insurance
business through its purchase of shares of preferred stock of IGF representing
80% of the outstanding voting securities of IGF. After this acquisition, the
Company purchased all the remaining outstanding shares of capital stock of IGF
as the shares became available for sale.
Formation of GGS Holdings; Acquisition of Superior
In June, 1995, the Company entered into a letter of intent to acquire
Superior from Fortis, and in January, 1996, the Company secured a commitment
from the GS Funds to invest equity capital. On January 31, 1996, Goran, the
Company, Fortis and its wholly-owned subsidiary, Interfinancial, Inc.
("Interfinancial"), a holding company for Superior, entered into a Stock
Purchase Agreement (the "Superior Purchase Agreement") pursuant to which the
Company agreed to purchase Superior from Interfinancial (the "Acquisition") for
a purchase price of approximately $66 million. Simultaneously with the execution
of the Superior Purchase Agreement, Goran, the Company, GGS Holdings and GS
Capital Partners II, L.P., a Delaware limited partnership, entered into an
agreement (the "GGS Agreement") to capitalize GGS Holdings and to cause GGS
Holdings to issue its capital stock to the Company and to the GS Funds, so as to
give the Company a 52% ownership interest and the GS Funds a 48% ownership
interest (the "Formation Transaction"). Pursuant to the GGS Agreement, (a) the
Company contributed to GGS Holdings (i) Pafco common stock with a book value
determined in accordance with U.S. GAAP of at least $15.3 million as reflected
on an audited post-closing balance sheet of Pafco, (ii) its right to acquire
Superior pursuant to the Superior Purchase Agreement and (iii) certain fixed
assets, including office furniture and equipment, having a value of
approximately $350,000 and (b) the GS Funds contributed to GGS Holdings $21.2
million in cash. If the book value of Pafco as reflected on the final
post-closing balance sheet is less than $15.3 million, the Company will be
required to contribute the amount of the deficiency in cash to GGS Holdings no
later than December 31, 1996, plus interest at the prime rate from the date of
closing of the Formation Transaction to date of payment.
Pursuant to the GGS Agreement, Pafco transferred all of the outstanding
capital stock of IGF (the "Transfer") in order to improve the risk-based capital
rating of Pafco and to permit GGS Holdings to focus exclusively on the
nonstandard automobile insurance business. Pafco accomplished the Transfer by
forming a wholly-owned subsidiary, IGF Holdings, Inc. ("IGF Holdings"), to which
Pafco contributed all of the outstanding shares of capital stock of IGF. Prior
to the distribution of the IGF Holdings capital stock to the Company, IGF
Holdings paid to Pafco a dividend in the aggregate amount of approximately $11.0
million (the "Dividend"), consisting of $7.5 million in cash and a subordinated
promissory note in the principal amount of approximately $3.5 million (the "IGF
Note"). Pafco then distributed the outstanding capital stock of IGF Holdings to
the Company. IGF Holdings funded the cash portion of the Dividend with bank debt
in the principal amount of $7.5 million (the "IGFH Bank Debt"). See "Risk
Factors -- Possible Liabilities Relating to Transactions." The IGFH Bank Debt
and the IGF Note will be repaid with a portion of the proceeds from the
Offering. See "Use of Proceeds."
The Formation Transaction and the Acquisition were completed on April
30, 1996. The purchase price paid by GGS Holdings for Superior was approximately
$66 million based on a GAAP net book value of Superior of $62.7 million as
reflected in a preliminary pre-closing balance sheet, subject to post-closing
adjustment based on the net book value of Superior as reflected in an audited
post-closing balance sheet as of April 30, 1996. GGS Management funded the
purchase price with a combination of the $21.2 million contributed by the GS
Funds and the proceeds of a $48.0 million senior bank facility extended to GGS
Management (the "GGS Senior Credit Facility"). See "Risk Factors -- Holding
Company Structure; Dividend and Other Restrictions; Management Fees."
The Stockholder Agreement among the Company and the GS Funds provides
that each of the Company and the GS Funds will have the right to designate two
members of the Board of Directors of GGS Holdings. The Company's representatives
on the Board of Directors of GGS Holdings are G. Gordon Symons, Chairman of the
Board of the Company, and Alan G. Symons, Chief Executive Officer of the
Company. Pursuant to their power under the Stockholder Agreement to designate
the Chairman of the Board of GGS Holdings, the GS Funds have named G. Gordon
Symons as Chairman of the Board of GGS Holdings. The Stockholder Agreement
-18-
<PAGE>
designates Alan G. Symons as the Chief Executive Officer of GGS Holdings and
gives him the right to designate and determine the compensation for all
management personnel, provided that the designation of, removal of, and
determination of compensation for, any person earning $100,000 or more per annum
is subject to the prior approval of the board. The GS Funds have the right at
any time to designate a chief operating officer for GGS Holdings but have
currently not elected to exercise this right. Upon request, the GS Funds have
the right to appoint one designee to each of the committees of the Board of
Directors of GGS Holdings. The Stockholder Agreement does not give the GS Funds
the right to appoint any designees to the board of directors of any of the
subsidiaries of GGS Holdings.
Prior to the Offering, the Company, through Symons International Group,
Inc. (Florida) ("SIGF"), its specialized surplus lines underwriting unit based
in Florida, provided certain commercial insurance products through retail
agencies, principally in the southeast United States. SIGF writes these
specialty products through a number of different insurers including Pafco,
United National Insurance Group, Munich American Reinsurance Corp. and Lloyd's
of London. Effective January 1, 1996, the Company transferred to Goran all of
the issued and outstanding shares of capital stock of SIGF (the "Distribution").
The Company's principal executive offices are located at 4720 Kingsway
Drive, Indianapolis, Indiana 46205 and its telephone number is (317) 259-6300.
-19-
<PAGE>
USE OF PROCEEDS
Based on an estimated offering price of $11.00 per share and estimated
offering expenses of $3.0 million, the net proceeds to the Company of the
Offering are estimated to be approximately $30.0 million (approximately $34.6
million if the Underwriters' over-allotment option is exercised in full). The
Company intends to apply the net proceeds from the Offering as follows: (i) to
contribute approximately $9 million to increase the statutory surplus of IGF to
provide support for the writing of additional crop insurance coverages, (ii) to
repay in full the IGFH Bank Debt, (iii) to apply approximately $3.5 million to
retire the IGF Note held by Pafco, (iv) to apply $4.0 million towards retirement
of the Parent Indebtedness, which has an aggregate outstanding principal balance
and accrued interest of approximately $7.3 million, and (v) to pay a dividend to
Goran in the amount of $3.5 million. See "The Company -- Formation of GGS
Holdings; Acquisition of Superior." The Company will use the remainder of the
net proceeds, if any, to repay the remaining balance of the Parent Indebtedness
and for general corporate purposes, including acquisitions. Until utilized for
the above purposes, the net proceeds of the Offering will be invested in
short-term, interest-bearing, investment-grade securities.
The IGFH Bank Debt matures on January 1, 2001, with principal repayable
in 16 quarterly installments of $468,750 commencing April 1, 1997. Interest will
accrue at a variable rate per annum equal to the prime rate until October 1,
1996 and thereafter at a rate equal to the prime rate plus one percent. The IGFH
Bank Debt is collateralized by a first priority security interest in all of the
outstanding shares of IGF and the guarantee of Symons International Group, Ltd.
("SIGL"), the controlling shareholder of Goran, collateralized by 966,600 shares
of Goran common stock. Additionally, certain financial covenants in favor of the
lender of the IGFH Bank Debt require IGF Holdings to maintain increasing levels
of income, retained earnings, and statutory capital over the term of the IGFH
Bank Debt. The IGF Note is payable on the earlier of November 30, 1996, or the
consummation of an IGFH or SIG Company Sale (as defined in the GGS Agreement).
The IGF Note may be prepaid only with the prior written consent of the lender of
the IGFH Bank Debt. The IGF Note bears interest at a variable rate per annum
equal to the prime rate plus one percent until October 1, 1996 and thereafter at
a rate equal to the prime rate plus two percent, and is collateralized by a
second lien on the outstanding shares of capital stock of IGF. The Parent
Indebtedness is payable on demand, accrues interest at a rate of 10% and was
originally incurred by SIG in 1992 as a result of Goran's partial funding of the
repayment of certain loan obligations arising from the capitalization of SIG's
U.S. operations.
DIVIDEND POLICY
The Company currently intends to retain earnings to finance the growth
and development of its business and does not anticipate paying cash dividends on
its Common Stock in the foreseeable future, except for the dividend to Goran
described in "Use of Proceeds." Any determination to pay cash dividends on the
Common Stock will depend on, among other things, the future earnings, capital
requirements and financial condition of the Company, legal restrictions on the
payment of dividends, and on such other factors as the Company's Board of
Directors may consider relevant. As a holding company, the Company will depend
on dividends and other payments from the Subsidiaries to meet its expenses and
other corporate obligations and, if declared, to pay dividends to shareholders.
In the case of the Insurers, such payments are restricted by the laws,
regulations and orders of regulatory authorities of the States of Indiana and
Florida. In addition, the Senior Credit Agreement effectively prohibits GGS
Management from paying dividends or making other payments to its affiliates in
excess of $100,000 per year in the aggregate. See "Risk Factors --Holding
Company Structure; Dividend and Other Restrictions; Management Fees."
-20-
<PAGE>
DILUTION
At March 31, 1996, the net tangible book value of the Common Stock was
approximately $8.0 million, or $1.14 per share. The net tangible book value per
share represents the amount of total tangible assets (total assets less
intangible assets, treating deferred policy acquisition costs as intangible
assets) of the Company reduced by its total liabilities divided by the number of
shares of Common Stock outstanding. After giving effect to the Transactions, the
pro forma net tangible book value before the Offering would have been $(6.0)
million, or $(.85) per share. Then, after giving effect to the sale of 3,000,000
shares of Common Stock in the Offering at an assumed initial public offering
price of $11.00 per share less estimated underwriting discounts and commissions
and offering expenses, but without taking into account any other changes in net
tangible book value after March 31, 1996, the as adjusted net tangible book
value of the Common Stock as at March 31, 1996 would have been $20.5 million, or
$2.05 per share. This represents an immediate increase in the pro forma net
tangible book value to Goran of $2.90 per share, and an immediate dilution in
net tangible book value to new investors purchasing Common Stock in the Offering
of $8.95 per share. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share............................ $11.00
Tangible net book value per share.......................................... 1.58
Less: Intangible assets per share..................................... (.44)
Less: Intangible assets per share arising from the Transactions....... (1.99)
-----
Pro forma net tangible deficit per share.......................... (.85)
Increase per share attributable to the purchase of
Common Stock by new investors in the Offering..................... 2.90
----
As adjusted net tangible book value per share after
the Offering....................................................... 2.05
-----
Dilution per share to new investors (1).................................... $8.95
=====
</TABLE>
- -------------------
(1) Dilution is determined by subtracting the pro forma net tangible book value
per share of Common Stock, after giving effect to the (i) the Transactions,
and (ii) the Offering, from the amount of cash paid for a share of Common
Stock by a new investor in the Offering.
-21-
<PAGE>
CAPITALIZATION
Set forth below is (i) the historical capitalization of the Company at
March 31, 1996, (ii) the pro forma capitalization of the Company at March 31,
1996, after giving effect to the Transactions, and (iii) the pro forma
capitalization of the Company at March 31, 1996, as adjusted to give effect to
the application of the net proceeds from the Offering (based on an assumed
offering price of $11.00 per share of Common Stock) as described in "Use of
Proceeds."
<TABLE>
<CAPTION>
At March 31, 1996
----------------------------------------------------
Pro Forma For
Pro Forma The Transactions
Company For The As Adjusted For
Historical Transactions (1) The Offering (1)
---------- ---------------- ----------------
(in thousands)
<S> <C> <C> <C>
Short-term debt:.......................................... $ 250 $ 7,750 $ 250
Long-term debt:
Bank loans............................................. --- 47,551 47,551
Notes payable.......................................... 6,926 6,926 926
------- ------- ---------
Total debt........................................... 7,176 62,227 48,727
------- ------- ---------
Minority interest......................................... --- 21,200 21,200
------- ------- ---------
Shareholders' equity:
Preferred stock; _____ shares authorized; no shares
outstanding pro forma and as adjusted................ --- --- ---
Common stock, no par value, and additional paid-in
capital; _____ shares authorized; 7,000,000 shares
outstanding pro forma and 10,000,000 shares
outstanding as adjusted.............................. 4,130 4,130 34,130
Unrealized loss on investments......................... (128) (128) (128)
Retained earnings...................................... 7,036 7,036 3,536
------- ------- ---------
Total shareholders' equity........................... $11,038 $11,038 $ 37,538
------- ------- ---------
Total capitalization ..................................... $18,214 $94,465 $107,465
======= ======= ========
</TABLE>
- ----------
(1) The pro forma information excludes shares reserved for issuance pursuant to
certain employment agreements with IGF, the Company's Stock Option
Incentive Plan and the Company's Director Option Plan. See "Management --
Executive Compensation --Employment Contracts and Termination of Employment
-- IGF," "-- Stock Option Plans -- SIG Stock Option Incentive Plan," and
"-Stock Option Plans -- Director Option Plan."
-22-
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements of
operations of the Company for the year ended December 31, 1995 and the three
months ended March 31, 1996 present results for the Company as if the
Transactions and the Offering had occurred as of January 1, 1995 and January 1,
1996, respectively. The accompanying unaudited pro forma consolidated balance
sheet as of March 31, 1996 gives effect to the Transactions and the Offering as
if they had occurred as of March 31, 1996. The pro forma adjustments are based
on available information and certain assumptions that the Company currently
believes are reasonable in the circumstances. The unaudited pro forma
consolidated financial statements have been derived from and should be read in
conjunction with the historical Consolidated Financial Statements and Notes of
the Company for the year ended December 31, 1995 and as of and for the unaudited
three months ended March 31, 1996 and the historical Consolidated Financial
Statements and Notes of Superior for the year ended December 31, 1995 and as of
and for the unaudited three months ended March 31, 1996, in each case contained
elsewhere herein, and should be read in conjunction with the accompanying Notes
to Unaudited Pro Forma Consolidated Financial Statements. The pro forma
adjustments and pro forma consolidated amounts are provided for informational
purposes only.
The pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the results of operations or financial
position that would have occurred had the Transactions and the Offering been
consummated on the dates assumed; nor is the pro forma information intended to
be indicative of the Company's future results of operations or financial
position.
Unaudited Pro Forma Consolidated Balance Sheet
At March 31, 1996
<TABLE>
<CAPTION>
Pro Forma
for the
Pro Forma Transactions
SIG Superior for the Offering and the
Historical Historical Adjustments (1) Transactions Adjustments (2) Offering
---------- ---------- --------------- ------------ --------------- --------
(in thousands)
Assets
<S> <C> <C> <C> <C> <C> <C>
Total invested assets and cash... $27,180 $120,886 $ 192 A1 $155,758 $15,000 M $170,758
7,500 C1
Receivables...................... 78,157 32,530 --- 110,687 --- 110,687
Other assets..................... 35,476 12,598 1,397 A1 50,691 --- 50,691
1,220 B3
Goodwill......................... --- --- 3,638 A2 3,638 --- 3,638
-------- -------- ------- -------- ------- --------
Total Assets ................. $140,813 $166,014 $13,947 $320,774 $15,000 $335,774
======== ======== ======= ======== ======= ========
Liabilities and
Shareholders' Equity
Losses and loss
adjustment expenses........... $50,009 $45,700 $--- $95,709 $--- $95,709
Unearned premiums................ 40,884 44,516 --- 85,400 --- 85,400
Payables......................... 31,242 12,222 --- 43,464 --- 43,464
Federal income taxes payable..... 464 823 --- 1,287 --- 1,287
Loans to affiliates.............. 6,926 --- --- 6,926 (4,000)M 2,926
Notes payable and line of credit. 250 --- 7,500 C1 7,750 (7,500)M 250
Term loan........................ --- --- 48,000 A1 48,000 --- 48,000
Minority interest................ --- --- 21,200 B1 21,200 --- 21,200
-------- -------- ------- -------- ------- --------
Total liabilities........... 129,775 103,261 76,700 309,736 (11,500) 298,236
-------- -------- ------- -------- ------- --------
Shareholders' equity ............ 11,038 62,753 (62,753) A5 11,038 26,500 N 37,538
-------- -------- ------- -------- ------- --------
Total liabilities and
shareholders' equity........ $140,813 $166,014 $13,947 $320,774 $15,000 $335,774
======== ======== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the pro forma consolidated
financial statements.
-23-
<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations
For the Three Months Ended March 31, 1996
<TABLE>
<CAPTION>
Pro Forma
for the
Pro Forma Transactions
SIG Superior for the Offering and the
Historical Historical Adjustments (1) Transactions Adjustments (2) Offering
---------- ---------- --------------- ------------ --------------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross premiums written .......... $41,422 $32,289 $ --- $73,711 $ --- $73,711
Net premiums written............. 18,730 32,126 $ --- 50,857 $ --- 50,857
Net premiums earned ............. 13,785 28,659 $ --- 42,444 $ --- 42,444
Net investment income............ 558 1,807 --- 2,365 --- 2,365
Other income..................... 977 1,473 70 C3 2,520 (70)I 2,450
Net realized capital
gain (loss)................... (36) 29 --- (7) --- (7)
------ ------ ----- ------ ---- ------
Total revenues.............. 15,284 31,968 70 47,322 (70) 47,252
Losses and loss
adjustment expenses........... 8,963 19,511 --- 28,474 --- 28,474
Policy acquisition and general
and administrative expenses... 3,669 8,188 58 A1 11,882 --- 11,882
36 A2
(130) A3
61 B3
Interest expense................. 249 --- 997 A4 1,489 (100)G 1,146
243 C2 (243)H
------ ------ ----- ------ ---- ------
Total expenses................ 12,881 27,699 1,265 41,845 (343) 41,502
Income before income taxes,
minority interest, and
discontinued operations....... 2,403 4,269 (1,195) 5,477 273 5,750
Provision for income taxes....... 817 1,455 (394) F 1,878 93 K 1,971
Minority interest................ --- --- 1,304 B2 1,304 (22)J 1,282
Loss from discontinued
operations (less
income taxes)................. --- --- --- --- --- ---
------ ------ ----- ------ ---- ------
Net income.................. $ 1,586 $2,814 $(2,105) $2,295 $202 $2,497
======== ====== ======= ====== ==== ======
Net income per
common share.................. $ 0.33 $ 0.25
Weighted average
shares outstanding............ 7,000 3 ,000 L 10,000
GAAP Ratios:
Loss and LAE ratio............... 65.0% 68.1% 67.1% 67.1%
Expense ratio.................... 28.4% 28.6% 31.5% 30.7%
------ ------ ----- ------ ---- ------
Combined ratio................ 93.4% 96.7% 98.6% 97.8%
</TABLE>
The accompanying notes are an integral part of the pro forma consolidated
financial statements.
-24-
<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Pro Forma
for the
Pro Forma Transactions
SIG Superior for the Offering and the
Historical Historical Adjustments (1) Transactions Adjustments (2) Offering
---------- ---------- --------------- ------------ --------------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross premiums written........... $124,634 $94,756 $(5,115) E $214,275 --- $214,275
Net premiums written............. 53,447 94,070 (4,539) E 142,978 --- 142,978
Net premiums earned.............. 49,641 97,614 (3,573) E 143,682 --- 143,682
Net investment income............ 1,173 7,093 (4) E 8,262 --- 8,262
Other income .................... 2,174 4,171 280 C3 6,625 (280)I 6,345
Net realized capital gain (loss). (344) 1,954 --- 1,610 --- 1,610
-------- ------ -------- ------- ---- ------
Total revenues................ 52,644 110,832 (3,297) 160,179 (280)1 59,899
Losses and loss adjustment
expenses...................... 35,971 72,343 (2,880) E 105,434 --- 105,434
Policy acquisition and general
and administrative expenses... 7,981 32,705 232 A1 40,055 --- 40,055
146 A2
(521) A3
244 B3
(732) E
Interest expense................ 1,248 -- 3,989 A4 6,211 (400)G 4,837
974 C2 (974)H
-------- ------ -------- ------- ---- ------
Total expenses................ 45,200 105,048 1,452 151,700 (1,374) 150,326
Income before income taxes,
minority interest, and
discontinued operations....... 7,444 5,784 (4,749) 8,479 1,094 9,573
Provision for income taxes....... 2,619 1,649 (1,565) F 2,703 372 K 3,075
Minority interest................ --- --- 136 B2 136 (88)J 48
Loss from discontinued
operations (less
income taxes)................. (4) --- 4 D --- --- ---
-------- ------ -------- ------- ---- ------
Net income.................. $ 4,821 $4,135 $ (3,316) $ 5,640 $810 $6,450
======== ====== ======== ======= ==== ======
Net income per common share...... $ 0.81 $ 0.65
======== =======
Weighted average shares
outstanding................... 7,000 3,000 L 10,000
GAAP Ratios:
Loss and LAE ratio............... 72.5% 74.1% 73.4% 73.4%
Expense ratio ................... 18.6% 33.5% 32.2% 31.2%
---- ----- ----- -----
Combined ratio................ 91.1% 107.6% 105.6% 104.6%
</TABLE>
The accompanying notes are an integral part of the pro forma consolidated
financial statements.
-25-
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Adjustments Relating to the Transactions
Acquisition of Superior
The acquisition of Superior will be accounted for under the purchase method of
accounting. Under this method, the total cost to acquire Superior will be
allocated to the assets and liabilities based on their fair values as of the
date of the acquisition with any excess of the total purchase price over the
fair value of the assets acquired less the fair value of the liabilities assumed
recorded as goodwill. Under the terms of the Superior Purchase Agreement, the
total purchase price for Superior was $66,390,000, including transaction costs
of $140,000. The GAAP carrying value of assets acquired and liabilities assumed
at the Acquisition date approximated fair value. There were no significant
identifiable intangible assets. Therefore, the excess cost of the total purchase
price was recorded as goodwill.
The Acquisition was funded with (i) $21,200,000 of cash contributions from the
GS Funds in exchange for a 48% minority interest in GGS Holdings; and (ii)
$48,000,000 in cash from the GGS Senior Credit Facility. Funds received in
excess of the total purchase price of Superior plus acquisition costs financed,
estimated to be $192,000, are reflected as cash until final determination of the
Acquisition purchase price. No additional investment income is assumed to be
earned on the excess cash retained from the proceeds of the Acquisition
financing.
Pro forma adjustments to give effect to the Acquisition and related transactions
are summarized as follows:
A1. Notes payable is adjusted to reflect the Acquisition financing of the
$48,000,000 GGS Senior Credit Facility as at March 31, 1996, and total
invested assets and cash are adjusted by $192,000 for funds received in
excess of the total purchase price.
Policy acquisition and general and administrative expenses for the
periods prior to the Acquisition is adjusted by $232,000 for the year
ended December 31, 1995 and by $58,000 for the three months ended March
31, 1996 to reflect the amortization of deferred loan origination costs
of $1,397,000 incurred related to the GGS Senior Credit Facility. The
debt issuance costs are amortized over six years, the term of the GGS
Senior Credit Facility.
A2. Goodwill related to the Acquisition on a pro forma basis is $3,638,000
and is based on a preliminary valuation of the total purchase price.
Accordingly, the allocation of the excess purchase price may be
adjusted upon final determination of such value.
Policy acquisition and general and administrative expenses for the
periods prior to the Acquisition is adjusted by $146,000 for the year
ended December 31, 1995 and by $36,000 for the three months ended March
31, 1996 to reflect the amortization of goodwill. Goodwill is amortized
over a 25-year period on a straight line basis based upon management's
estimate of the expected benefit period.
A3. Policy acquisition and general and administrative expenses for the
periods prior to the Acquisition is adjusted by $521,000 for the year
ended December 31, 1995 and by $130,000 for the three months ended
March 31, 1996 to reflect the elimination of management fees charged by
Superior's former parent, Fortis, for corporate expenses. Subsequent to
the Acquisition date, no such management fees have or will be charged
to Superior by the Company.
A4. Interest expense for the periods prior to the Acquisition is adjusted
by $3,989,000 for the year ended December 31, 1995 and by $997,000 for
the three months ended March 31, 1996 to reflect the GGS Senior Credit
Facility financing of $48,000,000 related to the Acquisition. It is
assumed that the interest rate on the GGS Senior Credit Facility was
8.31%. The Company entered into an interest rate swap to effectively
fix its borrowing costs at 8.31% through November 15, 1996. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company -- Liquidity and Capital
Resources."
A5. Shareholders' equity at March 31, 1996 has been adjusted to reflect the
elimination of Superior's historical shareholders' equity of
$62,753,000 as of March 31, 1996.
-26-
<PAGE>
The Formation Transaction
B1. In connection with the financing of the Acquisition, GGS Holdings was
formed, and $21,200,000 of cash contributions from GS Funds was
provided in exchange for a 48% minority interest in GGS Holdings. As
part of the Formation Transaction, the Company contributed Pafco to GGS
Holdings in exchange for a 52% controlling interest.
B2. Minority interest for the periods prior to the Formation Transaction
has been adjusted by $136,000 for the year ended December 31, 1995 and
by $1,304,000 for the three months ended March 31, 1996 to reflect the
48% minority interest in GGS Holdings.
B3. Other assets has been adjusted to reflect the capitalization of
organizational costs of $1,220,000 incurred in connection with the
Formation Transaction, consisting principally of legal, accounting and
finders fees.
Policy acquisition and general and administrative expenses for the
periods prior to the Formation Transaction is adjusted by $244,000 for
the year ended December 31, 1995 and by $61,000 for the three months
ended March 31, 1996 to reflect the amortization of organizational
costs. Organizational costs are amortized over a 5-year period on a
straight line basis.
The Transfer
In connection with the Transfer and immediately prior to the Formation
Transaction, IGF Holdings paid to Pafco the Dividend, consisting of $7,500,000
in cash and the IGF Note of $3,500,000. IGF Holdings funded the cash portion of
the Dividend with the proceeds of the $7,500,000 IGFH Bank Debt.
Pro forma adjustments to give effect to the Transfer and related transactions
are summarized as follows:
C1. Notes payable and line of credit is adjusted to reflect the financing
of the Dividend with the IGFH Bank Debt of $7,500,000, as at March 31,
1996. Pro forma notes payable and line of credit is not adjusted to
reflect the issuance of the IGF Note of $3,500,000 to Pafco, in
accordance with GAAP, since such intercompany transactions are
eliminated in consolidation.
C2. Interest expense for the periods prior to the Transfer is adjusted to
reflect the financing of the Dividend. It is assumed that the interest
rate on the IGFH Bank Debt was 9.25% (prime rate plus 1%). This rate
reflects the interest rate environment which existed at the Transfer
date. The stated interest rate on the IGF Note is 8.0%. Pro forma
adjustments to give effect to the financing are summarized as follows:
<TABLE>
<CAPTION>
Year ended Three months ended
December 31, 1995 March 31, 1996
----------------- --------------
<S> <C> <C>
IGFH Bank Debt .................... $694,000 $173,000
IGF Note........................... 280,000 70,000
-------- --------
$974,000 $243,000
======== ========
</TABLE>
C3. Other income has been adjusted by $280,000 for the year ended December
31, 1995 and by $70,000 for the three months ended March 31, 1996 to
reflect the interest income Pafco would earn which is derived from the
IGFH Note of $3,500,000, at a stated rate of 8.0%. No additional
investment income is assumed to be earned on the cash retained in Pafco
from the proceeds of the IGF Note.
-27-
<PAGE>
The Distribution
D. Loss from discontinued operations is adjusted to reflect the
Distribution, which occurred on January 1, 1996. Accordingly, all of
the discontinued operations related to SIGF activities have been
eliminated on a pro forma basis. No adjustments have been made to the
Pro Forma Consolidated Financial Statements as of and for the three
months ended March 31, 1996 as the Distribution occurred on January 1,
1996.
E. On April 29, 1996, Pafco ceded all of its commercial business relating
to (i) 1995 and previous years, and (ii) prospectively written
commercial business, through a 100% quota share reinsurance agreement
to Granite Re, an affiliate of the Company, with an effective date of
January 1, 1996. On a pro forma basis, all of the operations related to
the commercial business have been eliminated for the year ended
December 31, 1995. No adjustments have been made to the Pro Forma
Consolidated Financial Statements as of and for the three months ended
March 31, 1996 as the cession of commercial business to Granite Re
occurred on January 1, 1996. The following amounts have been
eliminated, on a pro forma basis:
<TABLE>
<CAPTION>
Year ended
December 31, 1995
<S> <C>
Gross premiums written ............................................... $ 5,115,000
Net premiums written ................................................. 4,539,000
Net premiums earned................................................... 3,573,000
Net investment income ................................................ 4,000
Losses and LAE........................................................ 2,880,000
Policy acquisition and general and administrative expenses............ 732,000
</TABLE>
No additional investment income is assumed to be earned on the cash
received by Pafco from the cession to Granite Re.
F. All applicable pro forma adjustments to operations are tax affected at
the effective rate.
Pro Forma Adjustments Relating to the Offering
G. Interest expense for the periods prior to the Offering are adjusted by
$400,000 for the year ended December 31, 1995 and by $100,000 for the
three months ended March 31, 1996 to reflect the repayment of
$4,000,000 of the Parent Indebtedness, with a stated interest rate of
10%.
H. Interest expense for the periods prior to the Offering are adjusted to
reflect the repayment of the $7,500,000 of the IGFH Bank Debt, with an
interest rate of 9.25%, and the repayment of the IGF Note of
$3,500,000, with a stated interest rate of 8.0% as follows:
<TABLE>
<CAPTION>
Year ended Three months ended
December 31, 1995 March 31, 1996
----------------- --------------
<S> <C> <C>
IGFH Bank Debt........ $694,000 $173,000
IGF Note.............. 280,000 70,000
-------- ---------
$974,000 $ 243,000
======== =========
</TABLE>
I. Other income has been adjusted by $280,000 for the year ended December
31, 1995 and by $70,000 for the three months ended March 31, 1996 to
reflect the elimination of interest income Pafco would have earned upon
subsequent repayment of the IGFH Note of $3,500,000, at a stated rate
of 8%.
J. Minority interest for the periods prior to the Formation Transaction
has been adjusted by $88,000 for the year ended December 31, 1995 and
by $22,000 for the three months ended March 31, 1996 to reflect the
48.0% minority interest in GGS Holdings resulting from entry I above.
K. All applicable pro forma adjustments to operations are tax affected at
the effective rate.
-28-
<PAGE>
L. The weighted average shares outstanding has been adjusted to reflect
the 3,000,000 shares issued in the Offering.
M. Net funds available for injection into the Company's investment
portfolio amounts to $15,000,000, assuming a per share offering price
of $11.00 and 3,000,000 shares issued in the Offering, as follows:
Gross proceeds.............................. $ 33,000,000
Less estimated issue costs.................. (3,000,000)
-------------
Subtotal net proceeds................... 30,000,000
Repayment of IGFH Bank Debt................. (7,500,000)
Repayment of Parent Indebtedness............ (4,000,000)
Payment of dividend to Goran................ (3,500,000)
-------------
Net funds available for investment...... $ 15,000,000
=============
N. Net increase in shareholders' equity is as follows:
Gross proceeds.............................. $ 33,000,000
Less estimated issue costs.................. (3,000,000)
-------------
Subtotal net proceeds................... 30,000,000
Payment of dividend to Goran................ (3,500,000)
Net change in shareholders' equity...... $ 26,500,000
=============
-29-
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF
SYMONS INTERNATIONAL GROUP, INC.
The selected consolidated financial data presented below is derived from
the consolidated financial statements of the Company and its Subsidiaries. Such
financial statements for, and as of the end of, each of the years in the three
year period ended December 31, 1995 have been audited by Coopers & Lybrand
L.L.P., independent public accountants, and are included in this Prospectus. The
selected consolidated financial data presented below for, and as of the end of,
each of the three month periods ended March 31, 1995 and 1996 are derived from
the unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus. The results of the operations of the Company for
the three months ended March 31, 1996 are not necessarily indicative of the
results of operations that may be expected for the full year. In the opinion of
management, the unaudited information includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations for such periods. The information
set forth below should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
--------------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(in thousands, except per share amounts and ratios)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA: (1)
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written ................ $ 91,974 $ 109,219 $ 88,936 $ 103,134 $ 124,634 $ 28,272 $ 41,422
Net premiums written .................. 31,543 35,425 31,760 35,139 53,447 10,300 18,730
Net premiums earned ................... 30,388 35,985 31,428 32,126 49,641 8,649 13,785
Net investment income ................. 1,370 1,319 1,489 1,241 1,173 319 558
Other income .......................... -- -- 886 1,622 2,174 592 977
Net realized capital gain (loss) ...... 381 486 (119) (159) (344) (45) (36)
--------- --------- --------- --------- --------- --------- ---------
Total revenues .................... 32,139 37,790 33,684 34,830 52,644 9,515 15,284
--------- --------- --------- --------- --------- --------- ---------
Losses and loss adjustment expenses ... 23,137 27,572 25,080 26,470 35,971 5,648 8,963
Policy acquisition and general and
administrative expenses ............. 5,480 7,955 8,914 5,801 7,981 2,045 3,669
Interest expense ...................... 847 459 996 1,184 1,248 272 249
--------- --------- --------- --------- --------- --------- ---------
Total expenses .................... 29,464 35,986 34,990 33,455 45,200 7,965 12,881
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before taxes,
discontinued operations,
extraordinary item, cumulative
effect of an accounting
change and minority interest ....... 2,675 1,804 (1,306) 1,375 7,444 1,550 2,403
Income taxes .......................... 771 996 83 (718) 2,619 500 817
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
discontinued operations,
extraordinary item, cumulative
effect of an accounting
change and minority interest ....... $ 1,904 $ 808 $ (1,389) $ 2,093 $ 4,825 $ 1,050 $ 1,586
Net income (loss) ..................... $ 1,770 $ 817 $ (323) $ 2,117 $ 4,821 $ 1,066 $ 1,586
========= ========= ========= ========= ========= ========= =========
Per common share data:
Income (loss) before
discontinued operations,
extraordinary item, and
cumulative effect of
an accounting change ............. $ 0.27 $ 0.12 $ (0.20) $ 0.30 $ 0.69 $ 0.15 $ 0.23
Net income (loss) .................. $ 0.25 $ 0.12 $ (0.05) $ 0.30 $ 0.69 $ 0.15 $ 0.23
========= ========= ========= ========= ========= ========= =========
Weighted average
shares outstanding ............... 7,000 7,000 7,000 7,000 7,000 7,000 7,000
GAAP RATIOS: (1)
Loss and LAE ratio ................... 76.1% 76.6% 79.8% 82.4% 72.5% 65.3% 65.0%
Expense ratio ......................... 20.8 23.4 31.5 21.7 18.6 26.8 28.4
--------- --------- --------- --------- --------- --------- ---------
Combined ratio ........................ 96.9% 100.0% 111.3% 104.1% 91.1% 92.1% 93.4%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------- March 31,
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
(in thousands, except per share amounts)
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C>
Investments ....................... $ 26,049 $ 27,941 $ 21,497 $ 18,572 $ 25,902 $ 27,180
Total assets ...................... 78,749 75,001 81,540 66,628 110,516 140,813
Losses and loss adjustment expenses 38,607 38,616 54,143 29,269 59,421 50,009
Total liabilities ................. 77,799 73,753 79,321 62,357 100,981 129,775
Minority interest ................. 466 55 -- 16 -- --
Total shareholders' equity ........ 484 1,193 2,219 4,255 9,535 11,038
Book value per share .............. $ 0.07 $ 0.17 $ 0.32 $ 0.61 $ 1.36 $ 1.58
STATUTORY CAPITAL AND SURPLUS:
Pafco (2) ......................... $ 8,251 $ 10,363 $ 8,132 $ 7,848 $ 11,875 $ 13,423
IGF ............................... $ 5,277 $ 6,400 $ 2,789 $ 4,512 $ 9,219 $ 10,488
</TABLE>
(footnotes on following page)
-30-
<PAGE>
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company -- Overview" for a discussion of the
accounting treatment accorded to the crop insurance business.
(2) The statutory surplus of Pafco includes Pafco's share of IGF's statutory
surplus. Pafco owned the following percentages of IGF at December 31 of
each of the following years: 1991, 87.9%; 1992, 98.2%; 1993, 98.2%; 1994,
98.8%; 1995, 100%. At April 30, 1996, Pafco transferred IGF to SIG. Prior
to the transfer, IGF also paid a dividend to Pafco in the form of cash of
$7,500,000 and a promissory note of $3,500,000. At April 30, 1996, Pafco's
statutory and capital surplus was $11,873,000. See "The Company --
Formation of GGS Holdings; Acquisition of Superior."
-31-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OF THE COMPANY
Overview
The Company underwrites and markets nonstandard private passenger
automobile insurance and crop insurance. Nonstandard Automobile Insurance
Operations; Impact of Formation Transaction and Superior Acquisition
The Company, through its 52% owned Subsidiaries, Pafco and Superior, is
engaged in the writing of insurance coverage on automobile physical damage and
liability policies for "nonstandard risks." Nonstandard insureds are those
individuals who are unable to obtain insurance through standard market carriers
due to factors such as poor premium payment history, driving experience, record
of prior accidents or driving violations, particular occupation or type of
vehicle. Premium rates for nonstandard risks are higher than for standard risks.
Since it can be viewed as a residual market, the size of the nonstandard private
passenger automobile insurance market changes with the insurance environment and
grows when standard coverage becomes more restrictive. Nonstandard policies have
relatively short policy periods and low limits of liability. Due to the low
limits of coverage, the period of time that elapses between the incurrence and
settlement of losses under nonstandard policies is shorter than many other types
of insurance. Also, since the nonstandard automobile insurance business
typically experiences lower rates of retention than standard automobile
insurance, the number of new policyholders underwritten by nonstandard
automobile insurance carriers each year is substantially greater than the number
of new policyholders underwritten by standard carriers. While pricing conditions
have improved in certain markets in 1996, the nonstandard automobile insurance
business has experienced a high degree of competition in recent years that has
made it difficult for the Company to achieve adequate pricing.
Prior to consummation of the Formation Transaction and the Acquisition
on April 30, 1996, the Company provided nonstandard automobile insurance
coverage primarily through Pafco as a wholly-owned subsidiary. In connection
with the Formation Transaction, the management agreement formerly in place
between the Company and Pafco, which provides for an annual management fee
payable to the Company in an amount equal to 15% of gross premiums, was assigned
to GGS Management. As a result of the change in the capital structure of the
Company's nonstandard automobile insurance business, the acquisition of Superior
by GGS Holdings and the assignment of the Pafco management agreement to GGS
Management, certain financial information relating to the Company's nonstandard
business in respect of periods prior to consummation of the Formation
Transaction and the Acquisition will not be comparable to corresponding
financial information for subsequent periods. See "The Company -- Formation of
GGS Holdings; Acquisition of Superior" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Superior."
Crop Insurance Operations
General. The majority of the Company's crop insurance business consists
of Multi-Peril Crop Insurance ("MPCI"). MPCI is a government-sponsored program
with accounting treatment which differs in certain respects from more
traditional property and casualty insurance lines. Farmers may purchase "CAT
Coverage" (the minimum available level of MPCI coverage) upon payment of a
minimal fixed administrative fee of $50 per policy (the "CAT Coverage Fee")
instead of a premium. This fee is included in Other Income. Commissions paid to
agents to write CAT policies are offset against the CAT Coverage Fee. For
purposes of the profit-sharing formula under the MPCI program referred to below,
the Company is credited with an imputed premium (its "MPCI Imputed Premium") for
all CAT Coverage policies it sells, determined in accordance with a formula. For
income statement purposes under GAAP, gross premiums written consist of the
aggregate amount of MPCI Premiums paid by farmers for "Buy-up Coverage" (MPCI
-32-
<PAGE>
coverage in excess of CAT Coverage), and any related federal premium subsidies,
but do not include any MPCI Imputed Premium credited on CAT Coverage. By
contrast, net premiums written (and net premiums earned) do not include any MPCI
Premiums or premium subsidies, all of which are deemed to be ceded to the U.S.
Federal Government as reinsurer. The Company's profit or loss from its MPCI
business is determined after the crop season ends on the basis of a complex
profit sharing formula established by law and the FCIC. For GAAP income
statement purposes, any such profit or loss sharing earned or payable by the
Company is treated as an adjustment to commission expense and is included in
policy acquisition and general and administrative expenses.
The Company receives from the FCIC (i) an expense reimbursement payment
equal to a percentage of gross premiums written for each Buy-up Coverage policy
it writes (the "Buy-up Expense Reimbursement Payment"), (ii) an LAE
reimbursement payment equal to 13.0% of MPCI Imputed Premiums for each CAT
Coverage policy it writes (the "CAT LAE Reimbursement Payment") and (iii) a
small excess LAE reimbursement payment (the "MPCI Excess LAE Reimbursement
Payment"). For 1994, 1995 and 1996, the Buy-up Expense Reimbursement Payment has
been set at 31% of the MPCI Premium, but it is scheduled to be reduced to 29% in
1997, 28% in 1998 and 27.5% in 1999. For GAAP income statement purposes, the
Buy-up Expense Reimbursement Payment is treated as a contribution to income and
reflected as a component of policy acquisition and general and administrative
expenses. The CAT LAE Reimbursement Payment and the MPCI Excess LAE
Reimbursement Payment are, for income statement purposes, recorded as an offset
against LAE, up to the actual amount of LAE incurred by the Company in respect
of such policies, and the remainder of the payment, if any, is recorded as Other
Income. See "Business --Crop Insurance -- Products."
Certain other characteristics of the Company's crop business may affect
comparisons of the Company's results and operating ratios with those of other
insurers, including: (i) the seasonal nature of the business whereby profits are
generally recognized predominantly in the second half of the year; (ii) the
short-term nature of crop business whereby losses are known within a short time
period; and (iii) the limited amount of investment income associated with crop
business. In addition, cash flows from the crop business differ from cash flows
from certain more traditional lines. See "-- Liquidity and Capital Resources."
The seasonal and short term nature of the Company's crop business, as well as
the impact on such business of weather and other natural perils, may produce
variations in the Company's operating results.
Impact of 1994 Reform Act and 1996 Reform Act. The 1994 Reform Act
required farmers for the first time to purchase at least CAT Coverage in order
to be eligible for other federally sponsored farm benefits, including acreage
"set aside" programs in which farmers are paid to leave a portion of their land
unplanted and crop price supports. The 1994 Reform Act also authorized for the
first time the marketing and selling of CAT Coverage by the local USDA offices.
As a result of an increase in the number of acres insured in 1995, the Company's
MPCI Premiums increased to $53.4 million in 1995 from $44.3 million in 1994 and
the fees and commissions received by the Company from its MPCI business
increased to $21.1 million in 1995 from $14.0 million in 1994. However, the 1996
Reform Act, recently signed into law by President Clinton, eliminates the
linkage between CAT Coverage and qualification for certain federal farm program
benefits and also limits the role of the USDA offices in the delivery of MPCI
coverage. The limitation of the USDA's role in the delivery system for CAT
Coverage should provide the Company with the opportunity to realize increased
revenues from the distribution and servicing of this product. The Company
believes that the potential negative impact of the delinkage mandated by the
1996 Reform Act will be mitigated in part by the likelihood that farmers will
continue to purchase MPCI to provide basic protection against natural disasters
as ad hoc federal disaster relief programs are reduced or eliminated. In
addition, the Company believes that (i) many lending institutions will likely
continue to require this coverage as a condition to crop lending and (ii) many
of the farmers who entered the MPCI program as a result of the 1994 Reform Act
have come to appreciate the reasonable price of the protection afforded by CAT
Coverage and will remain with the program regardless of delinkage. There can,
however, be no assurance as to the ultimate effect which the 1996 Reform Act may
have on the business or operations of the Company.
Crop Revenue Coverage. The Company has recently introduced a new
product in its crop insurance business called Crop Revenue Coverage, or "CRC."
In contrast to standard MPCI coverage, which features a yield guarantee or
coverage for the loss of production at a fixed price per commodity unit
established by the FCIC, CRC provides the insured with a guaranteed revenue
stream by combining both yield and price variability protection. CRC protects
against a grower's loss of revenue resulting from fluctuating crop prices and/or
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<PAGE>
low yields by providing coverage when any combination of crop yield and price
results in revenue that is less than the revenue guarantee provided by the
policy. CRC was approved by the FCIC as a pilot program for revenue insurance
coverage plans for the 1996 crop year, and has been available for corn and
soybeans in all counties in Iowa and Nebraska for the 1996 crop year. The
Company believes that CRC policies represent approximately 30% of the combined
corn policies written by IGF in Iowa and Nebraska for the 1996 crop year. In
July, 1996, the FCIC announced that CRC will be made available in the fall of
1996 for winter wheat in the entire states of Kansas, Michigan, Nebraska, South
Dakota, Texas and Washington and in parts of Montana. Since the FCIC generally
regulates CRC as one of its own programs, the material aspects of the CRC
program are substantially similar to those of other federal programs such as
MPCI, including the FCIC profit-sharing arrangement, the use of reinsurance
pools and expense reimbursement payments paid by the FCIC. Since CRC is, in
certain respects, a new product with which neither the Company nor the crop
insurance industry has had any prior experience, there is substantial
uncertainty as to the demand for, and the pricing and profitability of, this
product. Accordingly, there can be no assurance that the Company's financial
condition or results of operations will not be adversely affected by the writing
of CRC policies. See "Business -- Crop Insurance -- Products -- Crop Revenue
Coverage."
Recent Developments Affecting MPCI Underwriting Results. A combination
of weather events occurring in early 1996 will affect the Company's underwriting
results from its MPCI business in 1996. A severe drought in the Southern plains
has resulted in significant damage to winter wheat crops, and will adversely
affect the Company's MPCI underwriting results. The impact of these losses is
offset in part, however, by unusually good results from MPCI coverage for
Florida citrus crops as a result of better than normal weather in the regions
where the Company wrote such coverage. Although the Company is continuing to
review the effects of the drought, based on current information, management
believes that the aggregate effect of the drought and favorable citrus results
will not have a material impact on the Company's results of operations for the
complete 1996 year.
Certain Accounting Policies for Crop Insurance Operations. In 1995, on
a quarterly basis through September 30, the Company recognized (i) 30% of its
MPCI gross premiums written, (ii) commission expense at a rate of 16% of MPCI
gross premiums written recognized and (iii) Buy-up Expense Reimbursement at a
rate of 31% of MPCI gross premiums written recognized along with normal
operating expenses incurred in connection with premium writings. Starting in
1996, the Company began recognizing underwriting gain or loss reflecting the
Company's best estimate, based on, among other things, historical results, plus
a provision for adverse development. Actual MPCI operating results for a
calendar year are finally determined in the fourth quarter of each such year.
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses consist of
(i) gross commissions paid to agents, (ii) ceding commission income from
reinsurers, (iii) Buy-up Expense Reimbursement Payments, (iv) underwriting gain
or loss on the Company's MPCI business and (v) other operating expenses. The
following table sets forth certain information with respect to the Company's
policy acquisition and general and administrative expenses for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
------------------------------------------------- -------------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
Auto Crop Auto Crop Auto Crop Auto Crop Auto Crop
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross commission
expenses........... $8,345 $5,524 $7,070 $9,867 $7,162 $13,391 $1,768 $2,107 $2,020 $2,963
Ceding commission
income............. (9,173) (969) (5,381) (1,651) (2,991) (2,968) (906) (813) 550 ---
Buy-up Expense
Reimbursement
Payments........... (8,854) (13,845) (16,366) (3,930) (6,567)
MPCI underwriting
gain or loss....... 1,515 (3,257) (9,653) 175 (625)
Other operating
expenses........... 6,683 4,252 7,020 4,084 8,758 8,130 1,843 1,591 2,604 2,396
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Policy acquisition and
general and administrative
expenses (1)....... $5,855 $1,468 $8,709 $(4,802)$12,929 $(7,466) $2,705 $(870) $5,174 $(1,833)
====== ====== ====== ======= ======= ======= ====== ===== ====== =======
</TABLE>
- ----------
(1) Includes policy acquisition and general and administrative expenses for
crop insurance and nonstandard automobile insurance segments but excludes
policy acquisition and general and administrative expenses attributable to
corporate and discontinued operations.
Discontinuance of Surplus Lines Underwriting Unit
Prior to the Offering, the Company, through SIGF, its specialized
managing general agency and surplus lines underwriting unit based in Florida,
provided certain commercial insurance products through retail agencies,
principally in the southeast United States. SIGF writes these specialty products
through Pafco as well as a number of other insurers, including United National
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<PAGE>
Insurance Group, Munich American Reinsurance Corp. and Lloyd's of London.
Effective January 1, 1996, the Company sold to Goran all of the issued and
outstanding shares of capital stock of SIGF. All Pafco insurance policies issued
through SIGF in respect of business other than nonstandard automobile insurance
have been 100% reinsured by Granite Reinsurance Company, Ltd. ("Granite Re"), a
wholly-owned subsidiary of Goran. Although Pafco will in the future continue to
write business through SIGF, this business will also be reinsured with Granite
Re pursuant to a 100% quota share arrangement.
Selected Segment Data Of The Company
The following table presents historical segment data for the Company's
nonstandard automobile and crop insurance operations. This data does not reflect
results of operations attributable to corporate and discontinued operations nor
does it include the results of operations of Superior.
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
------------------------------------ -------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(in thousands, except ratios)
NONSTANDARD AUTOMOBILE
INSURANCE OPERATIONS:
<S> <C> <C> <C> <C> <C>
Gross premiums written.............. $ 52,187 $ 45,593 $ 49,005 $11,337 $17,922
Net premiums written................ 26,479 28,114 37,302 9,311 20,167
Net premiums earned................. 26,747 25,390 34,460 7,924 13,626
Net investment income............... 1,144 904 624 189 396
Other income........................ 886 1,545 1,787 334 591
Net realized capital loss........... (44) (55) (508) (37) (52)
-------- ------- ------- -------- ---------
Total revenues................. 28,733 27,784 36,363 8,410 14,561
-------- ------- ------- -------- ---------
Losses and loss
adjustment expenses.............. 17,152 18,303 25,423 4,990 8,565
Policy acquisition and general and
administrative expenses.......... 5,855 8,709 12,929 2,705 5,174
-------- ------- ------- -------- ---------
Total expenses................... 23,007 27,012 38,352 7,695 13,739
-------- ------- ------- -------- ---------
Income (loss) before income taxes .. $ 5,726 $ 772 $(1,989) $ 715 $ 822
======== ======= ======= ======== =========
GAAP RATIOS (NONSTANDARD
AUTOMOBILE ONLY):
Loss and LAE ratio................. 64.1% 72.1% 73.8% 63.0% 62.9%
Expense ratio....................... 21.9 34.3 37.5 34.1 38.0
-------- ------- ------- -------- ---------
Combined ratio...................... 86.0% 106.4% 111.3% 97.1% 100.9%
CROP INSURANCE
OPERATIONS: (1)
Gross premiums written (2).......... $35,156 $54,455 $70,374 $15,847 $21,404
Net premiums written (2)............ 4,281 4,565 11,608 53 263
Net premiums earned (2)............. 4,281 4,565 11,608 32 159
Net investment income............... 347 339 674 130 162
Other income........................ 0 73 384 258 373
Net realized capital gain (loss).... 114 (104) 164 (8) 16
-------- ------- ------- -------- ---------
Total revenues................. 4,742 4,873 12,830 412 710
-------- ------- ------- -------- ---------
Losses and loss
adjustment expenses.............. 6,774 7,031 8,629 (105) 397
Policy acquisition and general and
administrative expenses.......... 1,468 (4,802) (7,466) (870) (1,833)
Interest expense 235 492 627 240 95
-------- ------- ------- -------- ---------
Total expenses................... 8,477 2,721 1,790 (735) (1,341)
-------- ------- ------- -------- ---------
Income (loss) before income taxes... $ (3,735) $ 2,152 $11,040 $ 1,147 $ 2,051
======== ======== ======= ======== ========
STATUTORY CAPITAL AND SURPLUS:
Pafco (3)........................... $8,132 $7,848 $11,875 $9,817 $13,423
IGF ............................... 2,789 4,512 9,219 5,550 10,488
</TABLE>
- ----------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company -- Overview -- Crop Insurance
Operations" for a discussion of the accounting treatment accorded to
the crop insurance business.
(2) Crop hail insurance premiums are reported only in the second and fourth
calendar quarters, according to when the business is written.
(3) The statutory surplus of Pafco includes Pafco's share of IGF's
statutory surplus. Pafco owned the following percentages of IGF at
December 31 of each of the following years: 1993, 98.2%; 1994, 98.8%;
1995, 100%. At April 30, 1996, Pafco transferred IGF to SIG. Prior to
the transfer, IGF also paid a dividend to Pafco in the form of cash of
$7,500,000 and a promissory note of $3,500,000. At April 30, 1996
Pafco's statutory and capital surplus was $11,873,000. See "The Company
-- Formation of GGS Holdings; Acquisition of Superior."
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<PAGE>
Results of Operations
Three Months Ended March 31, 1996 and 1995:
Gross Premiums Written. Gross premiums written for the three month
period ended March 31, 1996 increased $13,150,000, or 46.5%, to $41,422,000 from
$28,272,000 for the same period in 1995 reflecting an increase in gross premiums
written of $6,585,000 in nonstandard automobile insurance, $5,557,000 in crop
insurance and $1,008,000 in premiums from discontinued operations. The increase
in nonstandard automobile gross premiums written was due to an increase in
policies in-force as the Company introduced product improvements as well as
premium rate increases in certain markets. The increase in crop insurance gross
premiums written was primarily due to farmers' electing higher crop price levels
to be insured under MPCI Buy-up Coverages and an increase in MPCI policies
in-force. Premiums reported in the first three months of each year generally do
not include significant crop hail premiums since most of these policies are
written in the second quarter.
Net Premiums Written. The Company's net premiums written for the three
month period ended March 31, 1996 increased $8,430,000, or 81.8%, to $18,730,000
from $10,300,000 for the same period in 1995 due to the non-renewal by the
Company, as of January 1, 1996, of its quota share reinsurance on its
nonstandard automobile business and the increase in gross premiums written in
the nonstandard automobile insurance business. Since all MPCI premiums are
reported as 100% ceded, MPCI gross premiums written have no effect on net
premiums written.
Net Premiums Earned. The Company's net premiums earned for the three
month period ended March 31, 1996 increased $5,136,000, or 59.4%, to $13,785,000
from $8,649,000 for the same period in 1995 reflecting an increase in net
premiums written.
Net Investment Income. The Company's net investment income for the
three month period ended March 31, 1996 increased $239,000, or 74.9%, to
$558,000 from $319,000 for the same period in 1995 due to a repositioning of the
Company's investment portfolio in the latter part of 1995, which has resulted in
higher net investment income through the first quarter of 1996. This
repositioning has also resulted in an increase in the average investment yield
to 8.4% for the three month period ended March 31, 1996 from 6.0% for the same
period in 1995. Also contributing to the increase in net investment income is an
increase in average invested assets to $26,606,000 for the three month period
ended March 31, 1996 from $20,897,000 for the same period in 1995.
Other Income. The Company's other income for the three month period
ended March 31, 1996 increased $385,000, or 65.0%, to $977,000 from $592,000 for
the same period in 1995 due principally to (i) increased billing fee revenue
from nonstandard automobile insurance policies, resulting from a higher in-force
policy count and an increase in fees implemented in late 1995, and (ii)
increased CAT LAE Reimbursement Payments resulting from the introduction of CAT
Coverages in January, 1995.
Net Realized Capital Gain (Loss). The Company recorded a net realized
capital loss from the sale of investments of $36,000 for the three month period
ended March 31, 1996 compared to a net realized capital loss from the sale of
investments of $45,000 for the same period ended March 31, 1995. The losses for
the three month period ended March 31, 1996 were the result of the sale of
investments due to the repositioning of the Company's investment portfolio that
was begun in the latter part of 1995 in connection with a change in investment
managers.
Losses and LAE. The Company's losses and LAE for the three month period
ended March 31, 1996 increased $3,315,000, or 58.7%, to $8,963,000 from
$5,648,000 for the same period in 1995. The losses and LAE for the nonstandard
automobile segment for the three month period ended March 31, 1996 increased
$3,575,000 to $8,565,000 compared to $4,990,000 for the same period in 1995
primarily as a result of the Company's nonrenewal of its automobile quota share
reinsurance treaty. The loss ratio for the nonstandard automobile segment for
the three month period ended March 31, 1996 was 62.9% as compared to 63.0% for
the same period ended 1995. The crop insurance business experienced an increase
in losses and LAE for the three month period ended March 31, 1996 of $502,000 to
$397,000 compared to a $105,000 contribution to income for the same period in
1995 reflecting an increase in net premiums written for crop hail.
Policy Acquisition and General and Administrative Expenses. Policy
acquisition and general and administrative expenses for the three months ended
March 31, 1996 increased $1,624,000, or 79.4%, to $3,669,000 from $2,045,000 for
the same period in 1995. This compares to an increase of 81.8% in net premiums
written. The nonstandard automobile business experienced an increase in policy
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<PAGE>
acquisition and general and administrative expenses of $2,469,000 due to (i) the
Company's nonrenewal of nonstandard automobile quota share reinsurance for 1996
which resulted in a reduction in ceding commission income and (ii) the recording
of a ceding commission expense on the recovery of the unearned premium for the
three month period ended March 31, 1996. As a result of the unique accounting
for the crop insurance segment, such segment experienced a contribution to
income reflected in the policy acquisition and general and administrative
expense line item of $1,833,000 for the three months ended March 31, 1996
compared to a contribution to income of $870,000 for the same period in 1995.
This increase in contribution resulted from an increase in Buy-up Expense
Reimbursement Payments due to higher gross premium writings, together with an
increase in the MPCI underwriting gain. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations for the Company --
Overview -- Policy Acquisition and General and Administrative Expenses."
Interest Expense. The Company's interest expense for the three month
period ended March 31, 1996 decreased $23,000, or 8.5%, to $249,000 from
$272,000 for the same period in 1995 due to lower utilization of the line of
credit borrowings by IGF as a result of higher cash flow from operating profits.
Income Tax Expense. The Company's income tax expense for the three
month period ended March 31, 1996 increased $317,000, or 63.4%, to $817,000 from
$500,000 for the same period in 1995 primarily as a result of a 55% increase in
the Company's income before federal income tax. The effective tax rate for the
three month period ended March 31, 1996 reflects a 34.0% provision compared to
32.3% provision for the same period in 1995.
Years ended December 31, 1995 and 1994:
Gross Premiums Written. Gross premiums written in 1995 increased
$21,500,000, or 20.8%, to $124,634,000 from $103,134,000 in 1994 reflecting an
increase in gross premiums written of $15,919,000 in crop insurance, $3,412,000
in nonstandard automobile insurance and $2,169,000 in premiums from discontinued
operations. The crop insurance segment experienced growth in both the crop hail
and MPCI business. The increase in crop hail gross premiums written to
$16,966,000 in 1995 from $10,130,000 in 1994 was due to increased opportunities
to market crop hail coverages to farmers as a result of the increases in sales
of MPCI products (both Buy-up Coverage and CAT Coverage) due to the 1994 Act.
The net increase in MPCI gross premiums written to $53,407,000 in 1995 from
$44,324,000 in 1994 resulted from an increase in the number of acres insured in
1995. The increase in gross premiums written for the nonstandard automobile
insurance segment was attributable to an increase in policies-in-force in
certain states, primarily in the state of Colorado.
Net Premiums Written. The Company's net premiums written in 1995
increased $18,308,000, or 52.1%, to $53,447,000 from $35,139,000 in 1994 due to
an increase in gross premiums written and a reduction in premiums ceded to
reinsurers under quota share reinsurance for both nonstandard automobile and
crop hail insurance.
Net Premiums Earned. The Company's net premiums earned in 1995
increased $17,515,000, or 54.5%, to $49,641,000 from $32,126,000 in 1994
reflecting an increase in net premiums written.
Net Investment Income. Net investment income in 1995 decreased $68,000,
or 5.5%, to $1,173,000 from $1,241,000 in 1994 principally due to a decrease in
the average yield earned on invested assets to 5.2% in 1995 from 6.0% in 1994.
Although market interest rates increased in 1995, the average yield on
investments declined primarily as a result of the repositioning of the Company's
investment portfolio to shorter term securities. The decrease in the average
yield was partially offset by an increase in average invested assets to
$22,653,000 in 1995 from $20,628,000 in 1994.
Other Income. The Company's other income in 1995 increased $552,000, or
34.0%, to $2,174,000 from $1,622,000 in 1994 due to increased CAT LAE
Reimbursement Payments related to the 1995 introduction of CAT Coverages and
increased billing fee income on nonstandard automobile business due primarily to
a higher in-force policy count.
Net Realized Capital Gain (Loss). The Company recorded a net realized
capital loss from the sale of investments of $344,000 in 1995 as compared to a
net realized capital loss of $159,000 in 1994. The net realized capital loss in
1995 was the result of the repositioning of the Company's investment portfolio
in connection with a change in investment managers and certain write-downs taken
on investments with an other than temporary decline in estimated fair value.
Losses and LAE. The Company's losses and LAE in 1995 increased
$9,501,000, or 35.9%, to $35,971,000 from $26,470,000 in 1994. The 35.9%
increase in losses and LAE was less than the 54.5% increase in net premiums
earned. Of such amounts, the nonstandard automobile business experienced a
$7,120,000 increase in losses and LAE to $25,423,000 in 1995 from $18,303,000 in
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<PAGE>
1994 due primarily to an increase in net premium writings. The Company's loss
and LAE ratio in 1995 decreased to 72.5% from 82.4% in 1994. The nonstandard
automobile business loss and LAE ratio increased to 73.8% in 1995 from 72.1% in
1994 primarily due to increased repair costs for automobile parts resulting from
the implementation of laws prohibiting use of reconditioned parts as well as
general inflationary pressures on costs of settling claims. In addition, the
crop business experienced an increase in losses and LAE to $8,629,000 in 1995
from $7,031,000 in 1994 primarily as a result of the increased volume of crop
hail business written in 1995. The crop loss and LAE ratio decreased to 74.3% in
1995 from 154.0% in 1994 due to more favorable weather conditions than in the
prior year. Crop insurance losses and LAE were also impacted by net MPCI LAE of
$0 in 1995 and $936,000 in 1994, after reduction for LAE reimbursements of
$3,324,000 in 1995 compared to $107,000 in 1994. These reimbursements are
reflected in losses and LAE up to the actual amount of LAE incurred with any
excess reflected in Other Income.
Policy Acquisition and General and Administrative Expenses. The
Company's policy acquisition and general and administrative expenses in 1995
increased $2,180,000, or 37.6%, to $7,981,000 from $5,801,000 in 1994. The
nonstandard automobile business experienced an increase in policy acquisition
and general and administrative expense of $4,220,000 primarily due to a 34%
reduction in ceding commission income in 1995 arising from reduced reliance on
quota share reinsurance. As a result of the unique accounting for the crop
insurance segment, such segment experienced a contribution to income reflected
in the policy acquisition and general and administrative expense line item of
$7,466,000 in 1995 compared to a contribution to income of $4,802,000 in 1994.
This increase in contribution resulted from an increase in Buy-Up Expense
Reimbursement Payments due to higher gross premium writings in 1995, together
with an increase in the MPCI underwriting gain. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company --
Overview -- Policy Acquisition and General and Administrative Expenses."
Interest Expense. The Company's interest expense in 1995 increased
$64,000, or 5.4%, to $1,248,000 from $1,184,000 in 1994 as a result of increased
line of credit borrowings by IGF due to an increase in cash flow requirements
and an increase in applicable interest rates. This was partially offset by
interest savings in 1995 over 1994 resulting from debt principal repayments and
the retirement of a Company term loan in June, 1995.
Income Tax Expense. The Company's income tax expense (benefit) related
to a tax provision on income (loss) from continuing operations increased to
$2,619,000 in 1995 from $(718,000) in 1994. The effective tax rate in 1995 was
35.2% as compared to an effective tax rate of (52.2)% in 1994. The tax benefit
in 1994 was due to a $1,492,000 change in estimate in the valuation allowance
the Company had previously established for its deferred tax assets. Years Ended
December 31, 1994 and 1993:
Gross Premiums Written. Gross premiums written in 1994 increased
$14,198,000, or 16.0%, to $103,134,000 from $88,936,000 in 1993 reflecting an
increase in gross premiums written of $19,299,000 in crop insurance, a decrease
in gross premiums written of $6,594,000 in nonstandard automobile insurance, and
a $1,493,000 increase in premiums from discontinued operations. The increase in
crop insurance gross premiums written resulted from farmers increasing the
amounts of catastrophe protection as a result of the significant losses caused
by the severe flooding in the Midwest in 1993. The decrease in nonstandard
automobile gross premiums written was due in part to price competition as the
Company decided not to match the lower premium rates of certain of its
competitors who were seeking to gain market share.
Net Premiums Written. The Company's net premiums written in 1994
increased $3,379,000, or 10.6%, to $35,139,000 from $31,760,000 in 1993 due to
an increase in gross premiums written and a reduction in premiums ceded to
reinsurers under quota share reinsurance on nonstandard automobile insurance.
Net Premiums Earned. The Company's net premiums earned in 1994
increased $698,000, or 2.2%, to $32,126,000 from $31,428,000 in 1993 reflecting
an increase in net premiums written.
Net Investment Income. Net investment income in 1994 decreased
$248,000, or 16.7%, to $1,241,000 from $1,489,000 in 1993 principally due to a
decrease in average invested assets of $4,091,000 resulting from a reduction in
nonstandard automobile insurance premium volume and higher losses and LAE. This
decrease in average invested assets was partially offset by an increase in the
average yield earned on invested assets to 6.6% in 1994 from 6.0% in 1993.
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<PAGE>
Other Income. The Company's other income in 1994 increased $736,000, or
83.1%, to $1,622,000 from $886,000 in 1993 primarily as a result of 1994 being
the first full year in which the Company earned billing fee income in the
nonstandard automobile insurance business. Billing fee income from nonstandard
automobile insurance increased to $1,033,000 in 1994 as compared to
approximately $521,000 in 1993.
Net Realized Capital Gain (Loss). The Company recorded a net realized
capital loss from the sale of investments of $159,000 in 1994 as compared to a
net realized capital loss of $119,000 in 1993. The losses in 1994 were the
result of the Company's election to take net realized capital losses from the
sale of certain investments. The losses in 1993 were due to sales of investments
and write-downs of investments.
Losses and LAE. The Company's losses and LAE in 1994 increased
$1,390,000, or 5.5%, to $26,470,000 from $25,080,000 in 1993. Of such amounts,
the nonstandard automobile business experienced a $1,151,000 increase in losses
and LAE to $18,303,000 in 1994 from $17,152,000 in 1993 as higher replacement
part costs for automobile repairs resulting from the implementation of laws
prohibiting the use of reconditioned parts increased costs associated with
physical damage losses. The loss ratio in 1994 increased to 82.4% from 79.8% in
1993. The nonstandard automobile loss and LAE ratio increased to 72.1% in 1994
as compared to 64.1% in 1993. In addition, the crop insurance business
experienced an increase of $257,000 in losses and LAE to $7,031,000 in 1994 from
$6,774,000 in 1993 primarily as a result of increased losses in the crop hail
insurance business.
Policy Acquisition and General and Administrative Expenses. The
Company's policy acquisition and general and administrative expenses in 1994
decreased $3,113,000, or 34.9%, to $5,801,000 from $8,914,000 in 1993. The
nonstandard automobile business experienced an increase in policy acquisition
and general and administrative expense of $2,854,000 primarily due to a 24%
reduction in ceding commission income in 1994 arising from reduced reliance on
quota share reinsurance. As a result of the unique accounting for the crop
insurance segment, such segment experienced a contribution to income reflected
in the policy acquisition and general and administrative expense line item of
$4,802,000 in 1994 compared to an expense of $1,468,000 in 1993. The
contribution to income in 1994 resulted from an increase in Buy-Up Expense
Reimbursement Payments due to higher gross premium writings in 1994, together
with an increase in the MPCI underwriting gain. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company --
Overview -- Policy Acquisition and General and Administrative Expenses."
Interest Expense. The Company's interest expense in 1994 increased
$188,000, or 18.9%, to $1,184,000 from $996,000 in 1993 due to increased cash
flow requirements and line of credit borrowings by IGF on the crop business.
This was partially offset by a decline in applicable interest rates.
Income Tax Expense. In 1994, the Company recognized an income tax
benefit of $718,000 as it changed its estimate in the valuation allowance it had
previously established for its deferred tax assets. The effective tax rate in
1994 was (52.2)%. This compares to income tax expense of $83,000 and an
effective tax rate of (6.35)% in 1993. In 1993, the Company increased its
valuation allowance by $696,000 to $1,752,000.
Liquidity and Capital Resources
The primary sources of funds available to the Company and its
Subsidiaries are premiums, investment income and proceeds from the maturity of
invested assets. Such funds are used principally for the payment of claims,
operating expenses, commissions, dividends and the purchase of investments.
There is variability to cash outflows because of uncertainties regarding
settlement dates for liabilities for unpaid losses and because of the potential
for large losses either individually or in the aggregate. Accordingly, the
Company maintains investment programs generally intended to provide adequate
funds to pay claims without the forced sale of investments.
After the Offering, SIG, on a stand-alone basis, will require funds to
defray operating expenses which will consist primarily of legal, accounting and
other fees and expenses in connection with the disclosure and regulatory
obligations of a public company and to satisfy debt service obligations on any
remaining balance of the Parent Indebtedness. In order to satisfy these
requirements, SIG intends to rely primarily on the fees from an administrative
agreement between SIG and IGF (the "Administration Agreement") pursuant to which
the Company will provide certain executive management, accounting, investing,
marketing, data processing and reinsurance services in exchange for a fee in the
amount of $150,000 quarterly. In addition, effective August 1, 1996, the
underwriting, marketing and administrative functions of IGF will be assumed by,
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<PAGE>
and selected employees will be transferred to, IGF Holdings and the Buy-up
Expense Reimbursement Payments will be paid by the FCIC directly to IGF
Holdings. Accordingly, IGF Holdings will be able to pay dividends to the Company
to the extent that Buy-up Expense Reimbursement Payments exceed the operating
and other expenses of IGF Holdings. There can, however, be no assurance that IGF
Holdings will have sufficient excess cash flow to permit the payment of any
dividends to the Company. Except for the fees to be paid under the
Administration Agreement, IGF is not expected to provide a significant source of
funds for the Company in view of Indiana regulatory restrictions on the payment
of dividends, restrictive covenants contained in the IGF Revolver (as defined
herein) and the capital needed by IGF to support growth in its premium writings.
As a result of the restrictive covenants contained in the credit
agreement with respect to the GGS Senior Credit Facility, GGS Holdings and its
subsidiaries, Pafco and Superior, are not expected to constitute a significant
source of funds for the Company. The GGS Senior Credit Facility restricts the
ability of GGS Management to undertake certain actions, including making, or
permitting any of its subsidiaries to make, certain restricted payments in
excess of $100,000 per year in the aggregate. For purposes of the GGS Senior
Credit Facility, "restricted payments" include dividends in the form of cash or
other tangible or intangible property (other than stock, options, warrants or
other rights to purchase stock), as well as administrative, advisory, management
and billing fees payable by GGS Management to any of its affiliates (other than
investment banking fees payable to Goldman, Sachs). As a result, this covenant
restricts the ability of GGS Management to pay dividends to its parent company,
GGS Holdings, in excess of $100,000 per year.
GGS Management, the wholly-owned subsidiary of GGS Holdings, collects
billing fees charged to policyholders of Pafco and Superior who elect to make
their premium payments in installments. GGS Management also receives management
fees of 15% of gross premiums and 17% of gross premiums, respectively, under its
management agreements with Pafco and Superior. There can be no assurance that
either the Indiana Department or the Florida Department will not in the future
require a reduction in these management fees. Further, in the Consent Order
approving the Acquisition, the Florida Department has prohibited Superior from
paying any dividends (whether extraordinary or not) for four years without the
prior written approval of the Florida Department, and extraordinary dividends
within the meaning of the Indiana Insurance Code cannot be paid by Pafco without
the prior approval of the Indiana Commissioner. See "Risk Factors -- Holding
Company Structure; Dividend and Other Restrictions; Management Fees." GGS
Management will require cash flow to defray operating expenses and repay the GGS
Senior Credit Facility. See "The Company -- Formation of GGS Holdings;
Acquisition of Superior."
The GGS Senior Credit Facility, with an outstanding principal balance
of $48 million, matures on April 30, 2002 and will be repaid in 11 consecutive
semi-annual installments, the first of which will occur on the first anniversary
of the closing date of the GGS Senior Credit Facility. The first installments of
principal repayments will be $3,128,000 and $2,886,500, respectively, with the
remaining installments increasing over the term of the GGS Senior Credit
Facility up to a final installment in the amount of $6,199,500. At the election
of GGS Management, interest on the GGS Senior Credit Facility shall be payable
either at the "Base Rate" option or LIBOR option, plus in each case the
applicable margin. The Base Rate is defined as the higher of (i) the federal
funds rate plus 1/2 of 1% or (ii) the prime commercial lending rate of the
lending bank. LIBOR is defined as an annual rate equal to the London Interbank
Offered Rate for the corresponding deposits of U.S. dollars. The applicable
margin for Base Rate loans is 1.50% and for LIBOR loans is 2.75%. In May, 1996,
the Company entered into an interest rate swap agreement to protect the Company
against interest rate volatility. As a result, the Company fixed its interest
rate on the GGS Senior Credit Facility at 8.3% through November, 1996. The GGS
Senior Credit Facility is collateralized by a pledge of all of the tangible and
intangible assets of GGS Holdings, including all of the outstanding shares of
GGS Management, and by a pledge of all of the tangible and intangible assets of
GGS Management, including all of the outstanding shares of capital stock of
Pafco and Superior.
While shareholders' equity is $11,038,000 at March 31, 1996, it does
not reflect the equity upon which SIG conducts its various insurance operations.
Pafco and IGF had statutory surplus at March 31, 1996 of $13,423,000 and
$10,488,000, respectively. Since the Transfer did not occur until April 30,
1996, Pafco's equity at March 31, 1996 included its investment in IGF. However,
since IGF Holdings declared and paid the Dividend to Pafco, the statutory
capital and surplus of Pafco was $11,873,000 as of April 30, 1996. It is from
these equity bases that the Company's insurance business is generated.
With a beginning balance in November, 1987 of $15 million, SIG's bank
debt was paid off in 1995 with a final installment payment of $1.0 million.
After the Offering, the outstanding principal balance of the Parent
Indebtedness, if any, will not exceed $3.3 million, will bear interest at the
rate of 10% per annum and is payable on demand.
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<PAGE>
During 1995, IGF continued the practice of borrowing funds under a
revolving line of credit to finance premium payables on amounts not yet received
from farmers (the "IGF Revolver"). The maximum borrowing amount under the IGF
Revolver was $6,000,000 until July 1, 1996, at which time the maximum borrowing
amount increased to $7,000,000. The IGF Revolver carried a weighted average
interest rate of 9.7%, 8.1% and 6.0%, in 1993, 1994 and 1995, respectively, and
___% and ___% for the three months ended March 31, 1995 and 1996, respectively.
These payables to the FCIC accrue interest at a rate of 15%, as do the
receivables from farmers. By utilizing the IGF Revolver, which bears interest at
a floating rate equal to the prime rate plus 1/4%, IGF avoids incurring interest
expense at the rate of 15% on interest payable to the FCIC while continuing to
earn 15% interest on the receivables due from the farmer. The IGF Revolver
contains certain covenants which restrict IGF's ability to (i) incur
indebtedness; (ii) declare dividends or make any capital distribution upon its
stock whether through redemption or otherwise, except to the extent such
dividends, distributions, or redemptions made during any calendar year would not
exceed 30% of IGF's net profit; and (iii) make loans to others, including
affiliates. The IGF Revolver also contains other customary covenants which,
among other things, restrict IGF's ability to participate in mergers, acquire
another enterprise or participate in the organization or creation of any other
business entity. IGF intends to apply a portion of the $9 million in net
proceeds from the Offering which will be contributed to it to satisfy premium
payables to the FCIC, thereby reducing the need to resort to the IGF Revolver to
make these payments and reducing the associated interest expense. In 1995, IGF
incurred $627,222 in interest expense attributable to draws under the IGF
Revolver to satisfy premium payables to the FCIC. At March 31, 1996, $6,000,000
remains available under the IGF Revolver.
Cash flows in the Company's MPCI business differ from cash flows from
certain more traditional lines. The Company pays insured losses to farmers as
they are incurred during the growing season, with the full amount of such
payments being reimbursed to the Company by the federal government within three
business days.
Effects of Inflation
The effects of inflation on the Company are implicitly considered in
estimating reserves for unpaid losses and LAE, and in the premium rate-making
process. The actual effects of inflation on the Company's results of operations
cannot be accurately known until the ultimate settlement of claims. However,
based upon the actual results reported to date, it is management's opinion that
the Company's liability for losses and LAE, including liabilities for losses
that have been incurred but not yet reported, make adequate provision for the
effects of inflation.
New Accounting Standards
During January, 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." The Company adopted SFAS No. 109 for the year ended December 31,
1993. The Statement adopts the liability method of accounting for deferred
income taxes. Under the liability method, companies will establish a deferred
tax liability or asset for the future tax effects of temporary differences
between book and taxable income. The effect on years prior to 1993 of changing
to this method was $1,175,000 and is reflected in the Consolidated Statement of
Operations for the Company, included elsewhere in this Prospectus, as the
cumulative effect of a change in accounting principles.
On January 1, 1994, the Company adopted the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." In
accordance with SFAS No. 115, prior period financial statements have not been
restated to reflect the change in accounting principle. The cumulative effect as
of January 1, 1994 of adopting Statement 115 has no effect on net income. The
effect of this change in accounting principle was $139,000, net of deferred
taxes of $73,000 on net unrealized gains on fixed maturities classified as
available for sale that were previously carried at amortized cost.
In March 1995, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" was issued. SFAS
No. 121 requires that long-lived assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. This Statement is
effective for financial statements for fiscal years beginning after December 15,
1995. The Company intends to adopt SFAS No. 121 in 1996. Based upon management's
review and analysis, adoption of SFAS No. 121 is not expected to have a material
impact on the Company's results of operations in 1996.
In December 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation" was issued. It introduces the use of a fair-value based method of
accounting for stock-based compensation. It encourages, but does not require,
companies to recognize compensation expense for stock-based compensation to
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<PAGE>
employees based on the new fair value accounting rules. Companies that choose
not to adopt the new rules will continue to apply the existing accounting rules
contained in Accounting Principles Board Opinion No. 25, "Account for Stock
Issued to Employees." However, SFAS No. 123 requires companies that choose not
to adopt the new fair value accounting rules to disclose pro forma net income
and earnings per share under the new method. SFAS No. 123 is effective for
financial statements for fiscal years beginning after December 15, 1995. The
Company has not yet determined the impact of adopting SFAS No. 123; however, the
adoption of this statement is not expected to have a material impact on the
Company's financial condition or results of operations.
The National Association of Insurance Commissioners ("NAIC") is
considering the adoption of a recommended statutory accounting standard for crop
insurers, the impact of which is uncertain since several methodologies are
currently being examined. Although the Indiana Department has granted the
Company approval through June, 1996 to continue its practice of recording its
MPCI business as 100% ceded to the FCIC with net underwriting results recognized
in ceding commissions for statutory accounting purposes, the Indiana Department
has indicated that in the future it will require the Company to adopt the MPCI
accounting practices recommended by the NAIC or any similar practice adopted by
the Indiana Department. Since such a standard would be adopted industry wide for
crop insurers, the Company would also be required to conform its future GAAP
financial statements to reflect the new MPCI statutory accounting methodology
and to restate all historical GAAP financial statements consistently with this
methodology for comparability.
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SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF
SUPERIOR INSURANCE COMPANY
The following table presents historical data of Superior and its
subsidiaries.
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
-------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(in thousands, except ratios)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Gross premiums written.................. $115,660 $112,906 $94,756 $21,954 $32,289
------- -------- ------- ------ ------
Net premiums written.................... 115,294 112,515 94,070 21,954 32,126
------- -------- ------- ------ ------
Net premiums earned..................... 118,136 112,837 97,614 25,666 28,659
Net investment income................... 8,170 7,024 7,093 1,826 1,807
Other income............................ 5,879 3,344 4,171 1,285 1,473
Net realized capital gain (loss)........ 3,559 (200) 1,954 103 29
------- -------- ------- ------ ------
Total revenues...................... 135,744 123,005 110,832 28,880 31,968
Losses and loss adjustment expenses..... 85,902 92,378 72,343 19,364 19,511
Policy acquisition and general and
administrative expenses............... 36,292 38,902 32,705 8,864 8,188
------- -------- ------- ------ ------
Total expenses...................... 122,194 131,280 105,048 28,228 27,699
------- -------- ------- ------ ------
Income (loss) before income
taxes, and a cumulative effect of a
change in accounting principle........ 13,550 (8,275) 5,784 652 4,269
Income taxes............................ 3,981 (3,800) 1,649 93 1,455
------- -------- ------- ------ ------
Income (loss) before cumulative effect
of a change in accounting principle.. 9,569 (4,475) 4,135 559 2,814
Cumulative effective of a change in
accounting principle................. (1,389) --- --- --- ---
------- -------- ------- ------ ------
Net income (loss)................... $10,958 $ (4,475) $ 4,135 $ 559 $2,814
======= ======== ======= ====== ======
GAAP RATIOS:
Loss and LAE ratio..................... 72.7% 81.9% 74.1% 75.4% 68.1%
Expense ratio........................... 30.7 34.5 33.5 34.5 28.6
------- -------- ------- ------ ------
Combined ratio.......................... 103.4% 116.4% 107.6% 109.9% 96.7%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------- March 31,
1993 1994 1995 1996
---- ---- ---- ----
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C>
Investments............................. $132,060 $107,346 $116,362 $120,778
Total assets............................ 180,241 161,864 160,130 166,376
Losses and loss adjustment
expenses.............................. 52,610 54,577 47,112 45,700
Total shareholders' equity.............. 73,756 51,878 61,616 62,753
STATUTORY CAPITAL
AND SURPLUS ........................ $ 56,656 $ 43,577 $ 49,277 $ 51,681
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OF SUPERIOR
Overview
Superior is engaged in the writing of insurance coverage on automobile
physical damage and liability policies for "nonstandard risks." Nonstandard
insureds are those individuals who are unable to obtain insurance through
standard market carriers due to factors such as poor premium payment history,
driving experience, record of prior accidents or driving violations, particular
occupation or type of vehicle. Premium rates for nonstandard risks are higher
than for standard risks. Since it can be viewed as a residual market, the size
of the nonstandard private passenger automobile insurance market changes with
the insurance environment and grows when standard coverage becomes more
restrictive. Nonstandard policies have relatively short policy periods and low
limits of liability. Due to the low limits of coverage, the period of time that
elapses between the incurrence and settlement of losses under nonstandard
policies is shorter than under many other types of insurance. Also, since the
nonstandard automobile insurance business typically experiences lower rates of
retention than standard automobile insurance, the number of new policyholders
underwritten by nonstandard automobile insurance carriers each year is
substantially greater than the number of new policyholders underwritten by
standard carriers. While pricing conditions have improved in 1996, the
nonstandard automobile insurance business has experienced very competitive
pricing conditions in recent years which have made it difficult for Superior to
achieve adequate pricing.
The majority of Superior's business consists of personal lines
nonstandard automobile insurance. Superior writes in eleven states, principally
in the southeastern United States and distributes its product through 3,250
independent agents. In mid 1994, Superior made a strategic decision to modify
its approach from providing a broad band single nonstandard automobile product
with a 15% commission rate to a multi-tiered, multi-commission program that was
similar to, but provided a price advantage over, programs offered by the larger
competitors in the nonstandard automobile marketplace. This step, combined with
a concentration of Superior's efforts on four major states, was designed to
present a more competitive product with a lower loss ratio and provide a
franchised configuration that could be exported to the remainder of Superior's
states. The modification of Superior's programs, more stringent underwriting
criteria and a concentration on four specific states, resulted in a reduction in
gross premiums written from the 1994 level of $112.9 million to a 1995 year end
level of $94.8 million. During the same time, Superior took an aggressive stance
addressing its cost of operations. More aggressively priced contracts were
negotiated with outside vendors and internal processes were evaluated for cost
effectiveness. The change in market approach, the effects of cost containment
and the acceptance of a lower commission level by the independent agents
resulted in net income in 1995 of $4.1 million compared to a net loss of $4.5
million in 1994. The loss ratio in 1995 was reduced to 107.6% compared to 1994's
loss ratio of 116.4%.
In order to shorten reporting lines, improve quality and decrease
costs, the branch claims offices were reduced from nine to three. In addition to
the consolidation of claims offices, the claims department management was
changed and revised operating procedures were introduced that included the
creation of specialties within the department for the handling of claims
involving subrogation, salvage, physical damage litigation and first reports.
These changes resulted in a substantial reduction in the expense for the
operation of the claims department and an improvement in the quality of file
handling with a resulting reduction in average paid severity.
As a result of the Acquisition, Superior's strategy for 1996 is to
refine its three-tier, multi-commission level programs and to move the
multi-tiered products into the states of California, Georgia and Mississippi.
Superior's processing flow has undergone a reengineering to reduce cost and
shorten processing intervals in order to provide an improved level of service.
In addition to the reengineering of the processing flow, Superior has made a
commitment to eliminate its previous manually intensive automated operating
system for a new fourth generation state of the art processing system that
Superior believes will help reduce cost, improve productivity and lower
operating expense by freeing it from an outside data processing vendor.
On April 30, 1996, Superior was acquired by GGS Holdings. As a result
of the Acquisition, certain financial information relating to Superior's
nonstandard business in respect of periods prior to consummation of the
Acquisition will not be comparable to corresponding financial information for
subsequent periods. See "The Company -- Formation of GGS Holdings; Acquisition
of Superior" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Company."
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<PAGE>
Results of Operations
Three Months Ended March 31, 1996 and 1995:
Gross Premiums Written. Superior's gross premiums written for the three
month period ended March 31, 1996 increased $10,335,000, or 47.1%, to
$32,289,000 from $21,954,000 for the same period in 1995 due to the introduction
of a new multi-tiered program through use of variable commission levels. The new
multi-tiered commission structure provided an alternate market to independent
agents who perceived some of Superior's major competitors as pursuing a direct
marketing approach.
Net Premiums Written. Superior's net premiums written for the three
month period ended March 31, 1996 increased $10,172,000, or 46.3%, to
$32,126,000 from $21,954,000 for the same period in 1995 due to an increase in
gross premiums written.
Net Premiums Earned. Superior's net premiums earned for the three month
period ended March 31, 1996 increased $2,993,000, or 11.7%, to $28,659,000 from
$25,666,000 for the same period in 1995 reflecting an increase in net premiums
written. This increase in net premiums earned does not fully reflect the 46.3%
increase in net premiums written since net premiums earned lagged behind net
premiums written.
Net Investment Income. Superior's net investment income for the three
month period ended March 31, 1996 decreased $19,000, or 1.0%, to $1,807,000 from
$1,826,000 for the same period in 1995 due to a decline in the average yield on
invested assets which was partially offset by an increase in average invested
assets.
Other Income. Superior's other income for the three month period ended
March 31, 1996 increased $188,000, or 14.6%, to $1,473,000 from $1,285,000 for
the same period in 1995 due to a growth in premiums and an increase in billing
fees relating to payment programs associated with an increased number of
policies written.
Net Realized Capital Gain (Loss). Superior recorded a net realized
capital gain from the sale of investments of $29,000 for the three month period
ended March 31, 1996 compared to a net realized capital gain from the sale of
investments of $103,000 for the same period in 1995.
Losses and LAE. Superior's losses and LAE for the three month period
ended March 31, 1996 increased $147,000, or 0.8%, to $19,511,000 from
$19,364,000 for the same period in 1995 due to an increase in net premiums
earned. However, the 0.8% increase in losses and LAE was less than the 11.7%
increase in net premiums earned due to improved results in claims administration
which resulted in a change of estimate that resulted in a decrease in reserves
of $1,300,000 in the first quarter of 1996. As a result, the loss and LAE ratio
for the three month period ended March 31, 1996 was 68.1% as compared to 75.4%
for the same period in 1995. Superior anticipates allocated and unallocated loss
adjustment expenses to continue to diminish as a reflection of an improved work
flow, productivity, and a compression of middle management positions as a result
of the claims department restructuring. Superior has negotiated flat rate fee
agreements with all counsel representing it and has obtained substantial
discounts for vendor service for independent appraisals, total loss evaluations,
medical bill review and the sale of salvage.
Policy Acquisition and General and Administrative Expenses. Superior's
policy acquisition and general and administrative expenses for the three month
period ended March 31, 1996 decreased $676,000, or 7.6%, to $8,188,000 from
$8,864,000 for the same period in 1995 due to reduced agents' commissions in
Florida and a general reduction in the cost of overhead.
Income Tax Expense. Superior's income tax expense for the three month
period ended March 31, 1996 increased $1,362,000 to $1,455,000 from $93,000 for
the same period in 1995. The effective tax rate in 1996 was 34.1% compared to
14.3% in 1995. The increase in income tax expense and the effective tax rate was
due to the utilization of net operating loss carry-forwards in 1995.
Years Ended December 31, 1995 and 1994:
Gross Premiums Written. Superior's gross premiums written in 1995
decreased $18,150,000, or 16.1%, to $94,756,000 from $112,906,000 in 1994 due to
the Company's curtailment of marketing efforts and writings in Illinois,
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<PAGE>
Mississippi, Tennessee, Texas, and Washington resulting from more restrictive
underwriting criteria, inadequately priced business in those states and other
unfavorable market conditions.
Net Premiums Written. Superior's net premiums written in 1995 decreased
$18,445,000, or 16.4%, to $94,070,000 from $112,515,000 in 1994 due to a
decrease in gross premiums written.
Net Premiums Earned. Superior's net premiums earned in 1995 decreased
$15,223,000, or 13.5%, to $97,614,000 from $112,837,000 in 1994 reflecting a
decrease in net premiums written.
Net Investment Income. Superior's net investment income in 1995
increased $69,000, or 1.0%, to $7,093,000 from $7,024,000 in 1994 due to a
slight increase in the average yield earned on invested assets resulting from
improved market conditions and an increase in invested assets due to improved
operating cash flows.
Other Income. Superior's other income in 1995 increased $827,000, or
24.7%, to $4,171,000 from $3,344,000 in 1994 due to higher billing fees in
Florida resulting from the ability to collect billing fees during the entire
year in 1995 compared to only part of the year in 1994.
Net Realized Capital Gain (Loss). Superior recorded a net realized
capital gain from the sale of investments of $1,954,000 in 1995 compared to a
net realized capital loss from the sale of investments of $200,000 in 1994. The
net realized capital gain in 1995 was the result of disposing of invested assets
with increased market values.
Losses and LAE. Superior's losses and LAE in 1995 decreased
$20,035,000, or 21.7%, to $72,343,000 from $92,378,000 in 1994 due to a decrease
in net premiums earned. However, the 21.7% decrease in losses and LAE was
greater than the 13.5% decrease in net premiums earned due to Superior assuming
a more aggressive stance with regard to the evaluation and settlement of bodily
injury claims, the specialization of the handling of physical damage claims with
a resulting reduction in average paid severities, and an improvement in
productivity and a reduction in cost as a result of the consolidation of nine
claims offices to three. As a result, the loss and LAE ratio for 1995 was 74.1%
as compared to 81.9% in 1994.
Policy Acquisition and General and Administrative Expenses. Superior's
policy acquisition and general and administrative expenses in 1995 decreased
$6,197,000, or 15.9%, to $32,705,000 from $38,902,000 in 1994 due to
reengineering of internal operations aimed at reducing cost and the introduction
of reduced agent commission programs.
Income Tax Expense. Superior's income tax expense and effective tax
rate for 1995 were $1,649,000 and 28.5%, respectively. This compares to an
income tax benefit of $3,800,000 in 1994, which resulted in an effective tax
rate of (45.9)%. The increase in income tax expense is primarily a function of
the improvement in net income before taxes in 1995 as compared to 1994 and an
decreased portion of net investment income being derived from tax-free sources.
Years Ended December 31, 1994 and 1993:
Gross Premiums Written. Superior's gross premiums written in 1994
decreased $2,754,000, or 2.4%, to $112,906,000 from $115,660,000 in 1993 due to
the implementation of certain underwriting restrictions in the State of Texas
and the termination of certain agency relationships in the State of Texas.
Net Premiums Written. Superior's net premiums written in 1994 decreased
$2,779,000, or 2.4%, to $112,515,000 from $115,294,000 in 1993 due to a decrease
in gross premiums written.
Net Premiums Earned. Superior's net premiums earned in 1994 decreased
$5,299,000, or 4.5%, to $112,837,000 from $118,136,000 in 1993 reflecting a
decrease in net premiums written.
Net Investment Income. Superior's net investment income in 1994
decreased $1,146,000, or 14.0%, to $7,024,000 from $8,170,000 in 1993 due
primarily to a decline in average invested assets which resulted from a decrease
in operating cash flow and dividends paid in early 1994.
Other Income. Superior's other income in 1994 decreased $2,535,000, or
43.1%, to $3,344,000 from $5,879,000 in income in 1993 due to an interruption in
the state of Florida in the charging of billing fees caused by statewide
regulatory intervention in regulating minimum down payments and servicing fees.
Net Realized Capital Gain (Loss). Superior recorded a net realized
capital loss from the sale of investments of $200,000 in 1994 compared to a net
realized capital gain from the sale of investments of $3,559,000 in 1993 due to
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<PAGE>
market conditions which drove market interest rates higher in 1994 causing
Superior's fixed maturity portfolio to decline in market value.
Losses and LAE. Superior's losses and LAE in 1994 increased $6,476,000,
or 7.5%, to $92,378,000 from $85,902,000 in 1993 due to claims management
inefficiencies arising from inadequate managerial supervision and a conversion
to a new claims management system. The loss and LAE ratio for 1994 was 81.9% as
compared to 72.7% for 1993.
Policy Acquisition and General and Administrative Expenses. Superior's
policy acquisition and general and administrative expenses in 1994 increased
$2,610,000, or 7.2%, to $38,902,000 from $36,292,000 in 1993 due to a
significant increase in employee compensation caused by the hiring of new
officers and managers.
Income Tax Expense. Superior recorded an income tax benefit of
$3,800,000 and an effective tax rate of (45.9)% in 1994 as compared to an income
tax expense of $3,981,000 and an effective tax rate of 29.4% in 1993. The income
tax benefit in 1994 was a function of the Company's generation of a net loss
before income taxes. The low effective tax rate in 1993 was due to a greater
portion of net investment income being derived from tax-free sources.
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<PAGE>
BUSINESS
General
The Company underwrites and markets nonstandard private passenger
automobile insurance and crop insurance. The Company writes business in the U.S.
exclusively through independent agencies and seeks to distinguish itself by
offering high quality, technology based services for its agents and
policyholders. For the twelve months ended March 31, 1996, the Company
(excluding Superior) had consolidated gross premiums written of approximately
$137.8 million and Superior, which was acquired on April 30, 1996, had
consolidated gross premiums written of approximately $105.1 million for the same
twelve month period. In addition to premium revenues, for the same period, the
Company received fee income of $23.8 million, consisting of CAT Coverage Fees in
the amount of $1.3 million, Buy-up Expense Reimbursement Payments in the amount
of $19.0 million and CAT LAE Reimbursement Payments and MPCI Excess LAE
Reimbursement Payments in the amount of $3.5 million. The Company's nonstandard
automobile insurance business, with its principal offices in Indianapolis,
Indiana, Atlanta, Georgia, and Tampa, Florida, writes insurance through
approximately 4,500 independent agencies in 18 states. IGF, with its principal
office in Des Moines, Iowa and regional offices in California, Indiana, Kansas,
Mississippi and North Dakota, writes MPCI and crop hail insurance through
approximately 1,200 independent agencies in 29 states. Based on gross premiums
written by each of Pafco and Superior for 1995 as reported by A.M. Best, the
Company believes that the combination of Pafco and Superior makes the Company's
nonstandard automobile group the 13th largest underwriter of nonstandard
automobile insurance in the United States. Based on information compiled in 1995
by the FCIC and NCIS, the Company believes that IGF is the sixth largest crop
insurer in the United States.
The following table sets forth the premiums written by Pafco and IGF by
line of business for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
------------------------ ----------------------------
1993 1994 1995 1996
------------------ ----------------- ------------------- ----------------------------
Gross Net Gross Net Gross Net Gross Net
Premiums Premiums Premiums Premiums Premiums Premiums Premiums Premiums
Written Written Written Written Written Written Written Written
------- ------- ------- ------- ------- ------- ------- -------
(in thousands)
Nonstandard
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Automobile (1)..$52,187 $26,479 $45,593 $28,114 $ 49,005 $37,302 $17,922 $20,167
Crop Hail (2)...... 8,593 4,281 10,130 4,565 16,966 11,608 263 263
MPCI (3)...........26,563 --- 44,325 --- 53,408 --- 21,141 ---
Other.............. 1,593 1,000 3,086 2,460 5,255 4,537 2,096 (1,700)
------- ------- -------- ------- -------- ------- ------- -------
Total....$88,936 $31,760 $103,134 $35,139 $124,634 $53,447 $41,422 $18,730
======= ======= ======== ======= ======== ======= ======= =======
</TABLE>
- ---------------
(1) Does not reflect net premiums written for Superior for the periods
indicated. For the years ended December 31, 1993, 1994 and 1995,
Superior and its subsidiaries had gross premiums written of $115.7
million, $112.9 million and $94.8 million, respectively, and net
premiums written of $115.3 million, $112.5 million and $94.1 million,
respectively. For the three months ended March 31, 1995 and 1996,
Superior and its subsidiaries had gross premiums written of $22.0
million and $32.3 million, respectively, and net premiums written of
$22.0 million and $32.1 million, respectively.
(2) Most of crop hail insurance policies are sold in the second quarter of
the calendar year.
(3) For a discussion of the accounting treatment of MPCI premiums, see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company."
<PAGE>
Nonstandard Automobile Insurance
Industry Background
The Company, through its 52% owned indirect Subsidiaries, Pafco and
Superior, is engaged in the writing of insurance coverage on automobile physical
damage and liability policies for "nonstandard risks." Nonstandard risks are
those individuals who are unable to obtain insurance through standard market
carriers due to factors such as poor premium payment history, driving
experience, record of prior accidents or driving violations, particular
occupation or type of vehicle. Premium rates for nonstandard risks are generally
higher than for standard risks. The Company believes that credit impaired risks
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<PAGE>
account for at least 60% of its current nonstandard premium volume. Total
private passenger automobile insurance premiums written by insurance carriers in
the United States in 1995 have been estimated by A.M. Best to be approximately
$100 billion. Since it can be viewed as a residual market, the size of the
nonstandard private passenger automobile insurance market changes with the
insurance environment and grows when standard coverage becomes more restrictive.
Although this factor, as well as industry differences in the criteria which
distinguish standard from nonstandard insurance, make it difficult to estimate
the size of the nonstandard market, management of the Company believes that the
voluntary nonstandard market has accounted for approximately 15% of total
private passenger automobile insurance premiums written in recent years. Based
on information compiled by A.M. Best for 1994, the Company estimates that the
nonstandard automobile market currently accounts for $15 billion in annual
premium volume.
Strategy
The Company has multiple strategies with respect to its nonstandard
automobile insurance operations, including:
o Through GGS Holdings, the Company seeks to achieve profitability
through a combination of internal growth and the acquisition of
other insurers and blocks of business.
o The Company is committed to the use of integrated technologies
which permit it to rate, issue, bill and service policies in an
efficient and cost effective manner.
o The Company competes primarily on the basis of underwriting
criteria and service to agents and insureds and generally does not
match price decreases implemented by competitors which are
directed towards obtaining market share.
o The Company encourages agencies to place a large share of their
profitable business with Pafco and Superior by offering, in
addition to fixed commissions, a contingent commission based on a
combination of volume and profitability.
o The Company promptly responds to claims in an effort to reduce the
costs of claims settlements by reducing the number of pending
claims and uses computer data bases to verify repair and vehicle
replacement costs and to increase subrogation and salvage
recoveries.
o The Company will seek to expand the multi-tiered marketing
approach currently employed by Superior and its subsidiaries in
Florida and other states in order to offer to its independent
agency network a broader range of products with different premium
and commission structures.
Products
The Company offers both liability and physical damage coverage in the
nonstandard automobile insurance marketplace, with policies having terms of
three to twelve months, with the majority of policies having a term of six
months. Most nonstandard automobile insurance policyholders choose the basic
limits of liability coverage which, though varying from state to state,
generally are $25,000 per person and $50,000 per accident for bodily injury, and
in the range of $10,000 to $20,000 for property damage. Of the approximately
144,000 combined policies of Pafco and Superior in force on December 31, 1995,
fewer than 6% had policy limits in excess of these basic limits of coverage. Of
the 54,000 policies of Pafco in force on December 31, 1995, approximately 90%
had policy periods of six months or less. Of the approximately 90,000 policies
of Superior in force as of December 31, 1995, approximately 42% had policy
periods of six months and approximately 58% had policy periods of 12 months.
The Company offers several different policies which are directed toward
different classes of risk within the nonstandard market. The Superior Preferred
policy covers insureds whose prior driving record, insurability and other
relevant characteristics indicate a lower risk profile than other risks in the
nonstandard market place. The Superior Standard policy is intended for risks
which do not qualify for Superior Preferred but which nevertheless present a
more favorable risk profile than many other nonstandard risks. The Superior
Specialty policies cover risks which do not qualify for either the Superior
Preferred or the Superior Standard. Pafco offers only a single nonstandard
policy which includes multiple discounts and surcharges designed to recognize
proof of prior insurance, driving violations, accident history and other factors
relevant to the level of risk insured.
Marketing
Based on gross premiums written reported by A.M. Best for 1994, the
Company believes that GGS Holdings is the eighth largest nonstandard automobile
insurance provider in Indiana, the seventh largest in Missouri, the twelfth
largest in Colorado and the eighth largest in Florida. Management plans to
continue to expand selectively into additional states. GGS Holdings will select
states for expansion based on a number of criteria, including the size of the
nonstandard automobile insurance market, state-wide loss results, competition
and the regulatory climate.
The following table sets forth the geographic distribution of gross
premiums written for the Company and Superior individually and for the Company
and Superior on a combined basis for the periods indicated.
<TABLE>
<CAPTION>
Combined
Company Superior Company and Superior
------------------------------------ ---------------------------------- ------------------------------------
Three Months Three Months Three Months
Year Ended Ended Year Ended Ended Year Ended Ended
December 31, March 31, December 31, March 31, December 31, March 31,
---------------------- ------------ --------------------- ------------ ----------------------- -----------
1993 1994 1995 1996 1993 1994 1995 1996 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
State
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arkansas....... $1,497 $1,619 $1,796 $506 --- --- --- --- $ 1,497 $ 1,619 $ 1,796 $506
California..... --- --- --- --- $13,132 $13,422 $15,350 $ 4,994 13,132 13,422 15,350 4,994
Colorado....... 9,634 5,629 9,257 3,104 --- --- --- --- 9,634 5,629 9,257 3,104
Florida........ --- --- --- --- 49,262 55,282 54,535 17,037 49,262 55,282 54,535 17,037
Georgia........ --- --- --- --- 6,149 7,342 5,927 1,971 6,149 7,342 5,927 1,971
Illinois....... --- --- 80 192 3,906 3,894 2,403 487 3,906 3,894 2,483 679
Indiana........ 16,559 13,648 13,710 4,666 57 414 132 (2) 16,616 14,062 13,842 4,664
Iowa........... 5,239 3,769 3,832 1,443 --- --- --- --- 5,239 3,769 3,832 1,443
Kentucky....... 6,093 9,573 7,840 2,996 --- --- --- --- 6,093 9,573 7,840 2,996
Mississippi.... --- --- --- --- 5,526 4,411 2,721 495 5,526 4,411 2,721 495
Missouri....... 10,766 8,163 8,513 3,212 --- --- --- --- 10,766 8,163 8,513 3,212
Nebraska....... 2,399 3,192 3,660 1,367 --- --- --- --- 2,399 3,192 3,660 1,367
Ohio........... --- --- --- --- 7,312 4,325 3,164 765 7,312 4,325 3,164 765
Oklahoma....... --- --- 317 436 --- --- --- --- --- --- 317 436
Tennessee...... --- --- --- --- 891 1,829 332 (2) 891 1,829 332 (2)
Texas.......... --- --- --- --- 19,318 10,660 3,464 2,133 19,318 10,660 3,464 2,133
Virginia....... --- --- --- --- 8,748 7,500 5,035 4,334 8,748 7,500 5,035 4,334
Washington..... --- --- --- --- 1,359 3,827 1,693 77 1,359 3,827 1,693 77
------- ------- ------- ------- -------- -------- ------- ------- -------- -------- -------- -------
Totals.... $52,187 $45,593 $49,005 $17,922 $115,660 $112,906 $94,756 $32,289 $167,847 $158,499 $143,761 $50,211
======= ======= ======= ======= ======== ======== ======= ======= ======== ======== ======== =======
</TABLE>
The Company and Superior market their nonstandard products exclusively
through approximately 4,500 independent agencies and focus their marketing
efforts in rural areas and the peripheral areas of metropolitan centers. As part
of its strategy, management is continuing its efforts to establish the Company
as a low cost deliverer of nonstandard automobile insurance while maintaining a
commitment to provide quality service to both agents and insureds. This element
of the Company's strategy is being accomplished primarily through the automation
of certain marketing, underwriting and administrative functions. In order to
maintain and enhance its relationship with its agency base, the Company has 21
territorial managers, each of whom resides in a specific marketing region and
has access to the technology and software necessary to provide marketing, rating
and administrative support to the agencies in his or her region.
The Company attempts to foster strong service relationships with its
agencies and customers. The Company is currently developing computer software
that will provide on-line communication with its agency force. In addition, to
deliver prompt service while ensuring consistent underwriting, the Company
offers rating software to its agents which permits them to underwrite risks in
their offices. The agent has the authority to sell and bind insurance coverages
in accordance with procedures established by the Company, which is a common
practice in the property and casualty insurance business. The Company reviews
all coverages bound by the agents promptly and generally accepts all coverages
which fall within its stated underwriting criteria. In most jurisdictions, the
Company has the right within a specified time period to cancel any policy even
if the risk falls within its underwriting criteria. See "Business -- Nonstandard
Automobile Insurance -- Underwriting."
The Company and Superior compensate their agents on a commission basis
based on a percentage of premiums produced. Pafco also offers its agents a
contingent commission based on volume and profitability, thereby encouraging the
agents to enhance the placement of profitable business with the Company.
Superior has recently incorporated the contingent commission into the
compensation package for its agents.
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<PAGE>
The Company believes that the combination of Pafco with Superior and
its two Florida domiciled insurance subsidiaries will allow the Company the
flexibility to engage in multi-tiered marketing efforts in which specialized
automobile insurance products are directed toward specific segments of the
market. Since certain state insurance laws prohibit a single insurer from
offering similar products with different commission structures or, in some
cases, premium rates, it is necessary to have multiple licenses in certain
states in order to obtain the benefits of market segmentation. The Company is
currently offering multi-tiered products in Florida, Texas and Virginia and has
filed multi-tiered products for approval in California. The Company intends to
expand the marketing of its multi-tiered products into other states and to
obtain multiple licenses for its Subsidiaries in these states to permit maximum
flexibility in designing commission structures.
Underwriting
The Company underwrites its nonstandard automobile business with the
goal of achieving adequate pricing. The Company seeks to classify risks into
narrowly defined segments through the utilization of all available underwriting
criteria. The Company maintains an extensive, proprietary database which
contains statistical records with respect to its insureds on driving and repair
experience by location, class of driver and type of automobile. Management
believes this database gives the Company the ability to be more precise in the
underwriting and pricing of its products. Further, the Company uses motor
vehicle accident reporting agencies to verify accident history information
included in applications. As of May 31, 1996, the Company had a combined
nonstandard automobile underwriting and processing staff of approximately 200
employees.
The Company utilizes many factors in determining its rates. Some of the
characteristics used are type, age and location of the vehicle, number of
vehicles per policyholder, number and type of convictions or accidents, limits
of liability, deductibles, and, where allowed by law, age, sex and marital
status of the insured. The rate approval process varies from state to state;
some states, such as Indiana, Colorado, Kentucky and Missouri, allow filing and
use of rates, while others, such as Florida, Arkansas and California, require
approval of the insurance department prior to the use of the rates.
The Company has begun to integrate its automated underwriting process
with the functions performed by its agency force. For example, the Company has
recently introduced a rating software package for use by agents in some states.
In many instances, this software package, combined with agent access to the
automated retrieval of motor vehicle reports, ensures accurate underwriting and
pricing at the point of sale. The Company believes the automated rating and
underwriting system provides a significant competitive advantage because it (i)
improves efficiencies for the agent and the Company, further linking the agent
to the Company, (ii) makes more accurate and consistent underwriting decisions
possible, and (iii) can be changed easily to reflect new rates and underwriting
guidelines.
Underwriting results of insurance companies are frequently measured by
their combined ratios. However, investment income, federal income taxes and
other non-underwriting income or expense are not reflected in the combined
ratio. The profitability of property and casualty insurance companies depends on
income from underwriting, investment and service operations. Underwriting
results are generally considered profitable when the combined ratio is under
100%. The following table sets forth loss and LAE ratios, statutory underwriting
expense ratios and statutory combined ratios for the periods indicated for the
nonstandard automobile insurance business of each of the Company and Superior
individually and on a combined basis. The ratios shown in the table below are
computed based upon GAAP, not SAP.
<TABLE>
<CAPTION>
Combined
Company Superior Company and Superior (1)
------------------------------- ------------------------------ ---------------------------------
Three Three Three
Months Months Months
Year Ended Ended Year Ended Ended Year Ended Ended
December 31, March 31, December 31, March 31, December 31, March 31,
---------------------- --------- ------------------- --------- ---------------------- ---------
1993 1994 1995 1996 1993 1994 1995 1996(2) 1993 1994 1995 1996(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss and
LAE ratio...... 64.1% 72.1% 73.8% 62.9% 72.7% 81.9% 74.1% 68.1% 70.9% 80.1% 73.8% 66.3%
Underwriting
expense ratio.. 21.9% 34.3% 37.5% 38.0% 30.7% 34.5% 33.5% 28.6% 29.3% 34.5% 34.8% 32.5%
---- ----- ----- ----- ----- ----- ----- ---- ----- ----- ----- ----
Combined
ratio.......... 86.0% 106.4% 111.3% 100.9% 103.4% 116.4% 107.6% 96.7% 100.2% 114.6% 108.6% 98.8%
==== ===== ===== ===== ===== ===== ===== ==== ===== ===== ===== ====
</TABLE>
- ----------
(1) These ratios have not been computed on a pro forma basis but rather have
been derived by adding the premiums, expenses, losses and LAE of each of
the Company and Superior.
(2) During the three months ended March 31, 1996, Superior decreased its IBNR
reserves by $1.3 million due to a change in estimate resulting from
improved claims administration.
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<PAGE>
In an effort to maintain and improve underwriting profits, the
territorial managers regularly monitor loss ratios of the agencies in their
regions and meet periodically with the agencies in order to address any adverse
trends in loss ratios.
Claims
The Company's nonstandard automobile claims department, consisting of
approximately 36 salaried claims personnel at Pafco and 83 at Superior as of May
31, 1996, handles claims on a regional basis from its Indianapolis, Indiana,
Atlanta, Georgia, Tampa, Florida and Anaheim, California locations. Management
believes that the employment of salaried claims personnel, as opposed to
independent adjusters, results in reduced ultimate loss payments, lower LAE and
improved customer service. The Company generally retains independent appraisers
and adjusters on an as needed basis for estimation of physical damage claims and
limited elements of investigation. The Company uses the Audapoint, Audatex and
Certified Collateral Corporation computer programs to verify, through a central
data base, the cost to repair a vehicle and to eliminate duplicate or "overlap"
costs from body shops. Autotrak, which is a national database of vehicles,
allows the Company to locate vehicles nearly identical in model, color and
mileage to the vehicle damaged in an accident, thereby reducing the frequency of
disagreements with claimants as to the replacement value of damaged vehicles. In
1995, the Company implemented new claims handling procedures designed to reduce
the number of pending claims.
Claims settlement authority levels are established for each adjuster or
manager based on the employee's ability and level of experience. Upon receipt,
each claim is reviewed and assigned to an adjuster based on the type and
severity of the claim. All claims-related litigation is monitored by a home
office supervisor or litigation manager. The claims policy of the Company
emphasizes prompt and fair settlement of meritorious claims, adequate reserving
for claims and controlling claims adjustment expenses. Reinsurance
The Company follows the customary industry practice of reinsuring a
portion of its risks and paying for that protection based upon premiums received
on all policies subject to such reinsurance. Insurance is ceded principally to
reduce the Company's exposure on large individual risks and to provide
protection against large losses, including catastrophic losses. Although
reinsurance does not legally discharge the ceding insurer from its primary
obligation to pay the full amount of losses incurred under policies reinsured,
it does render the reinsurer liable to the insurer to the extent provided by the
terms of the reinsurance treaty. As part of its internal procedures, the Company
evaluates the financial condition of each prospective reinsurer before it cedes
business to that carrier. Based on the Company's review of its reinsurers'
financial health and reputation in the insurance marketplace, the Company
believes its reinsurers are financially sound and that they therefore can meet
their obligations to the Company under the terms of the reinsurance treaties.
Pafco reinsures its business with Chartwell Reinsurance Company, Constitution
Reinsurance Corporation, Transatlantic Reinsurance Company and Generali - U.S.
Branch which accounted for 83% of nonstandard automobile premiums ceded by Pafco
in 1995 and is expected to account for the same percentage in 1996. Superior
reinsures its business with Everest Reinsurance Company (formerly Prudential
Reinsurance Company), Skandia America Reinsurance Corporation, Sorema North
America Reinsurance Company, Transatlantic Reinsurance Company, Winterthur
Reinsurance Corporation of America and Zurich Reinsurance Centre, Inc. Each of
these reinsurers is rated A- or better by A.M. Best. Reserves for uncollectible
reinsurance are provided as deemed necessary.
Pafco has an excess of loss treaty which covers 100% of losses on an
individual occurrence basis in excess of $200,000 up to a maximum of $1,050,000.
Pafco maintained quota share reinsurance prior to January 1, 1996 but currently
does not have any quota share reinsurance in effect.
Superior has a casualty excess of loss treaty which covers losses in
excess of $100,000 up to a maximum of $4,000,000. Superior maintains both
automobile and property catastrophe excess reinsurance. Superior's first
automobile casualty excess contains limits of $200,000 excess of $100,000, its
second casualty excess contains limits of $700,000 excess of $300,000 and its
third casualty excess has a limit of $4 million excess of $1 million. Further,
Superior's first layer of property catastrophe excess reinsurance covers 95% of
$500,000 excess of $500,000 with an annual limit of $1 million and its second
layer of property catastrophe excess reinsurance covers 95% of $2 million excess
of $1 million with an annual limit of $4 million.
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<PAGE>
Competition
The Company competes with both large national writers and smaller
regional companies in each state in which it operates. The Company's competitors
include other companies which, like the Company, serve the agency market, as
well as companies which sell insurance directly to customers. Direct writers may
have certain competitive advantages over agency writers, including increased
name recognition, increased loyalty of their customer base and, potentially,
reduced acquisition costs. The Company's primary competitors are Progressive
Casualty Insurance Company, Guaranty National Insurance Company, Integon
Corporation Group, Deerbrook Insurance Company (a member of the Allstate
Insurance Group) and the companies of the American Financial Group. Generally,
these competitors are larger and have greater financial resources than the
Company. The nonstandard automobile insurance business is price sensitive and
certain competitors of the Company have, from time to time, decreased their
prices in an apparent attempt to gain market share. Management believes that it
is generally not in the Company's best interest to match such price decreases,
choosing instead to compete on the basis of underwriting criteria and superior
service to its agents and insureds.
Crop Insurance
Industry Background
The two principal components of the Company's crop insurance business
are Multi-Peril Crop Insurance ("MPCI") and private named peril, primarily crop
hail insurance. Crop insurance is purchased by farmers to reduce the risk of
crop loss from adverse weather and other uncontrollable events. Farms are
subject to drought, floods and other natural disasters that can cause widespread
crop losses and, in severe cases, force farmers out of business. Historically,
one out of every 12 acres planted by farmers has not been harvested because of
adverse weather or other natural disasters. Because many farmers rely on credit
to finance their purchases of such agricultural inputs as seed, fertilizer,
machinery and fuel, the loss of a crop to a natural disaster can reduce their
ability to repay these loans and to find sources of funding for the following
year's operating expenses.
MPCI was initiated by the federal government in the 1930s to help
protect farmers against loss of their crops as a result of drought, floods and
other natural disasters. In addition to MPCI, farmers whose crops are lost as a
result of natural disasters have, in the past, sometimes been supported by the
federal government in the form of ad hoc relief bills providing low interest
agricultural loans and direct payments. Prior to 1980, MPCI was available only
on major crops in major producing areas. In 1980, Congress expanded the scope
and coverage of the MPCI program. In addition, the delivery system for MPCI was
expanded to permit private insurance companies and licensed agents and brokers
to sell MPCI policies, and the FCIC was authorized to reimburse participating
companies for their administrative expenses and to provide federal reinsurance
for the majority of the risk assumed by such private companies.
Although expansion of the federal crop insurance program in 1980 was
expected to make crop insurance the farmer's primary risk management tool,
participation in the MPCI program was only 32% of eligible acreage in the 1993
crop year. Due in part to low participation in the MPCI program, Congress has
provided an average of $1.5 billion per year in ad hoc disaster payments over
the six years prior to 1994. In view of the combination of low participation
rates in the MPCI program and large federal payments on both crop insurance
(with an average loss ratio of 147%) and ad hoc disaster payments since 1980,
Congress has, since 1990, considered major reform of its crop insurance and
disaster assistance policies. The 1994 Reform Act was enacted in order to
increase participation in the MPCI program and eliminate the need for ad hoc
disaster relief payments to farmers.
The 1994 Reform Act required farmers for the first time to purchase at
least CAT Coverage in order to be eligible for other federally sponsored farm
benefits, including acreage "set aside" programs in which farmers are paid to
leave a portion of their land unplanted and crop price supports. The 1994 Reform
Act also authorized for the first time the marketing and selling of CAT Coverage
by the local USDA offices. As a result of an increase in the number of acres
insured, the Company's MPCI Premiums increased to $53.4 million in 1995 from
$44.3 million in 1994 and the fees and commissions received by the Company from
its MPCI business increased to $21.1 million in 1995 from $14.0 million in 1994.
However, the 1996 Reform Act, recently signed into law by President Clinton,
eliminates the linkage between CAT Coverage and qualification for certain
federal farm program benefits and also limits the role of the USDA offices in
the delivery of MPCI coverage. In accordance with the 1996 Reform Act, the USDA
announced in July, 1996, the following 14 states in which CAT Coverage will no
longer be available through USDA offices but rather will be solely available
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<PAGE>
through private agencies: Arizona, Colorado, Illinois, Indiana, Iowa, Kansas,
Minnesota, Montana, Nebraska, North Carolina, North Dakota, South Dakota,
Washington and Wyoming. The limitation of the USDA's role in the delivery system
for MPCI should provide the Company with the opportunity to realize increased
revenues from the distribution and servicing of this product. The Company
believes that any potential negative impact of the delinkage mandated by the
1996 Reform Act will be mitigated in part by the likelihood that farmers will
continue to purchase MPCI to provide basic protection against natural disasters
as ad hoc disaster relief programs are reduced or eliminated. In addition, the
Company believes that (i) lending institutions will likely continue to require
this coverage as a condition to crop lending and (ii) many of the farmers who
entered the MPCI program as a result of the 1994 Reform Act have come to
appreciate the reasonable price of the protection afforded by MPCI basic
catastrophic coverage and will remain with the program regardless of delinkage.
There can, however, be no assurance as to the ultimate effect which the 1996
Reform Act may have on the business or operations of the Company.
For a more detailed description of the Company's MPCI business, see
"Risk Factors -- Nature of Crop Insurance Business" and "Business -- Crop
Insurance -- Products."
Strategy
The Company has multiple strategies for its crop insurance operations,
including the following:
o The Company will seek to enhance underwriting profits and
reduce the volatility of its crop insurance business through
geographic diversification and the appropriate allocation of
risks among the federal reinsurance pools and the effective
use of federal and third-party catastrophic reinsurance
arrangements.
o The Company also limits the risks associated with crop
insurance through selective underwriting of crops based on its
historical loss experience data base.
o The Company continues to develop and maintain a proprietary
knowledge-based underwriting system which utilizes a database
of Company-specific underwriting rules.
o The Company has further strengthened its independent agency
network by using technology to provide fast, efficient service
to its agencies and providing application documentation
designed for simplicity and convenience.
o Unlike many of its competitors, the Company employs full time
claims adjusters in order to minimize the losses experienced
by IGF.
o The Company stops selling its crop hail policies after the
date on which the plant growth emerges from the ground in
order to prevent farmers from adversely selecting against IGF
when a storm is forecast or other damages have occurred.
o The Company continues to explore growth opportunities and
product diversification through new specialty coverages,
including Crop Revenue Coverage and named peril insurance.
Products
Description of MPCI Insurance Program. MPCI is a federally-subsidized
program which is designed to provide participating farmers who suffer insured
crop damage with funds needed to continue operating and plant crops for the next
growing season. All of the material terms of the MPCI program and of the
participation of private insurers, such as the Company, in the program are set
by the FCIC under applicable law. MPCI provides coverage for insured crops
against substantially all natural perils. Purchasing an MPCI policy permits a
farmer to ensure that his crop yield for any growing season will be at least 50%
to 75% (as selected by the farmer at the time of policy issuance) of his
historic crop yield. If a farmer's crop yield for the year is greater than the
yield coverage he selected, no payment is made to the farmer under the MPCI
program. However, if a farmer's crop yield for the year is less than the yield
coverage selected, MPCI entitles the farmer to a payment equal to the yield
shortfall multiplied by 60% to 100% (as selected by the farmer at the time of
policy issuance) of the price for such crop for that season as set by the FCIC.
In order to encourage farmers to participate in the MPCI program and
thereby reduce dependence on traditional disaster relief measures, the 1994
Reform Act established CAT Coverage as a new minimum level of MPCI coverage,
which farmers may purchase upon payment of a minimal fixed administrative fee of
$50 per policy instead of any premium. CAT Coverage insures 50% of historic crop
yield at 60% of the FCIC-set crop price for the applicable commodities standard
unit of measure, i.e., bushel, pound, etc. CAT Coverage can be obtained from
private insurers such as the Company or from USDA field offices.
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<PAGE>
In addition to CAT Coverage, MPCI policies that provide a greater level
of protection than the CAT Coverage level are also offered (such policies,
"Buy-up Coverage"). Most farmers purchasing MPCI have historically purchased at
Buy-up Coverage levels, with the most frequently sold policy providing coverage
for 65% of historic crop yield at 100% of the FCIC-set crop price per bushel.
Buy-up Coverages require payment of a premium in an amount determined by formula
set by the FCIC. Buy-up Coverage can only be purchased from private insurers.
The Company focuses its marketing efforts on Buy-up Coverages, which have higher
premiums and which the Company believes will continue to appeal to farmers who
desire, or whose lenders encourage or require, revenue protection.
The number of MPCI policies written has historically tended to increase
after a year, such as 1993, in which many natural disasters adversely affecting
crops occurred, and decrease following a year, such as 1994, in which favorable
weather conditions prevailed.
The Company, like other private insurers participating in the MPCI
program, generates revenues from the MPCI program in two ways. First, it
markets, issues and administers policies, for which it receives administrative
fees; and second, it participates in a profit-sharing arrangement in which it
receives from the government a portion of the aggregate profit, or pays a
portion of the aggregate loss, in respect of the business it writes.
The Company's share of profit or loss on the MPCI business it writes is
determined under a complex formula established by the FCIC. Under this formula,
the primary factors that determine the Company's MPCI profit or loss share are
(i) the gross premiums the Company is credited with having written; (ii) the
amount of such credited premiums retained by the Company after ceding premiums
to certain federal reinsurance pools; and (iii) the loss experience of the
Company's insureds. The following discussion provides more detail about the
implementation of this profit sharing formula.
Gross Premiums. For each year, the FCIC sets the formulas for
determining premiums for different levels of Buy-up Coverage. Premiums are based
on the type of crop, acreage planted, farm location, price per bushel for the
insured crop as set by the FCIC for that year, and other factors. The federal
government will generally subsidize a portion of the total premium set by the
FCIC and require farmers to pay the remainder. Cash premiums received by the
Company from farmers after the end of a growing season are promptly remitted to
the federal government. Although applicable federal subsidies change from year
to year, such subsidies will range up to approximately 40% of the Buy-up
Coverage premium for 1996 depending on the crop insured and the level of Buy-up
Coverage purchased, if any. Federal premium subsidies are recorded on the
Company's behalf by the government. For purposes of the profit sharing formula,
the Company is credited with having written the full amount of premiums paid by
farmers for Buy-up Coverages, plus the amount of any related federal premium
subsidies (such total amount, its "MPCI Premium").
As previously noted, farmers pay a minimal administrative fee of $50
per policy but are not required to pay any premium for CAT Coverage. However,
for purposes of the profit sharing formula, the Company will be credited with an
imputed premium (its "MPCI Imputed Premium") for all CAT Coverages it sells. The
amount of such MPCI Imputed Premium credited is determined by formula. In
general, such MPCI Imputed Premium will be less than 50% of the premium that
would be payable for a Buy-up Coverage policy that insured 65% of historic crop
yield at 100% of the FCIC-set crop price per bushel, historically the most
frequently sold Buy-up Coverage.
Reinsurance Pools. Under the MPCI program, the Company must allocate
its MPCI Premium or MPCI Imputed Premium in respect of a farm to one of three
federal reinsurance pools, at its discretion. These pools provide private
insurers with different levels of reinsurance protection from the FCIC on the
business they have written. For insured farms allocated to the "Commercial
Pool," the Company, at its election, generally retains 50% to 100% of the risk
and the FCIC assumes 0% - 50% of the risk; for those allocated to the
"Developmental Pool," the Company generally retains 35% of the risk and the FCIC
assumes 65%; and for those allocated to the "Assigned Risk Pool," the Company
retains 20% of the risk and the FCIC assumes 80%.
Although the Company in general must agree to insure any eligible farm,
it is not restricted in its decision to allocate a risk to any of the three
pools, subject to a minimum aggregate retention of 35% of its MPCI Premiums and
MPCI Imputed Premiums written. The Company uses a sophisticated methodology
derived from a comprehensive historical data base to allocate MPCI risks to the
federal reinsurance pools in an effort to enhance the underwriting profits
realized from this business. The Company has crop yield history information with
respect to over 100,000 farms in the United States. Generally, farms or crops
which, based on historical experience, location and other factors, appear to be
less likely to suffer an insured loss, are placed in the Commercial Pool. Farms
or crops which appear to be more likely to suffer a loss are placed in the
Developmental Pool or Assigned Risk Pool.
The Company has historically allocated the bulk of its insured risks to the
Commercial Pool.
-54-
<PAGE>
The Company's share of profit or loss depends on the aggregate amount
of MPCI Premium and MPCI Imputed Premium on which the Company retains risk after
allocating farms to the foregoing pools (its "MPCI Retention").
Loss Experience of Insureds. The Company pays insured losses to farmers
as they are incurred during the growing season, with the full amount of such
payments reimbursed to the Company by the federal government within three
business days. After a growing season ends, the aggregate loss experience of the
Company's insureds in each state for risks allocated to each of the three
reinsurance pools is determined. If, for all risks allocated to a particular
pool in a particular state, the Company's share of losses incurred is less than
its aggregate MPCI Retention, the Company shares in the gross amount of such
profit according to a schedule set by the FCIC for each year. The profit and
loss sharing percentages are different for risks allocated to each of the three
reinsurance pools, and private insurers will receive or pay the greatest
percentage of profit or loss for risks allocated to the Commercial Pool.
The percentage split between private insurers and the federal
government of any profit or loss which emerges from an MPCI Retention is set by
the FCIC and generally is adjusted from year to year. For 1995, 1996 and 1997
crop years, the FCIC has increased the maximum potential profit share of private
insurers for risks allocated to the Commercial Pool above the maximum potential
profit share set for 1994, without increasing the maximum potential share of
loss for risks allocated to that pool for 1995. This change increases the
potential profitability of risks allocated to the Commercial Pool by private
insurers.
The following table presents MPCI Premiums, MPCI Imputed Premium, and
underwriting gains or losses of IGF for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1993 1994 1995
------- ------- -------
(in thousands)
<S> <C> <C> <C>
MPCI premiums.............................. $26,563 $44,325 $53,408
MPCI imputed premiums...................... -- 2,171 19,552
Gross underwriting
gain (loss)........................... (3,534) 4,344 10,870
Net private third-party reinsurance
recovery (expense) and other.......... 2,019 (1,087) (1,217)
Net underwriting gain (loss)............... $(1,515) $3,257 $9,653
</TABLE>
MPCI Fees and Reimbursement Payments. The Company receives Buy-up
Expense Reimbursement Payments from the FCIC for writing and administering
Buy-up Coverage policies. These payments provide funds to compensate the Company
for its expenses, including agents' commissions and the costs of administering
policies and adjusting claims. In 1994, the Buy-up Expense Reimbursement
Payments were set at 31% of the MPCI Premium. In 1995 and 1996, this payment has
also been set at 31% of the MPCI Premium, but it is scheduled to be reduced to
29% in 1997, 28% in 1998, and 27.5% in 1999.
Farmers are required to pay a minimal fixed administrative fee of $50
per policy in order to obtain CAT Coverage. This fee is retained by the Company
to defray the cost of administration and policy acquisition. The Company also
receives, from the FCIC, a separate CAT LAE Reimbursement Payment equal to
approximately 13.0% of MPCI Imputed Premiums in respect of each CAT Coverage
policy it writes and a small MPCI Excess LAE Reimbursement Payment. In general,
fees and payments received by the Company in respect of CAT Coverage are
significantly lower than those received for Buy-up Coverage.
-55-
<PAGE>
In addition to premium revenues, the Company received the following
fees and commissions from its crop insurance segment for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
--------------------------------- ----------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
CAT Coverage Fees...................$ ---$ 74 $ 1,298 $ --- $ ---
Buy-up Expense Reimbursement
Payments......................... $8,854 $13,845 $16,366 $3,930 $6,567
CAT LAE Reimbursement Payments
and MPCI Excess LAE
Reimbursement Payments........... $ 190 $ 107 $ 3,427 $ 660 $ 758
------ ------- ------- ------ ------
Total............................ $9,044 $14,026 $21,091 $4,590 $7,325
====== ======= ======= ====== ======
</TABLE>
Crop Revenue Coverage. The Company has recently introduced a new
product in its crop insurance business called Crop Revenue Coverage, or "CRC."
In contrast to standard MPCI coverage, which features a yield guarantee or
coverage for the loss of production, CRC provides the insured with a guaranteed
revenue stream by combining both yield and price variability protection. CRC
protects against a grower's loss of revenue resulting from fluctuating crop
prices and/or low yields by providing coverage when any combination of crop
yield and price results in revenue that is less than the revenue guarantee
provided by the policy. CRC was approved by the FCIC as a pilot program for
revenue insurance coverage plans for the 1996 crop year, and has been available
for corn and soybeans in all counties in Iowa and Nebraska beginning with such
crop year. CRC policies represent approximately 30% of the combined corn
policies written by IGF in Iowa and Nebraska for the 1996 crop year. In July,
1996, the FCIC announced that CRC will be made available in the fall of 1996 for
winter wheat in the entire states of Kansas, Michigan, Nebraska, South Dakota,
Texas and Washington and in parts of Montana.
Revenue insurance coverage plans such as CRC are the result of the 1994
Reform Act, which directed the FCIC to develop a pilot crop insurance program
providing coverage against loss of gross income as a result of reduced yield
and/or price. CRC was developed by a private insurance company under the
auspices of this pilot program, which authorizes private companies to design
alternative revenue coverage plans and to submit them for review, approval and
endorsement by the FCIC. As a result, although CRC is administered and reinsured
by the FCIC and appears as an official publication in the Federal Register and
risks are allocated to the federal reinsurance pools, CRC remains partially
influenced by the private sector, particularly with respect to changes in its
rating structure.
CRC plans use the policy terms and conditions of the Actual Production
History ("APH") plan of MPCI as the basic provisions for coverage. The APH
provides the yield component and a yield forecast by utilizing the insured's
historic yield records. The CRC revenue guarantee is the producer's approved APH
times the coverage level, times the higher of the spring market price or harvest
market price of the insured crop for each unit of farmland. The coverage levels
and exclusions in a CRC policy are similar to those in a standard MPCI policy.
As with MPCI policies, the Company receives from the FCIC an expense
reimbursement payment equal to 31% of gross premiums written in respect of each
CRC policy it writes. See "-- MPCI Fees and Reimbursement Payments." This
expense reimbursement payment is scheduled to be reduced to 29% in 1997, 28% in
1998 and 27.5% in 1999. Although the 1994 Reform Act directs the FCIC to alter
program procedures and administrative requirements so that the administrative
and operating costs of private insurance companies participating in the MPCI
program will be reduced in an amount that corresponds to the reduction in the
expense reimbursement rate, there can be no assurance that the Company's actual
costs will not exceed the expense reimbursement rate.
CRC protects revenues by extending crop insurance protection based on
APH to include price as well as yield variability. Unlike MPCI, in which the
crop price component of the coverage is set by the FCIC prior to the growing
season and generally does not reflect actual crop prices, CRC uses the commodity
futures market as the basis for its pricing component. Pricing occurs twice in
the CRC plan. The spring futures price is used to establish the initial policy
revenue guarantee and premium, and the harvest futures price is used to
establish the crop value to count against the revenue guarantee and to recompute
the revenue guarantee (and resulting indemnity payments) when the harvest price
is higher than the spring price.
The industry (including the Company) and the FCIC are considering
whether the current rating structure is adequate to support the CRC product, as
a result in part of possible underpricing of the commodity future embedded in
the product. The Company is studying this issue and other factors as part of its
-56-
<PAGE>
determination whether to expand or reduce its participation. Based on crop
performance to date in the regions where it has written CRC, the Company does
not believe that any potential underpricing of CRC policies it has written will
adversely affect its results of operations. Currently, the Company reinsures a
majority of the CRC risk which it underwrites into the Assigned Risk Pool.
Crop Hail. In addition to Multi-Peril Crop Insurance, the Company
offers stand alone crop hail insurance, which insures growing crops against
damage resulting from hail storms and which involves no federal participation,
as well as its proprietary HAILPLUS(TM) product which combines the application
and underwriting process for MPCI and hail coverages. The HAILPLUS(TM) product
tends to produce less volatile loss ratios than the stand alone product since
the combined product generally insures a greater number of acres, thereby
spreading the risk of damage over a larger insured area. Approximately 50% of
IGF's hail policies are written in combination with MPCI. Although both crop
hail and MPCI provide insurance against hail damage, under crop hail coverages
farmers can receive payments for hail damage which would not be severe enough to
require a payment under an MPCI policy. The Company believes that offering crop
hail insurance enables it to sell more MPCI policies than it otherwise would.
Named Peril. In addition to crop hail insurance, the Company also sells
a small volume of insurance against crop damage from other specific named
perils. These products cover specific crops, including hybrid seed corn,
cranberries, cotton and onions, and are generally written on terms that are
specific to the kind of crop and farming practice involved and the amount of
actuarial data available. The Company plans to seek potential growth
opportunities in this niche market by developing basic policies on a diverse
number of named crops grown in a variety of geographic areas, and to offer these
polices primarily to large producers through certain select agents. The
Company's experienced product development team will develop the underwriting
criteria and actuarial rates for the named peril coverages. As with the
Company's other crop insurance products, loss adjustment procedures for named
peril policies are handled by full-time professional claims adjusters who have
specific agronomy training with respect to the crop and farming practice
involved in the coverage.
Third Party Reinsurance
In order to reduce the Company's potential loss exposure under the MPCI
program, in addition to reinsurance obtained from the FCIC, the Company
purchases stop loss reinsurance from other private insurers. Such private
reinsurance would not eliminate the Company's potential liability in the event a
reinsurer was unable to pay or losses exceeded the limits of the stop loss
coverage. For crop hail insurance, the Company has in effect quota share
reinsurance of 10% of premiums. Thereafter, 95% of 50% of losses in excess of
80% of premiums up to 100% of premiums, and 95% of losses in excess of 100% up
to 140% of premiums, are protected. For MPCI, losses in excess of 100% up to
150% of premiums (subject to a 6-1/4% coparticipation) are reinsured. The
Company remains liable for losses below 100% of premiums and above 150% of
premiums, subject to FCIC reinsurance which reinsures losses in excess of 155%
up to 500% of premiums.
Based on a review of the reinsurers' financial health and reputation in
the insurance marketplace, the Company believes that the reinsurers for its crop
insurance business are financially sound and that they therefore can meet their
obligations to the Company under the terms of the reinsurance treaties. The
Company purchases reinsurance for its MPCI and commercial hail coverages
primarily from Scandinavian Reinsurance Company Ltd. and Partner Reinsurance
Company Ltd. In addition, Granite Re participates to the extent of 10% on these
coverages. These reinsurers (except for Granite Re, which is not rated) are
rated A or better by A.M. Best. Reserves for uncollectible reinsurance are
provided as deemed necessary.
Marketing; Distribution Network
IGF markets its products to the owners and operators of farms in 29
states through approximately 2,500 agents associated with approximately 1,200
independent insurance agencies, with its primary geographic concentration in the
states of Iowa, Texas, Illinois, Kansas and Minnesota. The Company has, however,
begun to diversify outside of the Midwest and Texas in order to reduce the risk
associated with geographic concentration. IGF is licensed in 21 states and
markets its products in additional states through a fronting agreement with a
third party insurance company. IGF has a stable agency base and it experienced
negligible turnover in its agencies in 1995. Through its agencies, IGF targets
farmers with an acreage base of at least 1,000 acres. Such larger farms
typically have a lower risk exposure since they tend to utilize better farming
practices and tend to have noncontiguous acreage thereby making it less likely
that the entire farm will be affected by a particular occurrence.
-57-
<PAGE>
The following table presents MPCI Premiums written by IGF by state for
the years ended December 31, 1993, 1994 and 1995.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1993 1994 1995
-------- -------- --------
(in thousands)
State
<S> <C> <C> <C>
Texas................................... $ 5,004 $ 6,751 $11,075
Iowa ................................... 5,578 8,506 9,296
Illinois................................ 4,090 7,302 7,305
Kansas.................................. 1,152 2,003 3,476
Minnesota............................... 1,030 1,965 2,026
Nebraska................................ 843 1,536 1,992
Indiana................................. 1,047 1,486 1,875
Colorado................................ 902 1,526 1,771
Missouri................................ 633 1,785 1,718
North Dakota............................ 1,037 1,153 1,638
All Other............................... 5,247 10,312 11,236
------- ------- -------
Total................................ $26,563 $44,325 $53,408
======= ======= =======
</TABLE>
The following table presents gross premiums written by IGF by state for
crop hail coverages for the years ended December 31, 1993, 1994 and 1995.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1993 1994 1995
--------- --------- --------
(in thousands)
State
<S> <C> <C> <C>
Iowa ................................... $ 3,158 $ 3,954 $ 4,667
Minnesota............................... 294 318 2,162
Colorado................................ 558 964 1,775
Nebraska................................ 672 1,022 1,477
Montana................................. 695 239 1,355
North Dakota............................ 729 1,087 1,283
Kansas.................................. 705 765 846
South Dakota............................ 101 124 756
Wisconsin............................... 328 315 458
Mississippi............................. 208 277 400
All Other............................... 1,145 1,065 1,787
------- ------- -------
Total................................ $ 8,593 $ 10,130 $16,966
======= ======== =======
</TABLE>
The Company seeks to maintain and develop its agency relationships by
providing agencies with faster, more efficient service as well as marketing
support. IGF owns an IBM AS400 along with all peripheral and networking
equipment and has developed its own proprietary software package, Aplus, which
allows agencies to quote and examine various levels of coverage on their own
personal computers. The Company has seven regional managers who are responsible
for the Company's field operations within an assigned geographic territory,
including maintaining and enhancing relationships with agencies in those
territories. IGF also uses application documentation which is designed for
simplicity and convenience. The Company believes that IGF is the only crop
insurer which has created a single application for MPCI and hail coverage.
IGF generally compensates its agents based on a percentage of premiums
produced and, in the case of CAT Coverage and crop hail insurance, a percentage
of underwriting gain realized with respect to business produced. This
compensation structure is designed to encourage agents to place profitable
business with IGF (which tends to be insurance coverages for larger farms with
respect to which the risk of loss is spread over larger, frequently
noncontiguous insured areas).
-59-
<PAGE>
Underwriting Management
Because of the highly regulated nature of the MPCI program and the fact
that rates are established by the FCIC, the primary underwriting functions
performed by the Company's personnel with respect to MPCI Coverage are (i)
selecting of marketing territories for MPCI based on the type of crops being
grown in the area, typical weather patterns and loss experience of both agencies
and farmers within a particular area, (ii) recruiting agencies within those
marketing territories which service larger farms and other more desirable risks
and (iii) ensuring that policies are underwritten in accordance with the FCIC
rules.
With respect to its hail coverage, IGF seeks to minimize its
underwriting losses by maintaining an adequate geographic spread of risk by rate
group. In addition, IGF establishes sales closing dates after which hail
policies will not be sold. These dates are dependent on planting schedules, vary
by geographic location and range from May 15 in Texas to July 15 in North
Dakota. Prior to these dates, crops are either seeds in the ground or young
growth newly emerged from the ground and hail damage to crops in either of these
stages of growth is minimal. The cut-off dates prevent farmers from adversely
selecting against IGF by waiting to purchase hail coverage until a storm is
forecast or damage has occurred. For its hail coverage, IGF also sets limits by
policy ($400,000 each) and by township ($2.0 million per township). As of
December 31, 1995, IGF's average exposure was approximately $30,000 per policy
and approximately $375,000 per township. The Company also uses a daily report
entitled "Severe Weather Digest" which shows the time and geographic location of
all extraordinary weather events to check incoming policy applications against
possible previous damage.
Claims/Loss Adjustments
In contrast to most of its competitors who retain independent adjusters
on a part-time basis for loss adjusting services, as of May 31, 1996, IGF
employed approximately 40 full-time professional claims adjusters who are
agronomy experts as well as approximately 190 part-time loss adjusters.
Management believes that the professionalism of the IGF full-time claims staff
coupled with their exclusive commitment to IGF help to ensure that claims are
handled in a manner so as to minimize losses experienced by IGF. The adjusters
are located throughout IGF's marketing territories. In order to promote a rapid
claims response, the Company has deployed several small four wheel drive
vehicles for use by its adjusters. The adjusters report to a field service
representative in their territory who manages adjusters' assignments, assures
that all preliminary estimates for loss reserves are accurately reported and
assists in loss adjustment. Within 72 hours of reported damage, a loss notice is
reviewed by an IGF service office claims manager and a preliminary loss reserve
is determined which is based on the adjuster's knowledge of the area or the
particular storm which caused the loss. Generally, within approximately two
weeks, hail and MPCI claims are examined and reviewed on site by an adjuster and
the insured signs a proof of loss form containing a final release. As part of
the adjustment process, IGF's adjusters use Global Positioning System Units,
which are hand held devices using navigation satellites to determine the precise
location where a claimed loss has occurred. IGF has a team of catastrophic
claims specialists who are available on 48 hours notice to travel to any of
IGF's six regional service offices to assist in heavy claim work load
situations.
Competition
The crop insurance industry is highly competitive. The Company competes
against other private companies and, with respect to basic catastrophic MPCI
coverage, USDA field service offices in certain areas. However, under the 1996
Reform Act, effective for the 1997 crop year, USDA field service offices may
offer catastrophic risk coverage in a state only if the Secretary of Agriculture
determines that there is an insufficient number of approved insurance providers
operating in the state to provide CAT Coverage to producers adequately.
Many of the Company's competitors have substantially greater financial
and other resources than the Company, and there can be no assurance that the
Company will be able to compete effectively against such competitors in the
future. The Company competes on the basis of the commissions paid to agents, the
speed with which claims are paid, the quality and extent of services offered,
the reputation and experience of its agency network and, in the case of private
insurance, policy rates. Because the FCIC establishes the rates that may be
offered for MPCI policies, the Company believes that quality of service and
level of commissions offered to agents are the principal factors on which it
-60-
<PAGE>
competes in the area of MPCI. The Company believes that the crop hail and other
named peril crop insurance industry is extremely rate-sensitive and the ability
to offer competitive rate structures to agents is a critical factor in the
agent's ability to write crop hail and other named peril premiums. Because of
the varying state laws regarding the ability of agents to write crop hail and
other named peril premiums prior to completion of rate and form filings (and, in
some cases, state approval of such filings), a company may not be able to write
its expected premium volume if its rates are not competitive.
The crop insurance industry has become increasingly consolidated. From
the 1985 crop year to the 1995 crop year, the number of insurance companies
having agreements with the FCIC to sell and service MPCI policies has declined
from 50 to 17. The Company believes that IGF is the sixth largest crop insurer
in the U.S. based on premium information compiled in 1995 by the FCIC and NCIS.
The Company's primary competitors are Rain & Hail Management, Inc. (affiliated
with Cigna Corporation), Rural Community Insurance Services, Inc. (which is
owned by Norwest Corporation), The Redland Group, Inc. (a subsidiary of
Acceptance Insurance Companies, Inc.), Crop Growers Corporation and the Farmers
Alliance Group. The Company believes that in order to compete successfully in
the crop insurance business it will have to market and service a volume of
premiums sufficiently large to enable the Company to continue to realize
operating efficiencies in conducting its business. No assurance can be given
that the Company will be able to compete successfully if this market further
consolidates.
Liability for Losses and Loss Adjustment Expenses
Loss reserves are estimates, established at a given point in time based
on facts then known, of what an insurer predicts its exposure to be in
connection with incurred losses. LAE reserves are estimates of the ultimate
liability associated with the expense of settling all claims, including
investigation and litigation costs resulting from such claims. The actual
liability of an insurer for its losses and LAE reserves at any point in time
will be greater or less than these estimates.
The Company maintains reserves for the eventual payment of losses and
LAE with respect to both reported and unreported claims. The Company follows two
principal methods of establishing reserves. Under the first method, nonstandard
automobile reserves are established on a case-by-case basis. The reserving
process takes into account the type of claim, policy provisions relating to the
type of loss and historical paid loss and LAE for similar claims. Crop insurance
claims are reserved based upon preliminary notice to the Company and
investigation of the loss in the field. The ultimate settlement of a crop loss
is based upon either the value of harvest or the yield of the crop.
Under the second method, loss and LAE reserves for claims that have
been incurred but not reported are estimated based on many variables including
historical and statistical information, inflation, legal developments, economic
conditions, trends in claim severity and frequency and other factors that could
affect the adequacy of loss reserves.
-61-
<PAGE>
The following table sets forth a three year analysis of the
undiscounted reserves for loss and LAE of the Company (not including Superior)
at the beginning of each year, the provision for new claims incurred in the
current year, the effect of reserve adjustments on claims of prior years and the
actual payments made during the year on both current year and prior year claims.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1993 1994 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance at January 1.................... $ 30,924 $ 54,143 $ 29,269
Less reinsurance recoverables........... 11,643 36,891 12,542
-------- -------- --------
Net balance at January 1............. 19,281 17,252 16,727
-------- -------- --------
Incurred related to:
Current Year......................... 23,931 26,268 35,184
Prior Years.......................... 1,149 202 787
-------- -------- --------
Total incurred..................... 25,080 26,470 35,971
-------- -------- --------
Paid related to:
Current Year......................... 14,877 16,647 21,057
Prior Years.......................... 12,232 10,348 10,018
-------- -------- --------
Total paid......................... 27,109 26,995 31,075
-------- -------- --------
Net balance at December 31.............. 17,252 16,727 21,623
Plus reinsurance recoverables........... 36,891 12,542 37,798
-------- -------- --------
Balance at December 31.................. $ 54,143 $ 29,269 $ 59,421
======== ======== ========
</TABLE>
The following table sets forth a three year analysis of the
undiscounted reserves for loss and LAE of Superior at the beginning of each
year, the provision for new claims incurred in the current year, the effect of
reserve adjustments on claims of prior years and the actual payments made during
the year on both current year and prior year claims.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1993 1994 1995
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Balance at January 1.................... $57,164 $52,610 $54,577
Less reinsurance recoverables........... 361 68 1,099
-------- -------- --------
Net balance at January 1............. 56,803 52,542 53,478
-------- -------- --------
Incurred related to:
Current Year......................... 92,619 91,064 77,266
Prior Years.......................... (6,717) 1,314 (4,923)
-------- -------- --------
Total incurred..................... 85,902 92,378 72,343
-------- -------- --------
Paid related to:
Current Year......................... 57,929 56,505 48,272
Prior Years.......................... 32,234 34,937 31,424
-------- -------- --------
Total paid......................... 90,163 91,442 79,696
-------- -------- --------
Net balance at December 31.............. 52,542 53,478 46,125
Plus reinsurance recoverables........... 68 1,099 987
-------- -------- --------
Balance at December 31.................. $ 52,610 $54,577 $47,112
======== ======= =======
</TABLE>
-62-
<PAGE>
The following tables show the accident year development of the unpaid
losses and LAE of the business of the Company (not including Superior), and of
Superior separately, for the periods indicated. Since Pafco was not formed until
1987 and IGF was not acquired until 1990, the reserve development table for the
Company only covers the past nine years. The top line of each table shows the
incurred losses and LAE by accident year as recorded for each of the indicated
years. These incurred losses and LAE include incurred but not reported ("IBNR")
claims.
The data in the upper portion shows the reestimated incurred losses and
LAE over time. A redundancy in reserves means that reserves established in prior
years exceeded actual losses and LAE or were revalued at less than the original
reserve amount. A deficiency in reserves means that the reserves established in
prior years were less than actual losses and LAE or were revalued at greater
than the original reserve amount. The data in the lower portion of the table
reflects the cumulative payments made over time.
In evaluating the following information, it should be noted that each
amount includes the effects of all changes in amounts for prior periods. For
example, the amount of redundancy related to losses settled in 1995 but incurred
in 1989 is included in the cumulative redundancy amount for each of the years
from 1989 through 1994. Reserves of the Company (not including Superior)
increased significantly from 1988 to 1995 principally because of an increase in
the volume of the Company's business.
-63-
<PAGE>
<TABLE>
<CAPTION>
The Company (not including Superior)
Year Ended December 31,
------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Incurred losses/LAE by accident
year - estimated at
December 31................. --- 8,464 13,397 22,222 18,542 19,452 21,818 12,392 15,044 22,056
Incurred reestimate as of:
One year later.............. --- 7,150 12,676 23,731 17,365 19,071 21,842 12,013 15,136
Two years Later............. --- 8,304 12,767 22,339 17,032 18,976 22,591 12,274
Three years later........... --- 8,418 12,688 22,529 17,034 19,133 22,825
Four years later............ --- 8,027 12,613 22,686 16,899 19,119
Five years later............ --- 7,950 12,613 22,695 16,817
Six years later............. --- 8,036 12,603 22,530
Seven years later........... --- 7,994 12,669
Eight years later........... --- 8,025
Nine years later............ ---
Cumulative redundancy/
(deficiency) as of
December 31, 1995........... --- 439 728 (308) 1,725 333 (1,007) 118 (92)
Paid cumulative as of:
One year later.............. --- 6,232 10,067 17,730 13,501 15,025 17,816 9,69611,185
Two years later............. --- 8,033 11,303 20,147 15,232 17,378 20,637 11,078
Three years later........... --- 8,148 11,955 21,516 16,043 18,334 21,917
Four years later............ --- 7,861 12,297 21,984 16,533 18,708
Five years later............ --- 7,869 12,442 22,235 16,675
Six years later............. --- 8,012 12,475 22,310
Seven years later........... --- 8,012 12,492
Eight years later........... --- 8,010
Nine years later............ ---
</TABLE>
-64-
<PAGE>
<TABLE>
<CAPTION>
Superior
Year Ended December 31,
-------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Incurred losses/LAE by accident
year - estimated at
December 31.................39,932 52,242 60,819 74,470 82,224 79,842 82,624 86,453 85,467 72,235
Incurred reestimate as of:
One year later..............45,691 56,551 62,830 70,297 78,686 73,938 79,092 86,816 83,793
Two years later.............45,866 57,664 62,643 69,658 77,795 72,058 77,052 85,069
Three years later...........46,345 58,751 62,040 68,586 76,602 71,002 76,319
Four years later............46,149 58,906 62,112 68,337 76,275 70,585
Five years later............46,304 58,891 62,003 68,312 76,295
Six years later.............46,428 58,907 61,988 68,168
Seven years later...........46,441 58,927 61,942
Eight years later...........46,430 58,917
Nine years later............46,430
Cumulative redundancy/
(deficiency) as of
December 31, 1995...........(6,498) (6,675) (1,123) 6,302 5,929 9,257 6,305 1,384 1,674
Paid cumulative as of:
One year later..............38,402 47,638 51,436 57,708 65,735 61,918 68,524 76,482 74,183
Two years later.............42,252 52,997 58,149 64,309 72,098 67,633 73,429 81,110
Three years later...........44,217 56,377 60,676 67,066 74,385 69,489 74,871
Four years later............44,981 58,281 61,712 67,858 75,741 69,905
Five years later............45,952 58,646 61,794 68,092 76,045
Six years later.............46,284 58,709 61,878 68,037
Seven years later...........46,374 58,838 61,804
Eight years later...........46,385 58,848
Nine years later............46,309
</TABLE>
-65-
<PAGE>
Investments
Insurance company investments must comply with applicable laws and
regulations which prescribe the kind, quality and concentration of investments.
In general, these laws and regulations permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common securities, real estate
mortgages and real estate.
The Company's investment policies are determined by the Company's Board
of Directors and are reviewed on a regular basis. The Company's investment
strategy is to maximize the after-tax yield of the portfolio while emphasizing
the stability and preservation of the Company's capital base. Further, the
portfolio is invested in types of securities and in an aggregate duration which
reflect the nature of the Company's liabilities and expected liquidity needs.
The investment portfolios of the Company and Superior are managed by third party
professional administrators, including Goldman Sachs, in accordance with
pre-established investment policy guidelines established by the Company and
Superior. The investment portfolios of the Company and of Superior at March 31,
1996 consisted of the following:
<TABLE>
<CAPTION>
Pro Forma
The Company and
The Company Superior Superior Combined
--------------------- ----------------------- --------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Type of Investment Cost Value Cost Value Cost Value
---------- --------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. government corporations
and agencies........................ $10,678 $10,663 $32,482 $32,678 $ 43,160 $ 43,341
Obligations of states and political
subdivisions...................... 393 415 24,918 25,928 25,311 26,343
Corporate securities.................. 328 329 40,911 42,407 41,239 42,736
Total fixed maturities............ 11,399 11,407 98,311 101,013 109,710 112,420
Equity securities:
Preferred stocks...................... 202 204 713 719 915 923
Common stocks......................... 11,484 11,412 5,783 7,920 17,267 19,332
-------- -------- --------- --------- -------- --------
11,686 11,616 6,496 8,639 18,182 20,255
-------- -------- --------- --------- -------- --------
Short-term investments ................. 935 (1) 935 (1) 10,852 10,852 11,787 11,787
Real estate............................. 482 482 274 274 756 756
Mortgage loans.......................... 2,690 2,690 --- --- 2,690 2,690
Other loans............................. 50 50 --- --- 50 50
-------- -------- --------- --------- -------- --------
Total investments................. $ 27,242 $ 27,180 $ 115,933 $ 120,778 $143,175 $147,958
======== ======== ========= ========= ======== ========
</TABLE>
- ----------
(1) Due to the nature of crop insurance, the Company must maintain short-term
investments to fund amounts due under the MPCI program. Historically, these
short-term funds are highest in the fall corresponding to the cash flow of
the agricultural industry.
-66-
<PAGE>
The following table sets forth, as of December 31, 1994 and 1995 and
March 31, 1996, the composition of the fixed maturity securities portfolio of
the Company (not including Superior) by time to maturity, and, as of March 31,
1996, the composition of the fixed maturity securities portfolio of the Company
and Superior combined by the time to maturity.
<TABLE>
<CAPTION>
The Company
------------------------------------------------------------- Pro Forma
December 31, the Company and
--------------------------------------- March 31, Superior Combined
1994 1995 1996 March 31, 1996
----------------- ------------------- ------------------- ---------------------
Percent Percent Percent Percent
Total Total Total Total
Market Market Market Market Market Market Market Market
Maturity Value Value Value Value Value Value Value Value
- --------------- ------ ------- ------ ------- ------- ------- -------- --------
(in thousands)
<C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year or less.......... $1,573 17.8% $4,610 35.6% $747 6.6% $ 1,253 1.1%
More than 1 year
through 5 years...... 4,074 46.0 5,051 39.1 6,687 58.6 42,526 37.8
More than 5 years
through 10 years..... 1,724 19.4 3,270 25.3 3,973 34.8 39,415 35.1
More than 10 years...... 1,490 16.8 --- --- --- --- 29,226 26.0
------ ----- ------- ----- ------- ----- -------- -----
Total............... $8,861 100.0% $12,931 100.0% $11,407 100.0% $112,420 100.0%
====== ===== ======= ===== ======= ===== ======== =====
</TABLE>
The following table sets forth, as of December 31, 1994 and 1995 and
March 31, 1996, the ratings assigned to the fixed maturity securities of the
Company (not including Superior), and, as of March 31, 1996, the ratings
assigned to the fixed maturity securities of the Company and Superior combined.
<TABLE>
<CAPTION>
The Company
------------------------------------------------------------- Pro Forma
December 31, the Company and
--------------------------------------- March 31, Superior Combined
1994 1995 1996 March 31, 1996
----------------- ------------------- ------------------- ---------------------
Percent Percent Percent Percent
Total Total Total Total
Market Market Market Market Market Market Market Market
Rating (1) Value Value Value Value Value Value Value Value
- --------------- ------ ------- ------ ------- ------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aaa or AAA.............. $5,772 65.1% $ 7,753 60.0% $9,046 79.3% $ 48,136 42.8%
Aa or AA................ 748 8.4 680 5.2 415 3.6 18,610 16.6
A ..................... 1,144 12.9 257 2.0 1,485 13.0 7,952 7.1
Baa or BBB.............. 100 1.2 100 0.8 --- .--- 2,910 2.6
Ba or BB................ --- --- --- --- --- --- 13,005 11.6
Below investment grade.. --- --- --- .--- --- .--- --- ---
Not rated............... 1,097 12.4 4,141 32.0 461 4.1 21,807 19.3
------ ----- ------- ----- ------- ----- -------- -----
Total............... $8,861 100.0% $12,931 100.0% $11,407 100.0% $112,420 100.0%
====== ===== ======= ===== ======= ===== ======== =====
</TABLE>
- ----------
(1) Ratings are assigned by Moody's Investors Service, Inc. when available,
with the remaining ratings assigned by Standard & Poor's Corporation.
-67-
<PAGE>
The investment results of the Company and the pro forma investment
results of the Company and Superior combined for the periods indicated are set
forth below:
<TABLE>
<CAPTION>
Pro Forma the
The Company Company and Superior
------------------------------------------------- Combined
Three Months Three Months
Years Ended Ended Ended
December 31, March 31, March 31,
------------ --------- -------------------------
1993 1994 1995 1995 1996 1996
---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net investment income (1) ........... $ 1,489 $ 1,241 $ 1,173 $ 319 $ 558 $ 2,365
Average investment portfolio (2) .... $ 24,719 $ 20,628 $ 22,653 $ 20,897 $ 26,606 $ 150,131
Pre-tax return on
average investment portfolio (3) 6.0% 6.0% 5.2% 6.1% 8.4% 6.3%
Net realized gains (losses) ......... $ (119) $ (159) $ (344) $ (45) $ (36) $ (7)
</TABLE>
- ----------
(1) Includes dividend income received in respect of holdings of common
stock.
(2) Average investment portfolio represents the average (based on amortized
cost) of the beginning and ending investment portfolio.
(3) The pre-tax return on average investment portfolio for the three months
ended March 31, 1995 and 1996 was calculated based upon a simple
annualization of net investment income.
Ratings
A.M. Best has currently assigned an A- rating to Superior and a B-
rating to Pafco. Pafco's rating has been confirmed by A.M. Best at a B- rating
subsequent to the Acquisition. Superior's rating has also been confirmed by A.M.
Best subsequent to the Acquisition, although it remains under review with
potential negative implications. IGF recently received an "NA-2" rating (a
"rating not assigned" category for companies that do not meet A.M. Best's
minimum size requirement) from A.M. Best but intends to seek a revised rating
after the infusion of capital from the proceeds of the Offering. See "Use of
Proceeds."
A.M. Best's ratings are based upon a comprehensive review of a
company's financial performance, which is supplemented by certain data,
including responses to A.M. Best's questionnaires, phone calls and other
correspondence between A.M. Best analysts and company management, quarterly NAIC
filings, state insurance department examination reports, loss reserve reports,
annual reports, company business plans and other reports filed with state
insurance departments. A.M. Best undertakes a quantitative evaluation, based
upon profitability, leverage and liquidity, and a qualitative evaluation, based
upon the composition of a company's book of business or spread of risk, the
amount, appropriateness and soundness of reinsurance, the quality,
diversification and estimated market value of its assets, the adequacy of its
loss reserves and policyholders' surplus, the soundness of a company's capital
structure, the extent of a company's market presence, and the experience and
competence of its management. A.M. Best's ratings represent an independent
opinion of a company's financial strength and ability to meet its obligations to
policyholders. A.M. Best's ratings are not a measure of protection afforded
investors. An "A-" and a "B-" rating are A.M. Best's fourth and eighth highest
rating classifications, respectively, out of 15 ratings. An "A-" rating is
awarded to insurers which, in A.M. Best's opinion, "have demonstrated excellent
overall performance when compared to the standards established by the A.M. Best
Company" and "have a strong ability to meet their obligations to policyholders
over a long period of time." A "B-" rating is awarded to insurers which, in A.M.
Best's opinion, "have demonstrated adequate overall performance when compared to
the standards established by the A.M. Best Company" and "generally have an
adequate ability to meet their obligations to policyholders, but their financial
strength is vulnerable to unfavorable changes in underwriting or economic
conditions." There can be no assurance that such ratings will not in the future
adversely affect the Company's competitive position.
-68-
<PAGE>
Regulation
General
As a general rule, an insurance company must be licensed to transact
insurance business in each jurisdiction in which it operates, and almost all
significant operations of a licensed insurer are subject to regulatory scrutiny.
Licensed insurance companies are generally known as "admitted" insurers. Most
states provide a limited exemption from licensing for insurers issuing insurance
coverages that generally are not available from admitted insurers. These
coverages are referred to as "surplus lines" insurance and these insurers as
"surplus lines" or "non-admitted" companies.
The Company's admitted insurance businesses are subject to
comprehensive, detailed regulation throughout the United States, under statutes
which delegate regulatory, supervisory and administrative powers to state
insurance commissioners. The primary purpose of such regulations and supervision
is the protection of policyholders and claimants rather than stockholders or
other investors. Depending on whether the insurance company is domiciled in the
state and whether it is an admitted or non-admitted insurer, such authority may
extend to such things as (i) periodic reporting of the insurer's financial
condition; (ii) periodic financial examination; (iii) approval of rates and
policy forms; (iv) loss reserve adequacy; (v) insurer solvency; (vi) the
licensing of insurers and their agents; (vii) restrictions on the payment of
dividends and other distributions; (viii) approval of changes in control; and
(ix) the type and amount of permitted investments.
Insurance Holding Company Regulation
The Company also is subject to laws governing insurance holding
companies in Florida and Indiana, where the Insurers are domiciled. These laws,
among other things, (i) require the Company to file periodic information with
state regulatory authorities including information concerning its capital
structure, ownership, financial condition and general business operations; (ii)
regulate certain transactions between the Company, its affiliates and the
Insurers, including the amount of dividends and other distributions and the
terms of surplus notes; and (iii) restrict the ability of any one person to
acquire certain levels of the Company's voting securities without prior
regulatory approval.
No Indiana domiciled insurer may make payments in the form of dividends
or otherwise to shareholders as such unless it possesses assets in the amount of
such payment in excess of its liabilities (including capital stock); provided,
that in no instance shall such dividend reduce the surplus below an amount equal
to 50% of the insurer's capital stock. A domestic insurer may not declare or pay
a dividend from any source of funds other than earned surplus without the prior
approval of the Indiana Department. Indiana law defines as "extraordinary" any
dividend or distribution which, together with all other dividends and
distributions to shareholders within the preceding twelve months, exceeds the
greater of: (i) 10% of statutory surplus as regards policyholders as of the end
of the preceding year or (ii) the prior year's net income. Such dividends or
distributions may only be made from earned surplus. Dividends which are not
"extraordinary" may be paid ten days after the Indiana Department receives
notice of their declaration. "Extraordinary" dividends and distributions may not
be paid without the prior approval of the Indiana Commissioner or until the
Indiana Commissioner has been given thirty days prior notice and has not
disapproved within that period. The Indiana Department must receive notice of
all dividends, whether "extraordinary" or not, within five business days after
they are declared.
-69-
<PAGE>
Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its stockholders except out of surplus
which is derived from realized net operating profits and net realized capital
gains. A Florida domestic insurer may make dividend payments or distributions to
stockholders without prior approval of the Florida Department if the dividend or
distribution does not exceed the larger of: (i) the lesser of 10% of surplus or
net income, not including realized capital gains, plus a 2-year carryforward,
(ii) 10% of surplus with dividends payable constrained to unassigned funds minus
25% of unrealized capital gains, or (iii) the lesser of 10% of surplus or net
investment income plus a 3-year carryforward with dividends payable constrained
to unassigned funds minus 25% of unrealized capital gains. Alternatively, a
Florida domestic insurer may pay a dividend or distribution without the prior
written approval of the Florida Department if (1) the dividend is equal to or
less than the greater of: (i) 10% of the insurer's surplus as regards
policyholders derived from realized net operating profits on its business and
net realized capital gains or (ii) the insurer's entire net operating profits
and realized net capital gains derived during the immediately preceding calendar
year; (2) the insurer will have policyholder surplus equal to or exceeding 115%
of the minimum required statutory surplus after the dividend or distribution;
(3) the insurer files a notice of the dividend or distribution with the
department at least ten business days prior to the dividend payment or
distribution; and (4) the notice includes a certification by an officer of the
insurer attesting that, after the payment of the dividend or distribution, the
insurer will have at least 115% of required statutory surplus as to
policyholders. Except as provided above, a Florida domiciled insurer may only
pay a dividend or make a distribution (i) subject to prior approval by the
Florida Department or (ii) 30 days after the Florida Department has received
notice of such dividend or distribution and has not disapproved it within such
time. In the Consent Order approving the Acquisition, the Florida Department has
prohibited Superior from paying any dividends (whether extraordinary or not) for
four years without the prior written approval of the Florida Department.
Under these laws, the maximum aggregate amounts of dividends permitted
to be paid to the Company in 1996 by IGF without prior regulatory approval is
$2,900,000, none of which has been paid, and Pafco cannot pay to the Company any
dividends in 1996 without prior regulatory approval. Although the Company
believes that amounts required for it to meet its financial and operating
obligations will be available, there can be no assurance in this regard. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company -- Liquidity and Capital Resources." Further, there
can be no assurance that, if requested, the Indiana Department will approve any
request for extraordinary dividends from Pafco or IGF or that the Florida
Department will allow any dividends to be paid by Superior during the four year
period described above.
The maximum dividends permitted by state law are not necessarily
indicative of an insurer's actual ability to pay dividends or other
distributions to a parent company, which also may be constrained by business and
regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's competitive position, the amount of premiums that can
be written and the ability to pay future dividends. Further, state insurance
laws and regulations require that the statutory surplus of an insurance company
following any dividend or distribution by such company be reasonable in relation
to its outstanding liabilities and adequate for its financial needs.
While the non-insurance company Subsidiaries are not subject directly
to the dividend and other distribution limitations, insurance holding company
regulations govern the amount which a Subsidiary within the holding company
system may charge any of the Insurers for services (e.g., management fees and
commissions). These regulations may affect the amount of management fees which
may be paid by Pafco and Superior to GGS Management. See "The Company --
Formation of GGS Holdings; Acquisition of Superior." The management agreement
formerly in place between the Company and Pafco which provides for an annual
management fee equal to 15% of gross premiums has been assigned to GGS
Management, a wholly-owned subsidiary of GGS Holdings. A similar management
agreement with a management fee of 17% of gross premiums has been entered into
between GGS Management and Superior. Employees of the Company relating to the
nonstandard automobile insurance business and all Superior employees became
employees of GGS Management effective April 30, 1996. As part of the approval of
the Formation Transaction, the Indiana Department has required Pafco to resubmit
its management agreement for review by the Indiana Department no later than May
1, 1997 (the first anniversary of the Formation Transaction), together with
supporting evidence that management fees charged to Pafco are fair and
reasonable in comparison to fees charged between unrelated parties for similar
services. In the Consent Order approving the Acquisition, the Florida Department
has reserved, for three years, the right to reevaluate the reasonableness of
fees provided for in the Superior management agreement at the end of each
calendar year and to require Superior to make adjustments in the management fees
based on the Florida Department's consideration of the performance and operating
percentages of Superior and other pertinent data. There can be no assurance that
either the Indiana Department or the Florida Department will not in the future
require a reduction in these management fees.
Federal Regulation
The Company's MPCI program is federally regulated and supported by the
federal government by means of premium subsidies to farmers, expense
reimbursement and federal reinsurance pools for private insurers. Consequently,
the MPCI program is subject to oversight by the legislative and executive
branches of the federal government, including the FCIC. The MPCI program
regulations generally require compliance with federal guidelines with respect to
underwriting, rating and claims administration. The Company is required to
perform continuous internal audit procedures and is subject to audit by several
federal government agencies.
The MPCI program has historically been subject to change by the federal
government at least annually since its establishment in 1980, some of which
changes have been significant. The most recent significant changes to the MPCI
-70-
<PAGE>
program came as a result of the passage by Congress of the 1994 Reform Act and
the 1996 Reform Act. See "Risk Factors -- Nature of Crop Insurance Business."
Certain provisions of the 1994 Reform Act, when implemented by the
FCIC, may increase competition among private insurers in the pricing of Buy-up
Coverage. The 1994 Reform Act authorizes the FCIC to implement regulations
permitting insurance companies to pass on to farmers in the form of reduced
premiums certain cost efficiencies related to any excess expense reimbursement
over the insurer's actual cost to administer the program, which could result in
increased price competition. To date, the FCIC has not enacted regulations
implementing these provisions but is currently collecting information from the
private sector regarding how to implement these provisions.
The 1994 Reform Act required farmers for the first time to purchase at
least CAT Coverage in order to be eligible for other federally sponsored farm
benefits, including acreage "set aside" programs in which farmers are paid to
leave a portion of their land unplanted and crop price supports. The 1994 Reform
Act also authorized for the first time the marketing and selling of CAT Coverage
by the local USDA offices. Partly as a result of the increase in the size of the
MPCI market resulting from the 1994 Reform Act, the Company's MPCI Premiums
increased to $53.4 million in 1995 from $44.3 million in 1994. However, the 1996
Reform Act, recently signed into law by President Clinton, eliminates the
linkage between CAT Coverage and qualification for certain federal farm program
benefits and also limits the role of the USDA offices in the delivery of MPCI
coverage. In accordance with the 1996 Reform Act, the USDA announced in July,
1996, 14 states where CAT Coverage will no longer be available through USDA
offices but rather would solely be available through private agencies: Arizona,
Colorado, Illinois, Indiana, Iowa, Kansas, Minnesota, Montana, Nebraska, North
Carolina, North Dakota, South Dakota, Washington and Wyoming. The limitation of
the USDA's role in the delivery system for MPCI should provide the Company with
the opportunity to realize increased revenues from the distribution and
servicing of this product. The Company believes that any potential negative
impact of the delinkage mandated by the 1996 Reform Act will be mitigated in
part by the likelihood that farmers will continue to purchase MPCI to provide
basic protection against natural disasters as ad hoc disaster relief programs
are reduced or eliminated. In addition, the Company believes that (i) lending
institutions will likely continue to require this coverage as a condition to
crop lending and (ii) many of the farmers who entered the MPCI program as a
result of the 1994 Reform Act have come to appreciate the reasonable price of
the protection afforded by MPCI basic catastrophic coverage and will remain with
the program regardless of delinkage. There can, however, be no assurance as to
the ultimate effect which the 1996 Reform Act may have on the business or
operations of the Company.
Underwriting and Marketing Restrictions
During the past several years, various regulatory and legislative
bodies have adopted or proposed new laws or regulations to deal with the
cyclical nature of the insurance industry, catastrophic events and insurance
capacity and pricing. These regulations include (i) the creation of "market
assistance plans" under which insurers are induced to provide certain coverages,
(ii) restrictions on the ability of insurers to rescind or otherwise cancel
certain policies in mid-term, (iii) advance notice requirements or limitations
imposed for certain policy non-renewals, and (iv) limitations upon or decreases
in rates permitted to be charged.
Insurance Regulatory Information System
The NAIC Insurance Regulatory Information System ("IRIS") was developed
primarily to assist state insurance departments in executing their statutory
mandate to oversee the financial condition of insurance companies. Insurance
companies submit data on an annual basis to the NAIC, which analyzes the data
using ratios concerning various categories of financial data. IRIS ratios
consist of 12 ratios with defined acceptable ranges. They are used as an initial
screening process for identifying companies that may be in need of special
attention. Companies that have several ratios that fall outside of the
acceptable range are selected for closer review by the NAIC. If the NAIC
determines that more attention may be warranted, one of several priority
designations is assigned, and the insurance department of the state of domicile
is then responsible for follow-up action.
During 1993, 1994 and 1995, Pafco had a liabilities to liquid assets
ratio ranging from 115% to 147%. The NAIC considers as "unusual" a liabilities
to liquid assets ratio in an amount greater than 105%. Pafco maintained such an
-71-
<PAGE>
"unusual" ratio during this period due to its investment in IGF, which is not
considered a liquid asset. The Transfer will allow Pafco to be in a normal range
for this test.
During 1993, 1994 and 1995, IGF had "unusual" values in the IRIS tests
for premiums to surplus, liabilities to liquid assets and reserve deficiency to
surplus ratios. IGF also had "unusual" values for investment yield, agents
balances to surplus and surplus aid to surplus ratios for 1994 and 1995. Due to
the unique accounting method employed by IGF, it is expected that these
"unusual" ratios will develop. The ratios for premiums to surplus, agents'
balances to surplus and surplus aid to surplus are impacted by the reinsurance
program mandated by the FCIC for the distribution of the MPCI program. See "--
Crop Insurance --Products." The ratio of liabilities to liquid assets is
"unusual" since agents' balances at December 31 are usually not settled until
late February. The investment yield ratio is "unusual" as premiums for crop
insurance are not due and payable until the crops are harvested. In addition,
late February is also the point in time where claims settlement is the highest,
thus resulting in minimal invested assets. The reserve deficiency to surplus
ratio is also "unusual."
The Company believes the proceeds applied to IGF from the Offering will
substantially ameliorate the premium writings to surplus leverage test.
Notwithstanding, the levels of risk retention are finite in view of both the
Federal and private reinsurance arrangements.
Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the NAIC has
adopted a formula and model law to implement risk-based capital ("RBC")
requirements for property and casualty insurance companies designed to assess
minimum capital requirements and to raise the level of protection that statutory
surplus provides for policyholder obligations. Indiana and Florida have
substantially adopted the NAIC model law, and Indiana has directly, and Florida
has indirectly, adopted the NAIC model formula. The RBC formula for property and
casualty insurance companies measures four major areas of risk facing property
and casualty insurers: (i) underwriting, which encompasses the risk of adverse
loss developments and inadequate pricing; (ii) declines in asset values arising
from credit risk; (iii) declines in asset values arising from investment risks;
and (iv) off-balance sheet risk arising from adverse experience from
non-controlled assets, guarantees for affiliates, contingent liabilities and
reserve and premium growth. Pursuant to the model law, insurers having less
statutory surplus than that required by the RBC calculation will be subject to
varying degrees of regulatory action, depending on the level of capital
inadequacy.
The RBC model law provides for four levels of regulatory action. The
extent of regulatory intervention and action increases as the level of surplus
to RBC falls. The first level, the Company Action Level (as defined by the
NAIC), requires an insurer to submit a plan of corrective actions to the
regulator if surplus falls below 200% of the RBC amount. The Regulatory Action
Level (as defined by the NAIC) requires an insurer to submit a plan containing
corrective actions and requires the relevant insurance commissioner to perform
an examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The Authorized Control Level (as defined by the
NAIC) gives the relevant insurance commissioner the option either to take the
aforementioned actions or to rehabilitate or liquidate the insurer if surplus
falls below 100% of the RBC amount. The fourth action level is the Mandatory
Control Level (as defined by the NAIC) which requires the relevant insurance
commissioner to rehabilitate or liquidate the insurer if surplus falls below 70%
of the RBC amount. Based on the foregoing formulae, as of May 1, 1996, the RBC
ratios of the Insurers were in excess of levels that would require regulatory
action.
Guaranty Funds
The Insurers also may be required under the solvency or guaranty laws
of most states in which they do business to pay assessments (up to certain
prescribed limits) to fund policyholder losses or liabilities of insolvent or
rehabilitated insurance companies. These assessments may be deferred or forgiven
under most guaranty laws if they would threaten an insurer's financial strength
and, in certain instances, may be offset against future premium taxes. Some
state laws and regulations further require participation by the Insurers in
pools or funds to provide some types of insurance coverages which they would not
ordinarily accept. The Company recognized its obligations for guaranty fund
assessments when it receives notice that an amount is payable to the fund.
The ultimate amount of these assessments may differ from that which has already
been assessed.
It is not possible to predict the future impact of changing state and
federal regulation on the Company's operations, and there can be no assurance
that laws and regulations enacted in the future will not be more restrictive
than existing laws.
Legal Proceedings
The Company's insurance subsidiaries are parties to litigation arising
in the ordinary course of business. The Company believes that the ultimate
resolution of these lawsuits will not have a material adverse effect on its
financial condition or results of operations. The Company, through its claims
reserves, reserves for both the amount of estimated damages attributable to
these lawsuits and the estimated costs of litigation.
IGF is the administrator of a run-off book of business. The FCIC has
requested that IGF take responsibility for the claims liabilities of these
policies under its administration. IGF has requested reimbursement of certain
expenses from the FCIC with respect to this run-off activity. IGF instituted
litigation against the FCIC on March 23, 1995 in the United States District
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<PAGE>
Court for the Southern District of Iowa seeking $4.3 million as reimbursement
for these expenses. The FCIC has counterclaimed for approximately $1.2 million
in claims payments for which FCIC contends IGF is responsible as successor to
the run-off book of business. While the outcome of this lawsuit cannot be
predicted with certainty, the Company believes that the final resolution of this
lawsuit will not have a material adverse effect on the financial condition of
the Company.
Properties
The headquarters for the Company, GGS Holdings and Pafco are located at
4720 Kingsway Drive, Indianapolis, Indiana 46205. The building is an 80,000
square foot multilevel structure approximately 50% of which is utilized by
Pafco. The remaining space is leased to third parties at a price of
approximately $10 per square foot.
Pafco also owns an investment property located at 2105 North Meridian,
Indianapolis, Indiana. The property is a 21,700 square foot, multilevel building
leased out entirely to third parties.
Superior's operations are conducted at leased facilities located in
Atlanta, Georgia, Tampa, Florida and Orange, California. Under a lease term
which extends through February, 1998, Superior leases office space at 280
Interstate North Circle, N.W., Suite 500, Atlanta, Georgia. Superior occupies
43,448 square feet at this location and subleases an additional 3,303 square
feet to third party tenants. Superior also has an office located at 3030 W.
Rocky Point Drive, Suite 770, Tampa, Florida consisting of 18,477 square feet of
space leased for a term extending through February, 2000. In addition, Superior
occupies an office at 1745 West Orangewood, Orange, California consisting of
3,264 square feet under a lease extending through May, 1997.
IGF owns a 17,500 square foot office building located at 2882 106th
Street, Des Moines, Iowa which serves as its corporate headquarters. The
building is fully occupied by IGF. IGF also owns certain improved commercial
property which is adjacent to its corporate headquarters.
The Company has a townhouse in Indianapolis, Indiana with an original
purchase price of $135,000 which is principally for use by out-of-town employees
and visitors to Indianapolis.
Employees
At May 31, 1996, the Company and its Subsidiaries employed
approximately 630 persons. The Company believes that relations with its
employees are excellent.
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<PAGE>
MANAGEMENT
Directors and Executive Officers of the Company
The directors of the Company are divided into three classes and are
elected to hold office for a three-year term or until their successors are
elected and qualified. The election of each class of directors is staggered over
each three-year period. See "Description of Capital Stock -- Anti-takeover
Provisions." All directors of the Company were elected by Goran as the sole
shareholder of the Company. After completion of the Offering, Goran will own
approximately 70% of the outstanding Common Stock (assuming no exercise of the
Underwriters' over-allotment option) and will continue to have the power to
control the Company and to be able to elect the Company's Board of Directors.
See "Risk Factors -- Control by Goran; Certain Continuing Relationships with
Goran and its Affiliates; Conflicts of Interest." All executive officers of the
Company are elected for one year terms and serve at the pleasure of the Board of
Directors.
The following table provides information regarding the executive
officers and directors of the Company and certain officers of the Subsidiaries.
<TABLE>
<CAPTION>
Expiration of
Term as Director
Name Age Position of the Company
- ----------- --- ----------------------------------- ----------------
<S> <C> <C> <C>
G. Gordon Symons 74 Chairman of the Board of Directors 1999
of the Company
Alan G. Symons 49 Director and Chief Executive Officer 1997
of the Company
Douglas H. Symons 43 Director, President and Chief
Operating Officer of the Company 1998
John J. McKeating 60 Director of the Company 1999
Robert C. Whiting 64 Director of the Company 1997
James G. Torrance, Q.C. 67 Director of the Company 1998
David R. Doyle 50 Director of the Company 1999
David L. Bates 37 Vice President, General Counsel
and Secretary of the Company N/A
Donald J. Goodenow 49 Executive Vice President of the Company N/A
Dennis G. Daggett 41 President and Chief Operating Officer of IGF N/A
Thomas F. Gowdy 40 Executive Vice President of IGF N/A
Roger C. Sullivan, Jr. 50 Executive Vice President of Superior N/A
Gary P. Hutchcraft 35 Vice President and Chief Financial Officer N/A
of the Company
</TABLE>
Biographical information for each of the individuals listed in the
above table is set forth below.
G. Gordon Symons has been Chairman of the Board of Directors of the
Company since its formation in 1987. He founded the predecessor to Goran in 1964
and has served as the Chairman of the Board of Goran since its formation in
1986. Mr. Symons also served as the President of Goran until 1992 and the Chief
Executive Officer until 1994. Mr. Symons currently serves as a director of
Symons International Group Ltd. ("SIGL"), a federally-chartered Canadian
corporation controlled by him which, together with members of the Symons family,
controls Goran. Mr. Symons also serves as Chairman of the Board of Directors of
all of the subsidiaries of Goran, including the Subsidiaries. Mr. Symons is the
father of Alan G. Symons and Douglas H. Symons.
Alan G. Symons has served as a director of the Company since 1995 and
was named its Chief Executive Officer in 1996. Mr. Symons has been a director of
Goran since 1986, and has served as Goran's President and Chief Executive
Officer since 1994. Mr. Symons has served as a director and as President and
Chief Executive Officer of each of GGS Holdings and GGS Management since the
formation of such companies in 1996, has served as Vice Chairman of the Board of
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<PAGE>
Directors of Pafco since 1995 and has served as President and Chief Executive
Officer of Superior since 1996. Prior to becoming the President and Chief
Executive Officer of Goran, Mr. Symons held other executive positions within
Goran since its inception in 1986. Mr. Symons is the son of G. Gordon Symons and
the brother of Douglas H. Symons.
Douglas H. Symons has served as a director and as President of the
Company since its formation in 1987, as its Chief Operating Officer since 1989,
and as the President of Pafco since 1987. Mr. Symons has been a director of
Goran since 1989, and has served as Goran's Chief Operating Officer and Vice
President since 1989. Mr. Symons has served as a director and an Executive Vice
President of each of GGS Holdings and GGS Management since their formation in
1996 and has served as Executive Vice President of Superior since 1996. Mr.
Symons is the son of G. Gordon Symons and the brother of Alan G. Symons.
Mr. McKeating has served as a director of the Company since 1996 and as
a director of Goran since 1995. Mr. McKeating retired in January, 1996 after
serving as President and owner of Vision 20/20 Optometric Clinics ("Vision
20/20") for 36 years. Vision 20/20, located in, Montreal, Quebec, is a Canadian
full-service retail clinic offering all aspects of professional eye care.
Mr. Whiting has served as a director of the Company since 1996, and has
served as a director of Granite Re since its formation in 1990. Since July,
1994, Mr. Whiting has served as President of Prime Advisors, Ltd., a
Bermuda-based insurance consulting firm. From its inception until June, 1994,
Mr. Whiting served as President and Chairman of the Board of Directors of
Jardine Pinehurst Management Co., Ltd., a Bermuda-based insurance management and
brokerage firm.
Mr. Torrance has served as a director of the Company since 1996. Mr.
Torrance was a founding partner in the Canadian law firm of Smith Lyons in 1962,
and, in April 1993, was named a partner emeritus in that firm. Mr. Torrance has
served as a director of Goran since 1995, and also serves as a director of
Dynacare Inc., Mitsui & Co. (Canada) Ltd., Potash Company of Canada Limited,
Sakura Bank (Canada), Toyota Canada Inc. and Wintershall Canada Ltd.
Mr. Doyle has served as a director of the Company since 1996. Since
January, 1996, Mr. Doyle has been Vice President, Finance & Administration, and
a director of Avantec, Inc., a Carmel, Indiana-based company which provides data
management services for the pharmaceutical industry in connection with clinical
trials. From May, 1994 to January, 1996, Mr. Doyle served as Vice President --
Financial Consultant of Raffensberger Hughes & Co., which provides securities
brokerage and financial consulting services. From December, 1992 to May, 1994,
Mr. Doyle was employed by Prudential Securities, Inc. as Vice President --
Investments. Prior to that, Mr. Doyle was employed by INB National Bank of
Indianapolis, Indiana from 1973 to 1992, including his service as First Vice
President & Department Manager from 1989 to 1992. Mr. Doyle has served on the
boards of numerous civic organizations, including the Children's Bureau of
Indianapolis, the Children's Bureau Foundation and Child Advocates, Inc.
Mr. Bates, J.D., C.P.A., has served as Vice President, General Counsel
and Secretary of the Company since November, 1995, after having been named Vice
President and General Counsel of Goran in April, 1995. Mr. Bates served as a
member of the Fort Howard Corporation Legal Department from September, 1988
through March, 1995. Prior to that time, Mr. Bates served as a Tax Manager with
Deloitte & Touche.
Mr. Goodenow has served as a director and Executive Vice President of
the Company since 1989. Mr. Goodenow also serves as a director and Executive
Vice President of Pafco and as a director of Superior. Prior to joining the
Company, Mr. Goodenow served in various executive capacities at Horace Mann
Insurance Company, an Illinois insurance company.
Mr. Daggett has served as the Chief Operating Officer of IGF since
August, 1995, as its President since February, 1996 and as a director of IGF for
more than five years. From 1993 to 1995, Mr. Daggett served as an Executive Vice
President of IGF. Mr. Daggett also served as Vice President of Marketing for IGF
from 1988 to 1993. Prior to joining IGF, Mr. Daggett was the co-owner of a crop
insurance managing general agency, McDonald National Insurance Services, Inc.,
from 1984 until 1988. From 1977 to 1983, Mr. Daggett was employed as a crop
insurance specialist with the FCIC.
Mr. Gowdy joined IGF in 1987 as a field representative, and
subsequently served as a regional manager for IGF's Mid-America service office.
Mr. Gowdy served as the Vice President of Marketing of IGF from 1993 until
February, 1996, when he was named Executive Vice President of IGF. Mr. Gowdy has
served as a director of IGF since 1993.
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<PAGE>
Mr. Sullivan was named Executive Vice President of Superior in May,
1996. From June, 1995 to May, 1996, Mr. Sullivan served as Vice President of
Claims for Superior. Prior to joining Superior, Mr. Sullivan served as a claim
consultant and on-site manager for Milliman and Robertson, Inc., a Chicago-based
insurance consulting firm, from August, 1994, to June, 1995. From May, 1987 to
August, 1994, Mr. Sullivan served as Vice President of Claims for Atlanta
Casualty Insurance Companies, an Atlanta-based carrier of standard and
nonstandard automobile insurance.
Mr. Hutchcraft, C.P.A., has served as Vice President and Chief
Financial Officer of the Company and Goran since July, 1996. Prior to that time,
Mr. Hutchcraft served as an Assurance Manager with KPMG Peat Marwick, LLP from
July, 1988 to July, 1996.
Committees and Compensation of the Board of Directors
Directors of the Company who are not employees of the Company or its
affiliates receive a flat annual retainer of $10,000. The annual retainer is
paid currently in cash. In addition, the Company reimburses Directors for
reasonable travel expenses incurred in attending Board and Board committee
meetings. Each director of the Company who is not also an employee of the
Company will automatically be granted options to acquire 5,000 shares of Common
Stock upon consummation of the Offering under the Company's Director Option
Plan. See "Executive Compensation -- Stock Option Plans -- Director Option
Plan."
The Company's Compensation Committee consists of Messrs. Doyle,
Torrance and Douglas Symons. The Company's Audit Committee consists of Messrs.
Alan Symons, Torrance and McKeating.
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<PAGE>
Executive Compensation
The following table sets forth the compensation paid to the Chief
Executive Officer of the Company and to each of the other four most highly
compensated executive officers of the Company and the Subsidiaries whose annual
salary and bonus for services rendered to the Company and the Subsidiaries in
1995 exceeded $100,000 (such individuals being collectively referred to as the
"Named Executives").
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Long-Term
Compensation Compensation
------------------------------------------------ Securities
Name and Fiscal Underlying
Principal Position Year Salary (1) Bonus SIG Options (#)
- ------------------ ---- ---------- ----- ---------------
<S> <C> <C> <C> <C>
Alan G. Symons 1995 $50,000 $ --- (2)
Chief Executive Officer
of the Company
Douglas H. Symons 1995 $149,982 $40,000 (2)
President and Chief
Operating Officer
of the Company
Dennis G. Daggett 1995 $125,000 $115,000 20,000 (3)
President and Chief
Operating Officer of IGF
Thomas F. Gowdy 1995 $92,000 $86,000 20,000 (3)
Executive Vice President
of IGF
Roger C. Sullivan, Jr. 1995 $125,000 $24,940 ---
Executive Vice President
of Superior
- ----------
</TABLE>
(1) Effective May, 1996, the annual salaries of the Named Executives were
increased as follows: Alan G. Symons, $200,000; Douglas H. Symons,
$150,000; Mr. Daggett, $180,000; Mr. Gowdy, $140,000; and Mr. Sullivan,
$125,000.
(2) Alan G. Symons and Douglas H. Symons hold options to acquire 125,828
shares and 73,855 shares, respectively, of Goran common stock. These
executives have also been granted options to acquire 55,555 and 27,777
shares, respectively, of common stock of GGS Holdings under the GGS
Stock Option Plan. See "-- Stock Option Plans -- GGS Holdings Stock
Option Plan."
(3) Under their employment agreements with IGF, each of Mr. Daggett and Mr.
Gowdy will automatically acquire an option to purchase 20,000 shares of
Common Stock of the Company upon consummation of the Offering, with an
exercise price per share equal to the initial public offering price.
See "-- Employment Contracts and Termination of Employment -- IGF."
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<PAGE>
Stock Option Plans
Goran Share Option Plan. The directors and executive officers of the
Company, including the Named Executives, are eligible to participate in Goran's
Share Option Plan (the "Share Option Plan"). Under the Share Option Plan, 10% of
the common shares of Goran outstanding from time to time have been reserved for
issuance. The objective of these grants is to increase the participant's equity
interest in Goran and to allow them to share in the appreciation of Goran's
common stock. The Share Option Plan has been approved by Goran's shareholders.
The terms, conditions and limitations of options granted under the
Share Option Plan are determined by the Board of Directors of Goran with respect
to each option, within certain limitations. The exercise price per share is the
closing price on The Toronto Stock Exchange on the date of grant of the option.
The term of each option is fixed by the Board of Directors of Goran when the
option is granted, but may not be longer than eight years from the date of the
grant. The exercise price per share is payable in full on the date of exercise.
Options granted under the Share Option Plan are not assignable.
The following table sets forth information on grants of stock options
pursuant to the Share Option Plan during 1995 to certain of the Named
Executives. All options are for the purchase of shares of common stock of Goran.
The Named Executives and other employees of Goran who participate in the Share
Option Plan will continue to hold their Goran stock options which remain
unexercised after the closing of the Offering. During 1995, options to purchase
a total of 63,354 common shares were granted to executive officers and directors
of Goran pursuant to the Share Option Plan, excluding options granted and
subsequently cancelled during the year. Options have been granted under the
Share Option Plan for an aggregate of 436,410 common shares of Goran as of
December 31, 1995, at an average exercise price of $1.94 per share.
<TABLE>
<CAPTION>
Option Grants in 1995
Individual
Grants
Number of % of Per Potential Realizable Value at
Securities Total Options Share Assumed Annual Rates of
Underlying Granted to Exercise Stock Price Appreciation
Options Employees or Base Expiration for Option Term (1)
Name Granted in 1995 (2) Price Date (3) 5% 10%
---- ------- ----------- ----- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Alan G. Symons 18,945 29.9 7.25 4/25/2000 $86,380 $218,897
Douglas H. Symons 9,473 15.0 7.25 4/25/2000 43,192 109,454
</TABLE>
- ----------
(1) Amounts represent the potential realizable value of each grant of
options, assuming that the market price of the underlying shares
appreciates in value from the date of grant to the end of the option
term, at annualized rates of 5% and 10%.
(2) Goran granted options totalling 63,364 shares to all employees of Goran
and its subsidiaries in 1995.
(3) The options were granted for a term of five years, subject to earlier
termination upon the occurrence of certain events related to
termination of employment.
The following table sets forth information with respect to option
exercises in 1995 and unexercised options to purchase shares of common stock of
Goran granted in 1995 and prior years under the Share Option Plan to the Named
Executives. As in the table above, all options are for the purchase of shares of
common stock of Goran.
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<PAGE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in 1995 and Option Values at December 31, 1995
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options at Options at
Acquired Value December 31, 1995 December 31, 1995 (1)
Name on Exercise (2) Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alan G. Symons 0 0 125,828 0 $1,164,386 0
Douglas H. Symons 0 0 73,855 0 637,131 0
</TABLE>
- ----------
(1) Based on the closing price of the Toronto Stock Exchange of Goran's
common stock on December 29, 1995 (CDN $11.88).
(2) In 1996, Alan G. Symons and Douglas H. Symons acquired _____ and ______
shares, respectively, of common stock of Goran through the exercise of
options.
GGS Holdings Stock Option Plan. The Board of Directors of GGS Holdings
has adopted the GGS Management Holdings, Inc. 1996 Stock Option Plan (the "GGS
Stock Option Plan"), effective as of April 30, 1996. A maximum of 10% of the
issued and outstanding shares of GGS Holdings' common stock (on a fully diluted
basis assuming exercise in full of all options) may be made the subject of
options granted under the GGS Stock Option Plan. A total of 111,111 shares of
common stock of GGS Holdings have actually been reserved for issuance under the
GGS Stock Option Plan, which authorizes the grant of incentive stock options to
such officers and other key employees as may be designated by the Board of
Directors of GGS Holdings. Stock options granted under the GGS Stock Option Plan
will be exercisable at such times and at such exercise prices as the Board of
Directors of GGS Holdings shall determine, but in any event not prior to the
earlier of (i) an initial public offering of GGS Holdings, and (ii) a Company
Sale (as defined in the GGS Agreement), and not later than ten years from the
date of the grant. Options granted under the GGS Stock Option Plan vest at a
rate of 20% per year for five years after the date of the grant. The exercise
price of options granted as of April 30, 1996 is, with respect to 50% of the
shares subject to each such option, $44.17 per share. The exercise price per
share for the remaining 50% is $44.17, subject to a compound annual increase in
the exercise price of 10%. Alan G. Symons has received 55,555 such options, and
Douglas H. Symons has received 27,777 such options. The exercise price of any
options granted under the GGS Stock Option Plan after April 30, 1996, will be
subject to a similar formula, with 50% of the shares subject to any such option
having an exercise price determined by the Board of Directors in its discretion,
and the other 50% having an exercise price which increases on each anniversary
of the date of the grant. No option granted under the GGS Stock Option Plan is
transferable by the option holder other than by the laws of descent and
distribution. Shares received upon exercise of such an option are not
transferable, except as provided in the Stockholder Agreement among the Company
and the GS Funds.
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<PAGE>
SIG Stock Option Incentive Plan. Presently, there are no outstanding
options to acquire shares of Common Stock of the Company. The Company intends to
adopt, and Goran as the sole shareholder is expected to approve, the Company's
Stock Option Incentive Plan (the "Stock Option Incentive Plan"), which will
contain provisions similar to the provisions of the Share Option Plan of Goran.
Stock option grants will provide the opportunity to purchase shares of Common
Stock of the Company at fair market value (the average of the high and the low
prices on the day preceding the date of grant) during the period the option
remains outstanding. Under the terms of the Stock Option Incentive Plan, the
Compensation Committee of the Board of Directors of the Company (the
"Compensation Committee") will be able to award to eligible employees of the
Company up to a maximum of 10% of the issued and outstanding shares of Common
Stock of the Company. The Compensation Committee may make awards in the form of
(i) stock options, including both incentive stock options and nonqualified stock
options, (ii) restricted stock, (iii) restricted or unrestricted stock awarded
as payment of incentives, and (iv) stock appreciation rights. A maximum of 10%
of the issued and outstanding shares of the Company's Common Stock (on a fully
diluted basis assuming exercise in full of all options) may be made the subject
of options granted under the Stock Option Incentive Plan and the Director Option
Plan (as defined herein).
Director Option Plan. The Company's Board of Directors has adopted the
Symons International Group, Inc. Director Option Plan (the "Director Option
Plan") effective as of the date of the Offering. The Director Option Plan, which
is intended to provide the Company's outside directors with an added incentive
to work toward the Company's long-term growth and continued profitability, was
approved by Goran as the sole shareholder of the Company in _______, 1996.
Options for 5,000 shares, with an exercise price equal to the initial public
offering price, will be granted to each of the directors of the Company who is
not also an executive officer of the Company upon consummation of the Offering.
Each of such options will have a term of ten years from the date of the grant.
Such options will not be exercisable during the first six months of their term.
Once they become exercisable, such options may be exercised in whole or in part
during their term, but not at any time as to fewer than 100 shares (unless the
exercise is with respect to an entire residue of fewer than 100 shares). The
exercise price of any option granted under the Director Option Plan must be paid
in full in cash or pursuant to a cashless exercise procedure approved by the
Compensation Committee, which administers the Director Option Plan. The Director
Option Plan provides that, in the event of any reorganization, recapitalization,
stock split, stock dividend, or other capital change, the Compensation Committee
is empowered to determine what changes, if any, are appropriate in the option
price of, and the number and kind of shares covered by, outstanding options
granted thereunder. A maximum of 10% of the issued and outstanding shares of the
Company's Common Stock (on a fully diluted basis assuming exercise in full of
all options) may be made the subject of options granted under the Stock Option
Incentive Plan and the Director Option Plan.
401(k) Savings Plan
The Company maintains the Symons International Group, Inc. Retirement
Savings Plan, a savings plan designed to take advantage of section 401(k) of the
Code (the "Savings Plan"). The Company is in the process of securing a
determination letter from the IRS confirming that the Savings Plan meets the
criteria of section 401(k). Employees who have been employed by the Company or
its Subsidiaries for at least six months and who elect to participate in the
Savings Plan, including the Company's executive officers, may deposit between 1%
to 15% of their pay, subject to a maximum dollar limitation, into an account
maintained for them by the Savings Plan's trustee. The Company may make
discretionary matching contributions and profit sharing contributions to the
Savings Plan depending on the performance of the Company, in accordance with a
formula adopted by the Board of Directors from time to time. For a participating
employee with less than five years of service to the Company, employer
contributions vest over time, based on the number of years of service.
Participants may select from a number of investment options under the Savings
Plan, including shares of common stock of Goran, and they are permitted to
change their investment options from time to time, subject to certain
limitations.
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<PAGE>
Employment Contracts and Termination of Employment
GGS Holdings. In connection with the Formation Transaction, GGS
Holdings has entered into employment agreements with each of Alan G. Symons and
Douglas H. Symons, pursuant to which these executives have agreed to serve as
Chief Executive Officer and Executive Vice President, respectively, of GGS
Holdings. Alan G. Symons' employment agreement provides that he is entitled to
serve on the Board of Directors of GGS Holdings until removed pursuant to the
terms of the Stockholder Agreement among the Company and the GS Funds.
The term of each of these employment agreements commenced as of the
closing of the Formation Transaction, or April 30, 1996, and continues in effect
for an initial period of five years. Upon the expiration of the initial
five-year period, the term of each agreement is automatically extended from year
to year thereafter, unless either party gives the other party six months'
written notice of an intention not to extend the term of the agreement. Each of
the agreements may be earlier terminated upon mutual agreement, retirement,
death, or disability, or for "cause," as defined in the agreements.
The employment agreements set forth the responsibilities of the
employees in their capacities as officers of GGS Holdings, as well as their
compensation, benefits and eligibility for stock options under the GGS Stock
Option Plan. Each of the employment agreements also provides that in the event
of termination of employment for any reason, GGS Holdings will continue to
provide the executive's base salary, bonus and other compensation and benefits
in accordance with GGS Holdings' policies then in effect. Further, in the event
such termination is by reason of the executive's death, GGS Holdings will
continue to provide the executive's base salary for a period of six months after
the date of termination. The employment agreements also contain customary
restrictive covenants respecting confidentiality and non-competition which
prevent the executives from, among other things, competing with GGS Holdings in
various capacities both during the term of their employment and for a period of
two years after their termination in the event such termination is effected
voluntarily by the executive, by reason of his disability, or by GGS Holdings
for "cause."
Under the employment agreements, Alan G. Symons is entitled to a base
salary of not less than $200,000 per year, and Douglas H. Symons is entitled to
a base salary of not less than $150,000 per year. The employment agreements
further provide that Alan G. Symons may earn a bonus in an amount ranging from
25% to 100% of base salary, or $50,000 to $200,000, and Douglas H. Symons may
earn a bonus in an amount ranging from 25% to 50% of base salary, or $37,500 to
$75,000.
IGF. IGF has entered into employment agreements with each of Dennis G.
Daggett and Thomas F. Gowdy, pursuant to which these executives have agreed to
serve as Chief Operating Officer and President and as Executive Vice President,
respectively, of IGF. The agreements provide that each of the executives is
entitled to serve on the Board of Directors of IGF until his successor is duly
elected and qualified. Should he not be appointed to the Board during the term
of his employment agreement, IGF will be deemed to be in material breach of the
agreement, and the executive may treat such a breach as "termination without
cause."
The term of each of these employment agreements commenced as of
February 1, 1996, and continues for a period of three years through January 31,
1999, unless earlier terminated in accordance with the terms of the agreement.
Upon the expiration of the initial three-year period, the term of each agreement
is automatically extended from year to year thereafter, unless either party
gives the other party six months' written notice of an intention not to extend
the term of the agreement. Notwithstanding the initial three-year period, an
executive's employment under each of these agreements may be terminated by
either party at any time for any reason. However, if the executive's employment
is terminated for any reason other than for "cause" (as defined in the
agreements), the executive is entitled to receive severance pay in the form of
one year's salary continuation from the date of termination. If the executive is
terminated without cause, receipt of severance payments is conditioned upon the
execution by both IGF and the executive of a mutual waiver and release. The
employment agreements also contain customary restrictive covenants respecting
confidentiality and non-competition which prevent the executives from, among
other things, competing with IGF in various capacities both during the term of
their employment and for a period of two years after their termination, in the
event such termination is effected voluntarily by the executive, by reason of
his disability, by IGF for "cause," or pursuant to a notice to non-renewal
delivered by either party.
The employment agreements with Mr. Daggett and Mr. Gowdy set forth the
responsibilities of the employees in their capacities as officers of IGF, as
well as their compensation, benefits, perquisites, expense reimbursement and
eligibility for stock options under Goran's Share Option Plan and any stock
option plan that may be adopted by IGF. Mr. Daggett receives a minimum annual
salary of $180,000 and Mr. Gowdy receives a minimum annual salary of $140,000.
Each of Mr. Daggett and Mr. Gowdy is eligible to participate in a bonus program
for IGF employees, pursuant to which the Compensation Committee of the Board of
Directors of IGF may make a discretionary award not to exceed 150% of the
awardee's base salary. Upon entering into their employment agreements, each of
Mr. Daggett and Mr. Gowdy received an option to acquire 20,000 shares of common
stock of Goran, with an exercise price equal to the fair market value of such
shares on the date of grant. In addition, the employment agreements provide that
each of Mr. Daggett and Mr. Gowdy will automatically acquire an option to
purchase 20,000 shares of Common Stock of the Company upon consummation of the
Offering with an exercise price per share equal to the initial public offering
price. Finally, the IGF employment agreements provide that each of Mr. Daggett
and Mr. Gowdy will receive options to acquire shares of IGF common stock, either
(i) at the discretion of the Board of Directors of IGF, or (ii) in the event of
an initial public offering of IGF common stock, pursuant to a formula set forth
in the agreement. This formula generally entitles the executive to receive
options to acquire up to 1.25% of the total shares of IGF common stock
outstanding after such an offering, provided that the executive relinquishes all
previously granted Goran options in connection therewith. Alternatively, the
formula provides that the executive may receive options to acquire only 0.75% of
the total shares of IGF common stock outstanding after such an offering and
still retain his Goran options. Any options to acquire shares of IGF common
stock granted pursuant to these agreements vest ratably over a five year period
from the date of grant. The employment agreements further entitle Mr. Daggett
and Mr. Gowdy to borrow up to $500,000 from IGF or one of its affiliates for the
purpose of purchasing IGF common stock.
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Superior. Superior has entered into an employment agreement with Roger
Sullivan, effective June 5, 1995. The letter evidencing the employment
agreement, as amended by the supplemental letter of May 9, 1996 described below,
provides that Mr. Sullivan is to receive an annual salary in the amount of
$125,000, subject to annual salary reviews which commenced on February 1, 1996.
Mr. Sullivan is also entitled to participate in Superior's Executive Bonus
Program, pursuant to which he will be eligible to receive an annual bonus of up
to 30% of his gross annual salary based on individual performance and Superior's
profitability. In addition, Mr. Sullivan is entitled to participate in
Superior's 401(k) profit sharing plan and pension plan and to receive other
customary employee benefits. In the event Superior is sold, liquidated or merged
with another company within four years after the effective date of Mr.
Sullivan's employment and, as a result of such event, his employment is
terminated, Mr. Sullivan is entitled to receive severance pay in an amount equal
to his then current annual base salary, provided that his termination is not due
to unsatisfactory performance. Mr. Sullivan is also entitled to additional
perquisites, including a company car and an expense allowance, and is eligible
to receive options under the Stock Option Incentive Plan.
Goran. Goran has entered into an employment agreement with Gary P.
Hutchcraft, pursuant to which Mr. Hutchcraft has agreed to serve as Vice
President and Chief Financial Officer of Goran and its subsidiaries, including
the Company. Under the employment agreement, Mr. Hutchcraft is entitled to a
base salary of not less than $120,000 per year and may earn a bonus in an amount
ranging from 10% to 30% of his base salary or $12,000 to $36,000.
The term of this employment agreement commenced as of June 30, 1996 and
continues until December 31, 1996, unless earlier terminated in accordance with
the terms of the agreement. Upon expiration of the initial six month period, the
term of the agreement is automatically extended from year to year thereafter,
unless either party gives the other party six months' written notice of an
intention not to extend the term of the agreement. Notwithstanding the
foregoing, the employment agreement may be terminated by either party at any
time for any reason. However, if Mr. Hutchcraft's employment is terminated for
any reason other than for "cause," as is defined in the agreement, he shall
receive, as severance pay, one month's current salary for each full and partial
year of service to SIG. Such severance pay is conditioned, however, upon the
execution by both parties of a mutual release and waiver. Furthermore, if within
twelve months after a change of control (defined in the agreement as the
inability of the Symons family to cause the election of a majority of the Board
of Directors of Goran, SIG or their successors) Mr. Hutchcraft receives a notice
of non-renewal, is terminated without cause or the Company is in breach of the
employment agreement (the "Change of Control Termination"), then Mr. Hutchcraft
shall receive his then current salary for (i) 78 weeks or (ii) until he
commences employment with another entity such that his base salary with that
entity is equal to or greater than his salary as of the Change of Control
Termination. In the case of Mr. Hutchcraft's commencing employment with another
entity within 78 weeks of the Change of Control Termination at a salary less
than his salary with the Company at the time of the Change of Control
Termination, the Company will pay Mr. Hutchcraft an amount equal to the
difference between his salary with the Company at the time of the Change of
Control Termination and his salary with the new entity for a period ending 78
weeks after the Change of Control Termination.
The employment agreement sets forth the responsibilities of Mr.
Hutchcraft in his capacity as an officer of SIG, as well as his compensation,
benefits, and perquisites. The employment agreement also contains customary
restrictive covenants respecting confidentiality and non-competition which
prevent Mr. Hutchcraft from, among other things, competing with SIG in various
capacities both during the term of his employment and for a period of two years
after his termination in the event such termination is effected voluntarily by
Mr. Hutchcraft, by reason of his disability, or by SIG for "cause" or pursuant
to a "notice of non-renewal" as provided in the agreement.
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Compensation Committee Interlocks and Insider Participation
The Company's Compensation Committee consists of three non-employee
directors, Messrs. Doyle, McKeating and Whiting. None of these individuals have
interlocks reportable under Section 402(j)(3) and (4) of Regulation S-K, and
none were employees, officers or former officers of Goran or its subsidiaries.
Mr. Alan Symons determined executive compensation for fiscal year 1995.
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Formation Transaction and the Superior Acquisition
Formation Transaction
Simultaneously with the execution of the Superior Purchase Agreement,
Goran, the Company, GGS Holdings and GS Capital Partners II, L.P., a Delaware
limited partnership, entered into the GGS Agreement to capitalize GGS Holdings
and to cause GGS Holdings to issue its capital stock to the Company and to the
GS Funds, so as to give the Company a 52% ownership interest and the GS Funds a
48% ownership interest in GGS Holdings. Pursuant to the GGS Agreement, (a) the
Company contributed to GGS Holdings (i) Pafco common stock with a book value
determined in accordance with U.S. GAAP of at least $15.3 million as reflected
on an audited post-closing balance sheet of Pafco, (ii) its right to acquire
Superior pursuant to the Superior Purchase Agreement and (iii) certain fixed
assets, including office furniture and equipment, having a value of
approximately $350,000, and (b) the GS Funds contributed to GGS Holdings $21.2
million in cash. If the book value of Pafco as reflected on the final
post-closing balance sheet is less than $15.3 million, the Company will be
required to contribute the amount of the deficiency in cash to GGS Holdings no
later than December 31, 1996, plus interest at the prime rate from the date of
closing of the Formation Transaction to the date of payment.
Under the GGS Agreement, the Company and Goran jointly and severally
provided customary representations and warranties to the GS Funds. In addition,
the Company and Goran assumed certain indemnification obligations with respect
to any losses that may be incurred by the GS Funds as a result of any breach of
such representations and warranties. The representations and warranties survive
the closing of the Formation Transaction for at least three years from the
closing date and, in some cases (including representations as to environmental
and tax liabilities and as to employee benefits), indefinitely. The GGS
Agreement provides that Goran and the Company may satisfy any such obligation to
indemnify the GS Funds by offsetting the amount, if any, by which the book value
of Pafco on the audited post-closing balance sheet exceeds $15.3 million. To the
extent that indemnifiable losses of the GS Funds exceed such amount (the
"Remaining Losses"), the GGS Agreement sets forth the methods by which Goran and
the Company may indemnify the GS Funds for such Remaining Losses. Before the
earlier of an IGF Company Sale (as defined in the GGS Agreement) or the first
anniversary of the Formation Transaction, Goran or the Company shall indemnify
the GS Funds for any Remaining Losses by, at the option of the GS Funds, either
(1) issuing to the GS Funds a promissory note for the Remaining Losses, (2)
issuing a promissory note to GGS Holdings for the Remaining Losses, or (3)
causing GGS Holdings to issue to the GS Funds (a) additional shares of GGS
Holdings common stock, up to a maximum number of shares which would result in
the Company's retention of majority ownership of GGS Holdings, and (b) a
promissory note for the balance of any Remaining Losses after the maximum number
of shares have been issued. After the earlier of an IGF Company Sale (as defined
in the GGS Agreement) or the first anniversary of the Formation Transaction,
Goran or the Company shall indemnify the GS Funds for any Remaining Losses by,
at the option of the GS Funds, either (1) paying cash to the GS Funds, (2)
making a contribution to GGS Holdings, or (3) issuing to the GS Funds additional
shares of GGS Holdings common stock. Any promissory note issued in connection
with these indemnification arrangements will bear interest at the prime rate.
The GGS Agreement further provides that Goran and the Company must jointly and
severally indemnify GGS Holdings and Pafco against any tax liabilities assessed
against Pafco with respect to periods ending on or before the closing date of
the Formation Transaction arising from its status as a former member of the
Company's consolidated tax group.
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IGF Transfer
Pafco transferred all of the outstanding capital stock of IGF pursuant
to the Transfer in order to improve the risk based capital rating of Pafco and
to permit GGS Holdings to focus exclusively on the nonstandard automobile
insurance business. Pafco accomplished the Transfer by forming a wholly-owned
subsidiary, IGF Holdings, to which Pafco contributed all of the outstanding
shares of capital stock of IGF.
IGF Holdings Dividend
Prior to the Transfer, Pafco received as a dividend from IGF Holdings
cash and the IGF Note having an aggregate value of approximately $11.0 million.
IGF Holdings funded the cash portion of the Dividend with the proceeds of the
IGFH Bank Debt. The IGFH Bank Debt matures on January 1, 2001, with principal
repayable in 16 quarterly installments of $468,750 commencing April 1, 1997.
Interest will accrue at a variable rate per annum equal to the prime rate until
October 1, 1996 and thereafter at a rate equal to the prime rate plus one
percent. The IGFH Bank Debt is collateralized by a first priority security
interest in all of the outstanding shares of IGF and the guarantee of Symons
International Group, Ltd., the controlling shareholder of Goran, collateralized
by 966,600 shares of Goran common stock. Additionally, certain financial
covenants in favor of the lender of the IGFH Bank Debt require IGF Holdings to
maintain increasing levels of income, retained earnings and statutory capital
over the term of the IGF Bank Debt. The IGF Note is payable on the earlier of
November 30, 1996, or the consummation of an IGF or SIG Company Sale (as defined
in the GGS Agreement). The IGFH Note may be prepaid only with the prior written
consent of the lender of the IGFH Bank Debt. The IGF Note bears interest at a
variable rate per annum equal to the prime rate plus one percent until October
1, 1996 and thereafter at a rate equal to the prime rate plus two percent and is
collateralized by a second lien on the outstanding shares of capital stock of
IGF. The IGFH Bank Debt and the IGF Note will be repaid with a portion of the
proceeds from the Offering. See "Use of Proceeds."
GGS Holdings Stockholder Agreement
The Stockholder Agreement among the Company, the GS Funds, Goran and
GGS Holdings provides that each of the Company and the GS Funds will have the
right to designate two members of the Board of Directors of GGS Holdings. The
Company's representatives on the Board of Directors of GGS Holdings are G.
Gordon Symons, Chairman of the Board of the Company, and Alan G. Symons, Chief
Executive Officer of the Company.
The Stockholder Agreement places restrictions on the ability of the
Company and the GS Funds to transfer their shares in GGS Holdings, other than
proposed transfers to affiliates or transfers made in connection with a sale of
GGS Holdings, without first offering the shares to the other party pursuant to a
right of first refusal procedure. In addition, in the event that either party
proposes to sell more than 20% of the issued and outstanding shares of GGS
Holdings to an outside purchaser, the other party is granted "tag-along rights"
pursuant to which it may participate proportionately in the proposed sale.
The Stockholder Agreement establishes certain rights of the GS Funds to
cause a sale of GGS Holdings upon the occurrence of certain triggering events,
including (i) the failure to consummate a registered initial public offering of
GGS Holdings stock representing at least 20% of all such stock issued and
outstanding, and generating at least $25 million in net proceeds, by April 30,
2001, (ii) the third separate occasion on which an equity financing or
acquisition transaction proposed by the GS Funds is rejected by the GGS Holdings
Board of Directors, and the loss of voting control (defined as being direct or
indirect ownership of 40% of the outstanding voting stock, if any other holder
or group holds in excess of 10% of the outstanding voting stock, and otherwise
25% thereof) of the Company or Goran by Alan G. Symons or his family members or
affiliates or (iii) the cessation of Alan G. Symons' employment as CEO of GGS
Holdings for any reason. Upon the occurrence of any of such events, and at any
time or from time to time thereafter, the GS Funds may, by notifying the Company
in writing, initiate the process of seeking to effect a sale of GGS Holdings on
terms and conditions which are acceptable to the GS Funds. However, within
thirty days after the Company receives notice of the GS Funds' intention to
initiate the sale of GGS Holdings, the Company may provide written notice to the
GS Funds that it wishes to acquire or combine with GGS Holdings. The Company's
notice to the GS Funds must include the proposed purchase price and other
material terms and conditions with such specificity as is necessary to permit
the GS Funds to evaluate the Company's offer. If, within 90 days of delivery of
the notice by the Company, the GS Funds accept the Company's offer, the Company
will be obligated to acquire or combine with GGS Holdings. In the event the GS
Funds reject the Company's proposal, (i) any sale to a third party effected
within 180 days after receipt of such proposal must not contain terms that are
in the aggregate less favorable to the GGS Holdings stockholders than those set
forth in the Company's proposal, (ii) any sale must provide for the same
consideration to be paid to each stockholder, and (iii) no sale may constitute
an acquisition by or a combination with an affiliate of the GS Funds.
Accordingly, under certain circumstances, the GS Funds may have the ability to
force the Company to divest itself of its nonstandard automobile operations.
Further, a forced sale of GGS Holdings may also cause the Company to be
characterized as an investment company within the meaning of the 1940 Act unless
the proceeds are redeployed into other business operations or another exemption
from registration under the 1940 Act is available.
Except as provided in the immediately preceding paragraph, and except
for sales either to affiliates or in a public offering, neither stockholder may
sell any of its stock in GGS Holdings for a period of two years from the closing
date of the Formation Transaction.
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Registration Rights Agreement
Pursuant to a registration rights agreement that GGS Holdings, the GS
Funds, Goran and the Company entered into in connection with the Formation
Transaction (the "Registration Rights Agreement"), each of the GS Funds and the
Company has certain "demand registration" rights to require GGS Holdings, after
the closing of an initial public offering of GGS Holdings common stock or after
the expiration of the two-year period following consummation of the Formation
Transaction, to file a registration statement under the Securities Act covering
all or any part of its shares, subject to the following conditions: (a) that it
holds at least 25% of the shares issued and outstanding as of the closing date
of the Formation Transaction; (b) that it seeks to register at least 20% of the
shares which were issued and outstanding as of the closing date; (c) that the
offering price would be at least $25 million; and (d) that GGS Holdings need not
effect such demand registration within six months of the effective date of
another registration of GGS Holdings common stock. Each of the GS Funds and the
Company also has certain "piggyback registration" rights to have any or all of
its shares of GGS Holdings common stock included in any proposed or required
registration of equity securities by GGS Holdings under the Securities Act on
Form S-1, S-2 or S-3. If, in connection with either demand registration or
piggyback registration, there is to be an underwritten offering, all persons
participating in such registration must agree to sell their shares pursuant to
the underwriting agreement. Neither this nor any other provision of the
Registration Rights Agreement, however, should be deemed to create an
independent obligation on the part of the Company or the GS Funds to sell its
shares pursuant to any effective registration statement. The Registration Rights
Agreement requires GGS Holdings to indemnify the Company and the GS Funds, and
requires the Company and the GS Funds to indemnify each other, against certain
liabilities, including liabilities under the Securities Act, in connection with
the registration of the shares of GGS Holdings common stock pursuant to the
Registration Rights Agreement. In the event that such indemnification is
unavailable or is insufficient, each indemnifying party will be subject to a
duty of contribution based on rules of proportionate fault.
Reinsurance Arrangements
Prior to the Transactions, certain of the Subsidiaries from time to
time have written policies of insurance on behalf of other Subsidiaries. Under
the GGS Agreement, Goran and the Company are required to cause Pafco to enter
into agreements of reinsurance with respect to all insurance policies previously
issued by Pafco (i) on behalf of SIGF and (ii) in respect of any other type of
insurance other than nonstandard automobile insurance. Pursuant to such
arrangements, all liabilities under, and all rights to receive premiums with
respect to, such policies are assigned to and assumed by a third party, provided
that such arrangements are on arm's length market terms. In addition, under the
GGS Agreement, Goran and the Company caused Pafco and IGF to enter into
agreements of reinsurance pursuant to which all policies relating to nonstandard
automobile insurance previously issued by IGF on behalf of Pafco have been
assigned to and assumed by Pafco. Also, for so long as Goran has voting control
of IGF, Goran and the Company are obligated, upon request by GGS Holdings, to
cause IGF to issue policies on behalf of Pafco, which policies must be fully
reinsured by Pafco. In the event the Company and the GS Funds agree to the
issuing of an insurance policy on behalf of Goran or any of its affiliates by
GGS Holdings or its subsidiaries, Goran will be required to arrange for an
agreement of reinsurance with a third party, such as, subject to certain
restrictions, Granite Re, a wholly-owned subsidiary of Goran. Goran and the
Company must indemnify GGS Holdings and its subsidiaries from and against all
losses relating to such policies.
All Pafco insurance policies previously issued through SIGF in respect
of business other than nonstandard automobile insurance have been 100% reinsured
by Granite Re. Although Pafco will, in the future, continue to write business
through SIGF, this business will also be reinsured with Granite Re pursuant to a
100% quota share arrangement.
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Management Agreements
Pafco and Superior Management Agreements
The management agreement formerly in place between the Company and
Pafco (the "Pafco Management Agreement") which provides for an annual management
fee equal to 15% of gross premiums has been assigned to GGS Management. Under
the management agreement, as assigned, GGS Management is granted the exclusive
authority, on behalf of Pafco, to receive and accept proposals for insurance in
all states in which Pafco conducts business. GGS Management has full and
exclusive authority and responsibility, as manager, to engage in certain
activities relating to Pafco's insurance business including, among other things,
collecting premium payments, appointing adjusters, adjusting and settling
claims, and fulfilling the obligations of Pafco under applicable laws and
regulations, including those to the Indiana Department and other governmental
agencies. The management agreement requires Pafco to indemnify GGS Management
with respect to (i) all claims for losses incurred by policyholders which are
caused directly by Pafco's error in processing and handling policies and (ii)
any actions taken by Pafco which result in loss or damage to GGS Management.
Likewise, GGS Management is required to indemnify Pafco for damages arising from
actions taken on behalf of Pafco as its agent under the agreement. Although the
agreement provides for an initial five-year term followed by automatically
renewable three-year terms, either party may terminate the agreement upon sixty
days' written notice to the other party.
A similar management agreement, with a management fee of 17% of gross
premiums, has been entered into between GGS Management and Superior (the
"Superior Management Agreement"). All employees of SIG related to the
nonstandard automobile insurance business and employees of Superior are now
employees of GGS Management. The management agreement between GGS Management and
Superior is similar to the Pafco management agreement and confers upon GGS
Management the exclusive authority, on behalf of Superior, to receive and accept
proposals for insurance in all states in which such companies conduct business.
GGS Management has full authority and responsibility, as manager, to engage in
certain activities relating to Superior's insurance business including, among
other things, collecting premium payments and holding such funds in a fiduciary
capacity, appointing adjusters, adjusting and settling claims, and fulfilling
the obligations of Superior under applicable laws and regulations, including
those to the Florida Department and other governmental agencies. Under the
agreement, GGS Management has a duty to report claims to Superior in a timely
manner, and to notify Superior in certain situations relating to the payment of
claims. Furthermore, the agreement prohibits GGS Management from engaging in
certain activities on behalf of Superior, including, among other things, binding
Superior to reinsurance treaties or retrocession agreements or committing
Superior to participate in insurance or reinsurance syndicates. The management
agreement requires Superior to indemnify GGS Management with respect to (i) all
claims for losses incurred by policyholders which are caused directly by
Superior's error in processing and handling policies and (ii) any actions taken
by Superior which result in loss or damage to GGS Management. Likewise, GGS
Management is required to indemnify Superior for damages arising from actions
taken on behalf of Superior as its agent under the agreement. Although the
agreement provides for an initial five-year term followed by automatically
renewable three-year terms, either party may terminate the agreement without
cause upon sixty days' written notice to the other party, or under certain
conditions defined in the agreement as constituting cause.
The Pafco Management Agreement and the Superior Management Agreement
are subject to periodic review by the Indiana Department and the Florida
Department, respectively, in order to determine whether the fees charged
thereunder and other terms are fair and reasonable to policyholders. As part of
the approval of the Formation Transaction and the Transfer, the Indiana
Department has required Pafco to resubmit its management agreement for review by
the Indiana Department no later than May 1, 1997 (the first anniversary of the
Formation Transaction), together with supporting evidence that management fees
charged to Pafco are fair and reasonable in comparison to fees charged between
unrelated parties for similar services. In the Consent Order approving the
Acquisition, the Florida Department has reserved, for a period of three years,
the right to reevaluate the reasonableness of fees provided for in the Superior
Management Agreement at the end of each calendar year and to require Superior to
make adjustments in the management fees based on the Florida Department's
consideration of the performance and operating percentages of Superior and other
pertinent data. There can be no assurance that either the Indiana Department or
the Florida Department may in the future require a reduction in these management
fees.
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IGF Administration Agreement (Nonstandard Automobile)
The Company and IGF have entered into an administration agreement (the
"IGF Administration Agreement") with respect to nonstandard automobile insurance
policies written by IGF and ceded to Pafco. The IGF Administration Agreement
confers broad authority upon the Company, as manager, to conduct IGF's
nonstandard automobile insurance business, subject to IGF's right to review and
consult with the Company concerning underwriting, rates, claims issues, reserves
and other matters pertaining to IGF's nonstandard automobile insurance
operations. The agreement prohibits IGF from marketing nonstandard automobile
insurance through any agents or brokers other than those appointed by the
Company, but it does not limit IGF's ability to make other products available to
its agency force, including crop insurance products. In consideration for its
services under the agreement, the Company receives an administration fee in an
amount equal to 30.5% of IGF's gross premiums written, from which the Company is
obligated to pay applicable underwriting expenses and unallocated LAE. Other
expenses are to be paid by the Company out of funds derived from IGF's
operations. IGF is entitled to 1% of all investment income on funds deposited
under this agreement to the account of IGF, and Pafco is entitled to 99% of such
investment income, which is payable quarterly on a pro rata basis. Under the IGF
Administration Agreement, the Company has agreed to indemnify IGF and its
directors, officers and employees for (i) fines or penalties imposed on IGF by
governmental authorities and (ii) claims and expenses arising from contractual
liability or punitive damages, including damages arising under insurance
contracts. The IGF Administration Agreement is for an indefinite term but is
subject to termination by either party upon sixty (60) days' prior written
notice, and immediately by IGF for "cause," which is generally defined to mean
the failure of Pafco to comply with the Quota Share Reinsurance Agreement
between IGF and Pafco and the failure of the Company to comply with applicable
laws and regulations in administering the agreement.
IGF Administration Agreement (Crop)
The Company and IGF have also entered into an administrative agreement
(the "Administration Agreement") with respect to the management of IGF's crop
insurance operations by the Company, pursuant to which the Company receives fees
payable in quarterly installments of $150,000. This Administration Agreement
requires the Company, through certain of its senior executives, to provide such
executive management functions as may from time to time be required by IGF,
including without limitation management services in the areas of accounting,
investments, marketing, data processing and reinsurance. The initial term of the
Administration Agreement commenced on January 1, 1990 and continued through
December 31, 1991. The Administration Agreement may be extended year to year by
written addendum executed by both parties as has been so extended through
December 31, 1996.
Investment Banking Services
Under the GGS Agreement, Goldman Sachs and any of its affiliates are
given the right to perform all investment banking services for GGS Holdings for
which an investment banking firm is retained after consummation of the Formation
Transaction. These services include, for example, advice and consultation in
connection with any sale of GGS Holdings, or service as the lead managing
underwriter with respect to any public offering or secondary offering of
securities of GGS Holdings.
Registration Rights Agreement between the Company and Goran
Pursuant to the registration rights agreement which will be entered
into between the Company and Goran (the "Goran Registration Rights Agreement"),
Goran will have the right to have any or all of the shares of Common Stock held
by it after the Offering included in a registration statement filed by the
Company under the Securities Act, subject to certain limitations set forth in
the Goran Registration Rights Agreement (a "Piggyback Registration"). In
addition, subject to (i) the Underwriting Agreement among the Underwriters, the
Company and Goran, which restricts the right of Goran to sell any Common Stock
for 180 days after the completion of the Offering, and (ii) certain other
conditions, Goran also will have the right to require the Company to file a
Registration Statement under the Securities Act with respect to the Common Stock
held by Goran (a "Demand Registration").
Goran will be entitled to an unlimited number of Demand Registrations,
provided that each Demand Registration is for a number of shares of Common Stock
exceeding 10% of the number of shares of Common Stock outstanding at the time
Goran requires the Demand Registration or Goran owns less than 10% of the number
of shares of Common Stock outstanding at the time it requires a Demand
Registration (unless the Company has been eligible to utilize a simplified form
of registration statement), and an unlimited number of Piggyback Registrations.
The registration rights will be assignable in whole or in part. Generally, the
Company will be required to file a registration statement within 30 days of a
request by Goran; however, the Company may defer compliance with any Demand
Registration request for up to 120 days if, in the good faith judgment of its
Board of Directors, the filing of a registration statement would be seriously
detrimental to the Company and its shareholders.
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In general, Goran will bear all of the registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company, "blue sky"
fees and expenses and the expense of any special audits incident to or required
by any Demand Registration. Goran will generally be responsible for its pro rata
share of such expenses in excess of $100,000 in connection with any Piggyback
Registration. Goran will also bear all fees and expenses of its counsel and all
underwriting discounts and selling commissions applicable to its sales.
The Company and Goran will agree to indemnify each other against
certain liabilities, including liabilities under the Securities Act, in
connection with the registration of Common Stock pursuant to the Goran
Registration Rights Agreement.
Control by Goran; Potential Conflicts with Goran
The Company is a wholly-owned subsidiary of Goran, and after completion
of the Offering, Goran will own approximately 70% of the outstanding Common
Stock, assuming no exercise of the Underwriters' over-allotment option. Goran
will have the power to control the Company, to elect its Board of Directors and
to approve any action requiring shareholder approval, including adopting
amendments to the Company's articles of incorporation and approving or
disapproving mergers or sales of all or substantially all of the assets of the
Company. Because Goran has the ability to elect the Board of Directors of the
Company, it will be able to effectively control all of the Company's policy
decisions. As long as Goran is the majority shareholder of the Company, third
parties will not be able to obtain control of the Company through purchases of
Common Stock not owned by Goran.
G. Gordon Symons, Chairman of the Board of Goran, the Company and GGS
Holdings and the father of Alan G. Symons, Chief Executive Officer of the
Company, and Douglas H. Symons, President and Chief Operating Officer of the
Company, and members of the Symons family beneficially own in the aggregate
61.0% of the outstanding common stock of Goran. Accordingly, since G. Gordon
Symons and members of his family have the ability to elect the Board of
Directors of Goran, they will have the ability to elect the Board of Directors
of the Company and otherwise to influence significantly the Company's business
and operations. Further, directors and executive officers of SIG, including
members of the Symons family, beneficially own in the aggregate approximately
62.1% of the outstanding shares of Goran. See "Securities Ownership of
Management and Goran."
Of the seven directors of the Company, five are current directors of
Goran (three of whom are members of the Symons family and two of whom are
independent directors of Goran), and two are outside directors. Directors and
officers of the Company and Goran may have conflicts of interest with respect to
certain matters affecting the Company, such as potential business opportunities
and business dealings between the Company and Goran and its affiliated
companies. See "Management -- Directors and Executive Officers of the Company."
Goran's failure to maintain ownership of at least 50% of the Company's
voting securities will expose Goran to a risk that it will be characterized as
an investment company within the meaning of the Investment Company Act of 1940,
as amended (the "1940 Act"), unless Goran's remaining voting securities of the
Company together with any other investment securities represent not more than
40% of the total assets of Goran on an unconsolidated basis. In such event,
Goran would be required to comply with the registration and other requirements
of the 1940 Act, which would be significantly burdensome for Goran. This
constraint makes it unlikely that Goran would approve a stock issuance by the
Company that reduces Goran's ownership below 50% and therefore would likely
limit the amount of additional capital which can be raised by the Company
through the issuance of voting securities. Among other consequences, such a
limit could affect the Company's ability to raise funds for acquisition
opportunities which may become available to the Company or to GGS Holdings. In
addition, the stockholder agreement between the Company and the GS Funds (the
"Stockholder Agreement") establishes certain rights of the GS Funds to cause a
sale of GGS Holdings upon the occurrence of certain triggering events, including
the third separate occasion on which an equity financing or acquisition
transaction proposed by the GS Funds is rejected by the GGS Holdings Board of
Directors, and the loss of voting control (defined as being direct or indirect
ownership of 40% of the outstanding voting stock if any other holder or group
holds in excess of 10% of the outstanding voting stock, and otherwise 25%
thereof) of the Company or Goran by Alan G. Symons or his family members or
affiliates. In any event, the Company will be unable to raise equity capital by
issuing additional shares of Common Stock unless Goran agrees to that issuance.
In addition, if Goran or the Company ever sold significant amounts of shares of
the Common Stock in the public market, those sales might have an adverse effect
on the market price of the Common Stock.
Currently, Goran does not market property and casualty insurance
products which compete with products sold by the Company. Although there are no
restrictions on the activities in which Goran may engage, management of the
Company does not expect that Goran and the Company will compete with each other
to any significant degree in the sale of property and casualty insurance
products. There can be no assurance, however, that the Company will not
encounter competition from Goran in the future or that actions by Goran or its
affiliates will not inhibit the Company's growth strategy. See "Risk Factors --
Control by Goran; Certain Continuing Relationships with Goran and its
Affiliates; Conflicts of Interest."
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Conflicts of interest between the Company and Goran could arise with
respect to business dealings between them, including potential acquisitions of
businesses or properties, the issuance of additional securities, the election of
new or additional directors and the payment of dividends by the Company. The
Company has not instituted any formal plan or arrangement to address potential
conflicts of interest that may arise between the Company and Goran. See "Risk
Factors -- Control by Goran; Certain Continuing Relationships with Goran and its
Affiliates; Conflicts of Interest."
Conflicts of interest similar to those which could arise between the
Company and Goran could also arise between the Company and GGS Holdings. Alan G.
Symons, Chief Executive Officer of the Company, and Douglas H. Symons, President
and Chief Operating Officer of the Company, also serve as the Chief Executive
Officer and President, and Vice President, respectively, of GGS Holdings. Such
individuals have entered into employment agreements with GGS Holdings requiring
them to devote substantially all of their working time and attention to the
business and affairs of GGS Holdings. Further, Alan G. Symons and certain other
members of management of the Company are entitled, under certain circumstances,
to receive options to purchase shares of common stock of GGS Holdings. See
"Management -- Executive Compensation -- Employment Contracts and Termination of
Employment -- GGS Holdings." In addition, in the event that the Company does not
continue to own at least 50% of the outstanding voting securities of GGS
Holdings and the voting securities of GGS Holdings owned by the Company
represent over 40% of the total assets of the Company on an unconsolidated
basis, the Company will be exposed to a risk that it would be characterized as
an investment company within the meaning of the 1940 Act. This consideration
will limit the amount of additional capital which can be raised through the
issuance by GGS Holdings of voting securities.
Computer Software Support and Licensing Agreements
The Company is a party to a software support agreement and software
licensing agreement with Tritech Financial Systems, Inc. ("Tritech"), which
provides software and maintenance services for numerous companies in the
insurance industry to facilitate compliance with applicable insurance laws and
industry mandated requirements. Robert Symons, the brother of Alan G. Symons and
Douglas H. Symons and son of G. Gordon Symons, is the President and controlling
shareholder of Tritech. Pursuant to the support and licensing agreements, the
Company paid $74,488 during the fiscal year ended December 31, 1995. Such amount
represented less than 5% of Tritech's total annual revenues in 1995.
Parent Indebtedness
The Parent Indebtedness consists of: (i) a demand note of the Company
payable to Goran which bears interest at 10% per annum and had a balance of
$2,232,000, including accrued interest of $396,000, at December 31, 1995; and
(ii) a demand note of the Company payable to Granite Re which bears interest at
10% per annum and had a balance of $3,764,000, including accrued interest of
approximately $1,064,000, at December 31, 1995. In addition, in April, 1996, the
Company issued another demand note payable to Goran which has a principal
balance of $1,000,000 and bears interest at 10% per annum.
Interest of Management in Certain Transactions
The following directors and Named Executive Officers of the Company
were indebted to Goran in amounts exceeding $60,000 during the financial year
ended December 31, 1995, on account of loans to purchase common shares of Goran
and its affiliates, certain of which were made pursuant to the Share Option Plan
(see "Management -- Executive Compensation -- Stock Option Plans -- Goran Share
Option Plan"):
Largest
Loan Balance
Name Date of Loan During 1995 Present Balance
---- ------------ ----------- ---------------
G. Gordon Symons June 27, 1986 $148,000 $148,000
June 30, 1986 200,000 200,000
Alan G. Symons June 27, 1986 9,974 9,974
June 30, 1986 50,599 40,172
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The foregoing loans are collateralized by pledges of the common shares
of Goran acquired and are payable on demand and are interest free. In addition,
G. Gordon Symons has an unsecured loan payable to Goran in the amount of $70,000
not relating to the purchase of common shares of Goran. This loan was taken out
on January 2, 1988, is payable on demand and is interest free.
G. Gordon Symons also has a demand loan payable to the Company in the
amount of $76,729 as of December 31, 1995 that bears interest at a per annum
rate equal to the 180-day treasury bill rate, of which $51,729 was used to
purchase common shares of Goran and its affiliates. Douglas H. Symons has a
demand loan payable to the Company in the amount of $74,000 as of December 31,
1995 that bears interest at a per annum rate equal to the 180-day treasury bill
rate. Alan G. Symons has a demand loan payable to the Company in the amount of
$47,875 as of December 31, 1995 that bears interest at a per annum rate equal to
the 180-day treasury bill rate, of which $27,309 was used to purchase common
shares of Goran and its affiliates. In addition, the Company holds a mortgage
note of G. Gordon Symons collateralized by a second mortgage on his personal
residence. This mortgage loan was originally incurred on October 3, 1988, has a
current principal balance of $277,502, matures on May 8, 1999 and bears interest
at 7% per annum.
The Company also has a receivable in the amount of $116,000 at December
31, 1996 from Vector Solutions, Inc., a wholly-owned subsidiary of Goran
("Vector"). This receivable was advanced to Vector in 1995 to enable Vector to
pay third party suppliers.
On September 1, 1989, the following interrelated transactions occurred.
First, Pafco loaned $1,700,000 (the "Pafco Loan") to Cliffstan Investments,
Inc., a Nevada corporation that is affiliated with the Company ("Cliffstan"). In
return, Cliffstan issued a promissory note in the amount of $1,700,000, bearing
interest at 7.8% per annum, in favor of Pafco (the "Cliffstan Note"). The
Cliffstan Note is collateralized by the unconditional guarantee of Gage North
Holdings, Inc., an Ontario corporation ("Gage North"). The guarantee of Gage
North is in turn collateralized by a mortgage on certain real property held by
Gage North. Alan G. Symons has a 33% ownership interest in Gage North. Second,
Cliffstan loaned the proceeds of the Pafco Loan to SIGL, who in return issued a
promissory note in the amount of $1,700,000, bearing interest at a rate of 8.3%
per annum, in favor if Cliffstan (the "SIGL Note"). Lastly, SIGL agreed to
discharge the obligations of Cliffstan under the Cliffstan Note in return for
Cliffstan discharging SIGL's obligations under the SIGL Note. On September 30,
1992, Pafco and Granite Re entered into a purchase agreement (the "Cliffstan
Note Purchase Agreement") whereby Pafco assigned a beneficial interest in the
Cliffstan Note, as amended to be payable on demand, to Granite Re and Granite Re
agreed to pay Pafco: (i) one installment of $345,201, comprising the accrued
interest on the Cliffstan Note, on September 30, 1992 and (ii) consecutive
quarterly installments of $200,000 plus interest at a rate of 7.8% per annum
beginning on December 31, 1992, until the full amount of the purchase price is
repaid, at which time Granite Re is to take legal title to the Cliffstan Note.
Pursuant to a guaranty dated April 22, 1994, Alan G. Symons guarantees the
obligations of Granite Re to Pafco under the Cliffstan Note Purchase Agreement
and the obligations of Cliffstan to Granite Re under the Cliffstan Note, up to
$350,000 in the aggregate. Once the obligations of Granite Re to Pafco under the
Cliffstan Note Purchase Agreement are less than $1,000,000, the guaranty of Alan
G. Symons is null and void. The guarantee of Alan G. Symons is collateralized by
200,000 shares of Goran common stock pledged by SIGL. The largest amount owing
under the Cliffstan Note since the beginning of 1995 was $1,355,335. The amount
due under the Cliffstan Note as of March 31, 1996 is $134,335.
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SECURITIES OWNERSHIP OF MANAGEMENT AND GORAN
Ownership of the Company
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock, as of the date of this Prospectus and
after giving effect to the Offering, by each person known by the Company to
beneficially own more than 5% of the outstanding shares of Common Stock.
As of the date hereof, none of the outstanding shares of Common Stock
is owned by any director or executive officer of the Company.
<TABLE>
<CAPTION>
Percentage of Percentage of
Shares of Shares of
Number Common Stock Common Stock
of Beneficially Owned Beneficially Owned
Name and Address Title of Class Shares Prior to the Offering After the Offering
- ---------------- -------------- ------ --------------------- ------------------
<S> <C> <C> <C> <C>
Goran Capital Inc. Common Stock, 7,000,000 (1) 100.0% 70.0% (2)
181 University no par value
Avenue
Suite 1101
Toronto, Ontario
Canada M5H 3M7
</TABLE>
- ------------
(1) Goran has sole voting and dispositive power over all of these shares.
(2) Goran would beneficially own 67.0% of the Company after the Offering if
the Underwriters' over-allotment option is exercised in full.
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<PAGE>
Ownership of Goran
The following table sets forth certain information regarding beneficial
ownership of the capital stock of Goran, as of July 25, 1996 (unless otherwise
indicated), by (i) each person known by the Company to beneficially own more
than 5% of the outstanding shares of a class of capital stock of Goran, (ii) by
each of the Company's executive officers and directors, and (iii) by all
executive officers and directors of the Company as a group. Except as otherwise
indicated, based on information furnished by such owners, the beneficial owners
of the capital stock listed below have sole voting and dispositive power with
respect to such shares, subject to community property laws where applicable.
Fractional shares are rounded to the nearest whole share.
The ownership of Goran will not be affected by the Offering.
<TABLE>
<CAPTION>
Percentage of Shares
Nature Number of of Common Stock
Name and Address Title of Class of Ownership Shares Beneficially Owned
- ---------------- -------------- ------------ ------ ------------------
<S> <C> <C> <C> <C>
Symons International Common Shares Directly Owned 1,650,413 (1) 31.0%
Group, Ltd.
4720 Kingsway Drive
Indianapolis, Indiana 46205
G. Gordon Symons Common Shares Directly Owned 855,167
3 Queens Cove, Atp B6 Held of Record by SIGL 1,650,413 (1)
Fairylands Subject to Exercisable Options 243,345
Pembroke, Bermuda HM 05 2,748,925 49.3%
Alan G. Symons Common Shares Directly Owned 509,366
4720 Kingsway Drive Subject to Exercisable Options 55,344
Indianapolis, Indiana 46205 564,710 10.5%
Douglas H. Symons Common Shares Directly Owned 87,083
4720 Kingsway Drive Subject to Exercisable Options 93,855
Indianapolis, Indiana 46205 180,938 3.3%
John J. McKeating Common Shares Subject to Exercisable Options 2,000
2120 Guy Street
Montreal, Quebec
H3H218
Robert C. Whiting Common Shares Directly Owned 41,000 *
7 Hastings Road
Pembroke, Bermuda
James G. Torrance Common Shares Subject to Exercisable Options 2,000 *
100 North Drive
Etobicoke, Ontario
Canada M9A 4R2
David R. Doyle Common Shares Directly Owned 2,350 *
1821 Park North Lane
Indianapolis, Indiana 46260
Dennis G. Daggett Common Shares Directly Owned 257
2882 106th Street Subject to Exercisable Options 20,000
Des Moines, Iowa 50322 20,257 *
Thomas F. Gowdy Common Shares Directly Owned 568
2882 106th Street Subject to Exercisable Options 20,000
Des Moines, Iowa 50322 20,568 *
Roger C. Sullivan, Jr. Common Shares N/A -0- 0%
280 Interstate Circle NW
Atlanta, Georgia 30339
All Directors and Executive Common Shares Directly Owned 3,146,204
Officers as a group Subject to Exercisable Options 436,544
(13 persons) 3,582,748 62.1%
</TABLE>
(1) These shares are also indicated as being beneficially owned by G.
Gordon Symons, since he is the controlling shareholder of Symons
International Group, Ltd.
* Less than 1%.
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DESCRIPTION OF CAPITAL STOCK
Authorized Capital Stock
The Company's authorized capital stock consists of 100,000,000 shares
of Common Stock and 50,000,000 shares of preferred stock (the "Preferred
Stock"). Immediately following the Offering, approximately 10,000,000 shares of
Common Stock will be outstanding (10,450,000 shares assuming the Underwriters'
over-allotment option is exercised). All of the shares of Common Stock that will
be outstanding immediately following consummation of the Offering, including the
shares of the Common Stock sold in the Offering, will be validly issued, fully
paid and nonassessable.
Common Stock
The holders of Common Stock will be entitled to one vote for each share
on all matters voted on by shareholders, including elections of directors, and,
except as otherwise required by law and provided in any resolution adopted by
the Company's Board of Directors with respect to any series of Preferred Stock,
the holders of such shares will possess exclusive voting power. The Articles of
Incorporation of the Company (the "Articles") do not provide for cumulative
voting in the election of directors. Holders of Common Stock shall have no
preemptive, subscription, redemption or conversion rights. Subject to any
preferential rights of any outstanding series of Preferred Stock created by the
Company's Board of Directors from time to time, the holders of Common Stock will
be entitled to such dividends as may be declared from time to time by the
Company's Board of Directors from funds available therefor, and upon liquidation
will be entitled to receive pro rata all assets of the Company available for
distribution to such holders.
Preferred Stock
The Indiana Business Corporation Law (the "IBCL") and the Company's
Articles authorize the Company's Board of Directors to establish one or more
series of Preferred Stock and to determine, with respect to any series of
Preferred Stock, the terms and rights of such series, including (i) the
designation of the series, (ii) the number of shares of the series, which number
the Company's Board of Directors may thereafter (except where otherwise provided
in the applicable certificate of designation) increase or decrease (but not
below the number of shares thereof then outstanding), (iii) whether dividends,
if any, will be cumulative or noncumulative, the preference or relation which
such dividend, if any, will bear to the dividends payable on any other class or
classes of any other series of capital stock, and the dividend rate of the
series, (iv) the conditions and dates upon which dividends, if any, will be
payable, (v) the redemption rights and price or prices, if any, for shares of
the series, (vi) the terms and amounts of any sinking fund provided for the
purchase or redemption of shares of the series, (vii) the amounts payable on and
the preference, if any, of shares of the series in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, (viii)(a) whether the shares of the series will be convertible or
exchangeable into shares of any other class or series, or any other security, of
the Company or any other corporation, and (b) if so, the specification of such
other class or series or such other security, the conversion or exchange
price(s) or rate(s), any adjustments thereof, the date(s) as of which such
shares shall be convertible or exchangeable and all other terms and conditions
upon which such conversion or exchange may be made, (ix) restrictions on the
issuance of shares of the same series or of any other class or series, (x) the
voting rights, if any, of the holders of the shares of the series, and (xi) any
other relative rights, preferences and limitations of such series.
Although the Company's Board of Directors has no present intention of
doing so, it could issue a series of Preferred Stock that, depending on the
terms of such series, could impede the completion of a merger, tender offer or
other takeover attempt. The Company's Board of Directors will make any
determination to issue such shares based on its judgment as to the best
interests of the Company and its shareholders. The Company's Board of Directors,
in so acting, could issue Preferred Stock having terms that could discourage an
acquisition attempt through which an acquiror may be able to change the
composition of the Company's Board of Directors, including a tender offer or
other transaction that some, or a majority, of the Company's shareholders may
believe to be in their best interests or in which shareholders might receive a
premium for their Common Stock over the then current market price of such Common
Stock.
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Anti-takeover Provisions
The following discussion is a general summary of the material
provisions of the Company's Articles, the Company's By-Laws (the "By-Laws") and
certain other provisions which may be deemed to have an effect of delaying,
deferring or preventing a change in control. The following description of
certain of these provisions is general and not necessarily complete and is
qualified by reference to the Articles and By-Laws.
Directors
Certain provisions in the Articles and By-Laws will impede changes in
majority control of the Board of Directors of the Company. The Articles and
By-Laws provide that the Board of Directors of the Company will be divided into
three classes, with directors in each class elected for three-year staggered
terms. Therefore, it would take two annual elections to replace a majority of
the Company's Board of Directors. The By-Laws also impose certain notice and
information requirements in connection with the nomination by shareholders of
candidates for election to the Board of Directors or the proposal by
shareholders of business to be acted upon at an annual meeting of shareholders.
The Articles provide that directors may be removed only by the affirmative vote
of at least a majority of the shares eligible to vote generally in the election
of directors.
Authorization of Preferred Stock
The Board of Directors of the Company is authorized, without
shareholder approval, to issue Preferred Stock in series and to fix the voting
designations, preferences and relative, participating, optional or other special
rights of the shares of each series and the qualifications, limitations and
restrictions thereof. Preferred Stock may rank prior to the Common Stock as to
dividend rights, liquidation preferences, or both, and could have full or
superior voting rights. The holders of Preferred Stock will be entitled to vote
as a separate class or a series under certain circumstances, regardless of any
other voting rights which such holders may have. Accordingly, issuance of shares
of Preferred Stock could adversely affect the voting power of holders of Common
Stock or could have the effect of deterring or delaying an attempt to obtain
control of the Company.
Provisions of Indiana Law
Several provisions of the IBCL could affect the acquisition of shares
of the Common Stock or otherwise the control over the Company. Chapter 43 of the
IBCL prohibits certain business combinations, including but not limited to
mergers, sales of assets, recapitalization and reverse stock splits, between
corporations such as the Company (assuming that it has over 100 shareholders)
and any interested shareholder, defined to include any direct or indirect
beneficial owner of 10% or more of the voting power of the outstanding voting
shares, for five years following the date on which the shareholder obtained 10%
ownership unless the business combination or the purchase of the shares was
approved in advance of that date by the board of directors. If prior approval is
not obtained, several price and procedural requirements must be met before the
business combination can be completed.
In addition, Chapter 42 of the IBCL (the "Control Share Acquisition
Statute") contains provisions designed to assure that minority shareholders have
a voice in determining their future relationship with an Indiana corporation
(the definition of which would include the Company if the Company has over 100
shareholders) in the event that a person were to make a tender offer for, or
otherwise acquire enough shares to increase such person's percentage holdings of
such corporation's outstanding voting securities past any one or more of the
following threshold levels: 20%, 33 1/3%, and 50%. Under the Control Share
Acquisitions Statute, if an acquiror purchases those shares at a time that the
corporation is subject to the Control Share Acquisitions Statute, then until
each class or series of shares entitled to vote separately on the proposal
approves, by a majority of all votes entitled to be cast by that group
(excluding shares held by officers of the corporation, by employees of the
corporation who are directors thereof and by the acquiror), the rights of the
acquiror to vote the shares that take the acquiror over each level of ownership
as stated in the statute, the acquiror cannot vote those shares.
The IBCL requires directors to discharge their duties, based on the
facts then known to them, in good faith, with the care an ordinary, prudent
person in a like position would exercise under similar circumstances and in a
manner the director reasonably believes to be in the best interests of the
corporation. The director is not personally liable for any action taken as a
director, or any failure to take any action, unless the director has breached,
or failed to perform the duties of the director's office in compliance with, the
foregoing standard and the breach or failure to perform constitutes willful
misconduct or recklessness.
The IBCL specifically authorizes directors, in considering the best
interests of a corporation, to consider the effects of any action on
shareholders, employees, suppliers, and customers of the corporation, and
communities in which offices or other facilities of the corporation are located,
and any other factors the directors consider pertinent. Under the IBCL,
directors are not required to approve a proposed business combination or other
corporate action if the directors determine in good faith that such approval is
not in the best interests of the corporation. The IBCL explicitly provides that
the different or higher degree of scrutiny imposed in Delaware and certain other
jurisdictions upon director actions taken in response to potential changes in
control will not apply.
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<PAGE>
The foregoing provisions of the IBCL could have the effect of
preventing or delaying a person from acquiring or seeking to acquire a
substantial equity interest in, or control of, the Company.
Insurance Regulation Concerning Change of Control
Many state insurance regulatory laws, including Indiana's and
Florida's, intended primarily for the protection of policyholders contain
provisions that require advance approval by state agencies of any change in
control of an insurance company or insurance holding company which owns an
insurance company that is domiciled (or, in some cases, having such substantial
business that it is deemed commercially domiciled) in that state. In addition,
many state insurance regulatory laws contain provisions that require
prenotification to state agencies of a change in control of a nondomestic
admitted insurance company in that state. While such prenotification statutes do
not authorize the state agency to disapprove the change of control, such
statutes do authorize issuance of a cease and desist order with respect to the
nondomestic admitted insurer if certain conditions exist, such as undue market
concentration. Any future transactions constituting a change in control of the
Company would generally require prior approval by the insurance departments of
Indiana and Florida, as well as notification in those states which have
preacquisition notification statutes or regulations. The need to comply with
those requirements may deter, delay or prevent certain transactions affecting
the control of the Company or the ownership of the Company's Common Stock,
including transactions which could be advantageous to the shareholders of the
Company. For a more comprehensive discussion of applicable Indiana and Florida
regulations, see "Business --Regulation."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 10,000,000
shares of Common Stock outstanding (10,450,000 if the Underwriters'
over-allotment option is exercised in full). Of those shares, the 3,000,000
shares of Common Stock sold in the Offering (3,450,000 if the Underwriters'
over-allotment option is exercised in full) will be freely transferable without
restriction under the Securities Act, except for any such shares of Common Stock
which may be acquired by an "affiliate" of the Company (as that term is defined
in Rule 144 promulgated under the Securities Act), which shares will be subject
to the resale limitations of Rule 144. The remaining 7,000,000 shares of
outstanding Common Stock held by Goran are "restricted securities" within the
meaning of Rule 144 and may not be resold in a public distribution except in
compliance with the registration requirements of the Securities Act or pursuant
to an exemption from registration, such as that to which Rule 144 relates.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned
"restricted securities" for a period of at least two years from the later of the
date on which such restricted securities were acquired from the Company or from
an affiliate of the Company is entitled to sell, within any three-month period,
a number of such securities that does not exceed the greater of 1% of the then
outstanding shares of the Common Stock or the average weekly trading volume in
the Common Stock reported through the automated quotation system of a registered
securities association during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain restrictions on the manner of sale,
notice requirements, and the availability of current public information about
the Company. Further, under Rule 144(k), if a period of at least three years has
elapsed between the later of the date on which restricted shares were acquired
from the Company or from an affiliate of the Company, a holder of such
restricted securities who is not an affiliate of the Company for at least three
months prior to the sale would be entitled to sell the shares immediately
without regard to the volume limitations and other conditions described above.
The Company, its directors and executive officers and Goran have agreed
not to sell or otherwise dispose of any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
the representatives of the Underwriters, except for shares of Common Stock
offered in connection with the Offering. See "Underwriting."
Pursuant to the Goran Registration Rights Agreement, between the
Company and Goran, Goran has certain rights to require the Company to effect the
registration under the Securities Act of shares of Common Stock owned by Goran,
in which event such shares could be sold publicly upon the effectiveness of any
such registration without restriction. See "Certain Relationships And Related
Transactions -- Registration Rights Agreement between the Company and Goran."
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<PAGE>
Prior to the Offering, there has been no public market for the Common
Stock and no prediction can be made as to the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
of the Common Stock prevailing from time to time. The Company is unable to
estimate the number of shares that may be sold in the public market pursuant to
Rule 144 because this will depend on the market price of the Common Stock, the
individual circumstances of the sellers and other factors. Any sale of
substantial amounts of Common Stock in the open market could adversely affect
the market price of the Common Stock.
The Company plans to make application to list the Common Stock on the
Nasdaq National Market under the symbol "SIGC."
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among
the Company, Goran and each of the Underwriters named below (the "Underwriting
Agreement"), the Underwriters named below have agreed, severally and not
jointly, through Advest, Inc. and Mesirow Financial Services, Inc., the
representatives of the Underwriters (the "Representatives"), to purchase from
the Company, and the Company has agreed to sell to the Underwriters, the
aggregate number of shares of Common Stock set forth opposite their respective
names below:
Number
Underwriter of Shares
Advest, Inc............................................
Mesirow Financial, Inc. ..............................
Total.............................................. 3,000,000
The Underwriters are committed to purchase and pay for all of the
shares of Common Stock offered hereby if any are purchased. The Underwriting
Agreement provides that the obligations of the several Underwriters are subject
to approval of certain matters by their counsel and to various other conditions.
The Underwriters have advised the Company that they propose to offer
the shares of the Common Stock directly to the public at the offering price set
forth on the cover page of this Prospectus and to certain selected dealers at
such price less a concession not in excess of $0.__ per share. The Underwriters
may allow, and such dealers may re-allow, a concession not in excess of $0.____
per share to certain other dealers. After the public offering of the shares, the
public offering price, concession and re-allowance to dealers may be changed by
the Underwriters.
-96-
<PAGE>
The Company has granted to the Underwriters an option, exercisable
during the 30-day period beginning on the date of the Prospectus, to purchase up
to 450,000 additional shares of Common Stock, solely to cover over-allotments,
if any, at the public offering price less the underwriting discounts set forth
on the cover page of the Prospectus. If the Underwriters exercise such option,
the Underwriters have severally agreed, subject to certain conditions, to
purchase approximately the same percentage thereof that the number of shares to
be purchased by each of them, as shown in the table above, bears to the
3,000,000 shares of Common Stock. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 3,000,000
shares are being sold.
The Company, Goran and the executive officers and directors of the
Company have agreed that they will not offer, sell, contract to sell, or
otherwise dispose of, any shares of Common Stock held by them (other than
issuances by the Company pursuant to outstanding warrants or options) for a
period of 180 days after the date of this Prospectus, without the written
consent of the Representatives.
The Company and Goran have agreed to indemnify the Underwriters
against, and to contribute to losses arising out of, certain liabilities,
including liabilities under the Securities Act subject to certain limitations.
The foregoing is a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to a copy of
the Underwriting Agreement which is on file as an exhibit to the Registration
Statement.
The Representatives have advised the Company that the Underwriters do
not intend to confirm sales to any account over which they exercise
discretionary authority.
<PAGE>
LEGAL MATTERS
The validity of the Shares offered hereby and certain other legal
matters in connection with the Offering are being passed upon for the Company by
Barnes & Thornburg, Indianapolis, Indiana. Certain legal matters in connection
with the Offering are being passed upon for the Underwriters by LeBoeuf, Lamb,
Greene & MacRae, L.L.P., a limited liability partnership including professional
corporations, New York, New York.
EXPERTS
The consolidated financial statements and related schedules of the
Company as of December 31, 1994 and 1995 and for each of the years in the three
year period ended December 31, 1995 appearing in this Prospectus and the
Registration Statement have been audited and reported upon by Coopers & Lybrand
L.L.P., independent public accountants, as set forth in their reports thereon
appearing elsewhere herein and upon the authority of said firm as experts in
accounting and auditing. The consolidated financial statements and related
schedules of Superior as of December 31, 1994 and 1995 and for each of the years
in the three year period ended December 31, 1995 appearing in this Prospectus
and the Registration Statement have been audited and reported upon by Coopers &
Lybrand L.L.P., independent public accountants, as set forth in their reports
thereon appearing elsewhere herein and upon the authority of said firm as
experts in accounting and auditing.
-97-
<PAGE>
GLOSSARY OF SELECTED INSURANCE
AND CERTAIN DEFINED TERMS
1940 Act......................... The Investment Company Act of 1940, as
amended.
1994 Reform Act................. The Federal Crop Insurance Reform Act of
1994.
1996 Reform Act.................. The Federal Agriculture Improvement and
Reform Act of 1996.
Acquisition...................... The acquisition by GGS Holdings of Superior
Insurance Company, a Florida property and
casualty insurer primarily engaged in the
writing of nonstandard automobile insurance.
Actual Production
History ("APH")............... A plan of MPCI which provides the yield
component and yield forecast of an insured by
utilizing the insured's historic yield
record. CRC plans use the policy terms and
conditions of the APH as their basic
provisions of coverage.
Actuarial analysis;
actuarial models.............. Evaluation of risks in order to attempt to
assure that premiums and loss reserves
adequately reflect expected future loss
experience and claims payments; in evaluating
risks, mathematical models are used to
predict future loss experience and claims
payments based on past loss ratios and loss
development patterns and other relevant data
and assumptions.
Admitted insurer................. An insurance company licensed by a state
regulatory authority to transact insurance
business in that state. An admitted insurer
is subject to the rules and regulations of
each state in which it is licensed governing
virtually all aspects of its insurance
operations and financial condition. A
non-admitted insurer, also known as an excess
and surplus lines insurer, is not licensed to
transact insurance business in a given state
but may be permitted to write certain
business in that state in accordance with the
provisions of excess and surplus lines
insurance laws which generally involve less
rate and operational regulation.
A.M. Best........................ A. M. Best Company, Inc., a rating agency and
publisher for the insurance industry.
Assume........................... To accept from the primary insurer or
reinsurer all or a portion of the liability
underwritten by such primary insurer or
reinsurer.
Buy-up Coverage.................. Multi-Peril Crop Insurance policy providing
coverage in excess of that provided by CAT
Coverage. Buy-up Coverage is offered only
through private insurers.
-98-
<PAGE>
Buy-up Expense
Reimbursement Payment....... An expense reimbursement payment made by the
FCIC to an MPCI insurer equal to a percentage
of gross premiums written for each Buy-up
Coverage policy written by such MPCI insurer.
Casualty insurance............... Insurance which is primarily concerned with
the losses caused by injuries to third
persons (i.e., not the policyholder) and the
legal liability imposed on the insured
resulting therefrom. It includes, but is not
limited to, employers' liability, workers'
compensation, public liability, automobile
liability, personal liability and aviation
liability insurance. It excludes certain
types of loss that by law or custom are
considered as being exclusively within the
scope of other types of insurance, such as
fire or marine.
CAT Coverage..................... The minimum available level of Multi-Peril
Crop Insurance, providing coverage for 50% of
a farmer's historical yield for eligible
crops at 60% of the price per bushel for such
crop set by the FCIC. This coverage is
offered through private insurers and USDA
field offices.
CAT Coverage Fee................. A minimum fixed administrative fee of $50 per
policy for which farmers may purchase CAT
Coverage. The CAT Coverage Fee takes the
place of a premium.
CAT LAE Reimbursement
Payment..................... An LAE reimbursement payment made by the FCIC
to an MPCI insurer equal to 13.0% of MPCI
Imputed Premiums for each CAT Coverage policy
written by such MPCI insurer.
Cede; ceding company............. When an insurance company reinsures its
risk with another insurance company, it
"cedes" business and is referred to as the
"ceding company."
Code............................. Internal Revenue Code of 1986, as amended.
Combined ratio................... The sum of the expense ratio and the loss and
LAE ratio determined in accordance with GAAP
or SAP.
Commission....................... The Securities and Exchange Commission.
Common Stock..................... The shares of common stock, no par value, of
the Company.
Company (or SIG)................. Symons International Group, Inc. and
its Subsidiaries, unless the context
indicates otherwise.
Contribution..................... The contribution by Pafco of IGF to IGF
Holdings in exchange for all of the capital
stock of IGF Holdings.
Crop Revenue Coverage (CRC)...... CRC provides the insured with a guaranteed
revenue stream by combining both yield and
price variability protection and protects
against a grower's loss of revenue resulting
from fluctuating crop prices and/or low
yields by providing coverage when any
combination of crop yield and price results
in revenue that is less than the revenue
guarantee provided by the policy.
<PAGE>
Crop year....................... For MPCI, a crop year commences on July 1 and
ends on June 30. For crop hail insurance, the
crop year is the calendar year.
Direct premiums written......... Total premiums collected in respect of
policies issued by an insurer during a given
period without any reduction for premiums
ceded to reinsurer.
Direct writer................... An insurer or reinsurer that markets and
sells insurance directly to its insured,
either by use of telephone, mail or exclusive
agents.
Distribution.................... The distribution by the Company to Goran of
all of the outstanding capital stock of
Symons International Group, Inc. (Florida), a
Florida based surplus lines underwriting
manager.
Dividend........................ The payment by IGF Holdings to Pafco of a
dividend consisting of $7.5 million in cash
and the IGF Note.
Excess and surplus
lines insurance............ The business of insuring risks for which
insurance is unavailable from admitted
insurers in whole or in part. Such business
is placed by the broker or agent with
nonadmitted insurers in accordance with the
excess and surplus lines provisions of state
insurance laws.
Excess of loss reinsurance....... A form of reinsurance whereby the
reinsurer, subject to a specified limit,
agrees to indemnify the ceding company for
the amount of each loss, on a defined class
of business, that exceeds a specified
retention.
<PAGE>
Exchange Act..................... The Securities Exchange Act of 1934, as
amended.
Expense ratio.................... Under statutory accounting, the ratio of
underwriting expenses to net premiums
written. Under GAAP accounting, the ratio of
underwriting expenses to net premiums earned.
Federal Crop Insurance
Corporation(FCIC)........... A wholly-owned federal government corporation
within the Farm Services Agency.
Florida Department............... The Florida Department of Insurance.
FormationTransaction............. The formation of GGS Management Holdings,
Inc., a corporation 52% owned by the Company
and 48% owned by the GS Funds.
Fortis........................... Fortis, Inc., the parent company of
Interfinancial, the former holding company
for Superior.
Generally Accepted Accounting
Principles(GAAP)............ Accounting principles as set forth in
opinions of the Accounting Principles Board
of the American Institute of Certified Public
Accountants and/or in statements of the
Financial Accounting Standards Board and/or
their respective successors and which are
applicable in the circumstances as of the
date in question.
GGSAgreement..................... The agreement by and among Goran, SIG, GGS
Holdings and the GS Funds dated January 31,
1996 evidencing the Formation Transaction.
GGS Holdings..................... GGS Management Holdings, Inc., a holding
company for Pafco and Superior controlled by
the Company.
GGS Management................... GGS Management, Inc., a wholly-owned
subsidiary of GGS Holdings.
GGS Senior Credit Facility....... A $48 million senior bank facility extended
to GGS Management used to partially fund the
purchase of Superior.
Goldman Sachs.................... Goldman, Sachs & Co.
Goran............................ Goran Capital Inc., a Canadian
federally-chartered corporation and the
current sole shareholder of the Company.
<PAGE>
Granite Re...................... Granite Reinsurance Company Ltd., a
subsidiary of Goran.
Gross premiums written........... Direct premiums written plus
premiums collected in respect of policies
assumed, in whole or in part, from other
insurance carriers.
GS Funds......................... GS Capital Partners II, L.P.; GS Capital
Partners II Offshore, L.P.; Stone Street
Funds L.P.; Bridge Street Funds L.P.; and
Goldman Sachs & Co. Verwaltungs GmbH, all of
which are investment funds affiliated with
Goldman Sachs.
IBCL............................. The Indiana Business Corporation Law.
IGF.............................. IGF Insurance Company, an indirect
wholly-owned subsidiary of the Company.
IGFH Bank Debt................... A promissory note in the principal amount of
$7.5 million issued by IGF Holdings.
IGF Holdings..................... IGF Holdings, Inc., a wholly-owned subsidiary
of the Company.
IGF Note......................... A subordinated promissory note of IGF
Holdings in the principal amount of
approximately $3.5 million paid to Pafco by
IGF Holdings as part of the Dividend.
-99-
<PAGE>
IGF Revolver..................... IGF's revolving line of credit used to
finance premium payables on amounts not yet
received from farmers.
Incurred but not
reported (IBNR) claims...... Claims under policies that have been incurred
but have not yet been reported to the Company
by the insured.
Incurred but not reported (IBNR)
reserves.................... IBNR reserves include LAE related to losses
anticipated from IBNR claims and may also
provide for future adverse loss development
on reported claims.
IndianaCommissioner.............. The Indiana Commissioner of Insurance.
Indiana Department............... The Indiana Department of Insurance.
Insurance Regulatory Information
System (IRIS)............... A system of ratio analysis developed by the
NAIC primarily intended to assist state
insurance departments in executing their
statutory mandates to oversee the financial
condition of insurance companies.
Insurers......................... The direct and indirect consolidated
insurance subsidiaries of the Company, which
include IGF, Pafco and Superior.
Interfinancial................... Interfinancial, Inc., a wholly-owned
subsidiary of Fortis, Inc. and the former
holding company for Superior.
IRS.............................. Internal Revenue Service.
<PAGE>
Loss adjustment expenses
(LAE)....................... Expenses incurred in the settlement of
claims, including outside adjustment
expenses, legal fees and internal
administrative costs associated with the
claims adjustment process, but not including
general overhead expenses.
Loss and LAE ratio............... The ratio of losses and LAE incurred to
premiums earned.
Loss and LAE reserves............ Liabilities established by insurers to
reflect the ultimate estimated cost of claim
payments as of a given date.
MPCI Excess LAE Reimbursement
Payment..................... A small excess LAE reimbursement payment made
by the FCIC to an MPCI insurer.
MPCI Imputed Premium............. For purposes of the profit/loss sharing
arrangement with the federal government, the
amount of premiums credited to the Company
for all CAT Coverage it sells, as such amount
is determined by formula.
MPCI Premium..................... For purposes of the profit/loss sharing
arrangement with the federal government, the
amount of premiums credited to the Company
for all Buy-up Coverage paid by farmers, plus
the amount of any related federal premium
subsidies.
MPCI Retention................... The aggregate amount of MPCI Premium and MPCI
Imputed Premium on which the Company retains
risk after allocating farms to the three
federal reinsurance pools.
<PAGE>
Multi-Peril Crop
Insurance (MPCI)............ A federally-regulated and subsidized crop
insurance program that insures a producer of
crops with varying levels of protection
against substantially all natural perils to
growing crops.
NAIC............................. The National Association of Insurance
Commissioners.
Nasdaq National Market........... The Nasdaq Stock Market's National Market.
NCIS............................. National Crop Insurance Services, Inc., the
actuarial data facility for the commercial
crop insurance industry.
Net premiums earned.............. The portion of net premiums written
applicable to the expired period of policies
and, accordingly, recognized as income during
a given period.
Net written premiums............. Total premiums for insurance written (less
any return premiums) during a given period,
reduced by premiums ceded in respect of
liability reinsured by other carriers.
Nonstandard automobile
insurance................... Personal lines automobile insurance written
for those individuals presenting an above
average risk profile (i.e., higher risk) in
terms of payment history, driving experience,
record of prior accidents or driving
violations, particular occupation or type of
vehicle and other factors.
Offering......................... The offering by the Company of 3,000,000
shares of its Common Stock by the
Underwriters.
Pafco............................ Pafco General Insurance Company, an Indiana
property and casualty insurance company.
Parent Indebtedness.............. Indebtedness of the Company to Goran in the
principal amount of $7.3 million.
Policiesin-force Policies written and recorded on the books of
an insurance carrier which are unexpired as
of a given date.
<PAGE>
Policyholders' or
Statutory Surplus........... As determined under SAP, the excess of total
admitted assets over total liabilities.
Price Selection.................. The maximum per unit commodity price by crop
to be used in computing MPCI Premiums, which
is set each year by the FCIC.
Quota share reinsurance.......... A form of reinsurance in which the reinsurer
shares a proportional part of both the
original premiums and the losses of the
reinsured.
Reinsurance...................... The practice whereby a company called the
"reinsurer" assumes, for a share of the
premium, all or part of a risk originally
undertaken by another insurer called the
"ceding" company or "cedent." Reinsurance may
be affected by "treaty" reinsurance, where a
standing agreement between the ceding and
reinsuring companies automatically covers all
risks of a defined category, amount and type,
or by "facultative" reinsurance where
reinsurance is negotiated and accepted on a
risk-by-risk basis.
Representatives.................. Advest, Inc. and Mesirow Financial, Inc., the
representatives of the Underwriters.
Retention........................ The amount of liability, premiums or losses
which an insurance company keeps for its own
account after application of reinsurance.
Risk-based capital (RBC)
requirements................ Capital requirements for property and
casualty insurance companies adopted by the
NAIC to assess minimum capital requirements
and to raise the level of protection that
statutory surplus provides for policyholder
obligations.
Securities Act................... The Securities Act of 1933, as amended.
SIG (or the Company)............. Symons International Group, Inc., a specialty
insurer which underwrites and markets
nonstandard private passenger automobile
insurance and crop insurance.
-100-
<PAGE>
SIGF............................. Symons International Group, Inc. (Florida), a
Florida based surplus lines underwriting
manager and a subsidiary of Goran.
SIGL............................. Symons International Group, Ltd., a Canadian
corporation and the controlling shareholder
of Goran.
Standard automobile insurance.... Personal lines automobile insurance written
for those individuals presenting an average
risk profile in terms of loss history,
driving record, type of vehicle driven and
other factors.
Statutory Accounting
Practices(SAP).............. Accounting practices which consist of
recording transactions and preparing
financial statements in accordance with the
rules and procedures prescribed or permitted
by state regulatory authorities. Statutory
accounting emphasizes solvency rather than
matching revenues and expenses during an
accounting period.
Statutory surplus................ The excess of admitted assets over total
liabilities (including loss reserves),
determined using data reported in accordance
with SAP.
Stockholder Agreement............ The stockholder agreement among the Company,
Goran, GGS Holdings and the GS Funds, dated
April 30, 1996.
-102-
<PAGE>
Stoploss reinsurance............. A form of reinsurance, similar to Excess of
Loss Reinsurance, whereby the primary insurer
caps its loss on a particular risk by
purchasing reinsurance in excess of such cap.
Subsidiaries..................... All of the direct and indirect consolidated
subsidiaries of the Company.
Superior......................... Superior Insurance Company, a Florida
property and casualty insurer primarily
engaged in the writing of nonstandard
automobile insurance and its principal
subsidiaries, Superior American Insurance
Company, a Florida insurance company, and
Superior Guaranty Insurance Company, a
Florida insurance company.
Superior Purchase
Agreement................... Stock Purchase Agreement, dated January 31,
1996, by and among Goran, the Company, Fortis
and Interfinancial pursuant to which the
Company purchased Superior.
Surplus.......................... The same as "policyholders' or statutory
surplus," defined above.
Tail............................. The period of time that elapses between the
incurrence and settlement of losses under a
policy. A "short-tail" insurance product is
one where losses are known comparatively
quickly; ultimate losses under a "long-tail"
insurance product are sometimes not known for
years.
Transactions..................... The Formation Transaction (defined herein),
the Acquisition (defined herein) and other
related transactions, including the Transfer
(defined herein), the Dividend (defined
herein) and the Distribution (defined
herein).
Transfer......................... The transfer by Pafco of all of the
outstanding capital stock of IGF through the
formation of IGF Holdings and the
contribution to IGF Holdings of all of the
outstanding shares of capital stock of IGF
and the distribution of IGF Holdings to the
Company.
Treaty reinsurance............... The reinsurance of a specified type or
category of risks defined in a reinsurance
agreement (a "treaty") between a primary
insurer or other reinsured and a reinsurer.
Typically, in treaty reinsurance, the primary
insurer or reinsured is obligated to offer
and the reinsurer is obligated to accept a
specified portion of all such type or
category of risks originally underwritten by
the primary insurer or reinsured.
-103-
<PAGE>
Underwriting..................... The insurer's or reinsurer's process of
reviewing applications submitted for
insurance coverage, deciding whether to
accept all or part of the coverage requested
and determining the applicable premiums.
Underwriting expenses............ The aggregate of policy acquisition costs,
including commissions, and the portion of
administrative, general and other expenses
attributable to underwriting operations.
Unearned premiums................ The portion of a premium representing the
unexpired portion of the contract term as of
a certain date.
USDA............................. United States Department of Agriculture.
-104-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Symons International Group, Inc. and Subsidiaries
Page
Reports of Independent Accountants.................................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31,
1994 and 1995 and March 31, 1996............................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1993, 1994 and 1995 and the Three Months
Ended March 31, 1995 and 1996.................................. F-4
Consolidated Statements of Stockholder's Equity for the
Years Ended December 31, 1993, 1994 and 1995 and
the Three Months Ended March 31, 1995 and 1996................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1994 and 1995 and the Three Months
Ended March 31, 1995 and 1996.................................. F-6
Notes to Consolidated Financial Statements.......................... F-7 - F-29
Superior Insurance Company and Subsidiaries
Reports of Independent Accountants ............................ F-30
Consolidated Financial Statements:
Consolidated Balance Sheets as of
December 31, 1994 and 1995 and March 31, 1996.................. F-31
Consolidated Statements of Operations for the Years Ended
December 31, 1993, 1994 and 1995 and the Three Months
Ended March 31, 1995 and 1996.................................. F-32
Consolidated Statements of Changes in Stockholders'
Equity for the Years
Ended December 31, 1993, 1994 and 1995 and
the Three Months Ended March 31, 1995 and 1996................. F-33
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1993, 1994 and 1995
and the Three Months Ended March 31, 1995 and 1996............. F-34
Notes to Consolidated Financial Statements.......................... F-35 - F-50
F-1
<PAGE>
Report of Independent Accountants
Board of Directors and Stockholder of
Symons International Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Symons
International Group, Inc. and subsidiaries as of December 31, 1994 and 1995, and
the related consolidated statements of operations, changes in stockholder's
equity and cash flows for each of the three years in the period ended December
31, 1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Symons
International Group, Inc. and subsidiaries as of December 31, 1994 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1994, the
Company adopted Financial Accounting Standards Board's Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
As discussed in Notes 1 and 8 to the consolidated financial statements, the
Company adopted Financial Accounting Standards Board Statement No. 109,
Accounting for Income Taxes, during the year ended December 31, 1993.
/s/ Coopers & Lybrand L.L.P.
Indianapolis, Indiana
March 18, 1996, except for the second
paragraph in Note 6, and Note 18,
as to which the date is July 29, 1996
F-2
<PAGE>
Symons International Group, Inc. and Subsidiaries
Consolidated Balance Sheets
as of December 31, 1994 and 1995 and March 31, 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------------- March 31,
ASSETS 1994 1995 1996
---------- --------- -----------
(unaudited)
Assets:
Investments:
Available for sale:
<S> <C> <C> <C>
Fixed maturities, at market ......................... $ 8,861 $ 12,931 $ 11,407
Equity securities, at market ........................ 5,424 4,231 11,617
Short-term investments, at amortized cost, ............... 790 5283 935
which approximates market
Real estate, at cost ..................................... 507 487 481
Mortgage loans ........................................... 2,940 2,920 2,690
Other .................................................... 50 50 50
Investments in and advances to related parties ................ 2,948 2,952 2,993
Cash and cash equivalents ..................................... 42 2311 --
Receivables (net of allowance for doubtful
accounts of $1,209, $927 and $962 in 1994,
1995 and March 31, 1996, respectively) .............. 14,665 8,203 15,593
Reinsurance recoverable on paid and unpaid
losses, net ............................................... 12,886 54,136 59,571
Prepaid reinsurance premiums .................................. 6,988 6,263 24,707
Federal income taxes recoverable .............................. 192 -- --
Deferred policy acquisition costs ............................. 1,479 2,379 3,085
Deferred income taxes ......................................... 2,002 1,421 1,401
Property and equipment ........................................ 4,236 5,502 5,873
Other ......................................................... 2,618 1,447 410
--------- --------- ---------
Total assets ........................................ $ 66,628 $ 110,516 $ 140,813
========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Losses and loss adjustment expenses ........................... $ 29,269 $ 59,421 $ 50,009
Unearned premiums ............................................. 14,416 17,497 40,884
Reinsurance payables .......................................... 4,073 6,206 22881
Payables to affiliates ........................................ 5,390 6,474 10,933
Federal income tax payable .................................... -- 133 464
Line of credit and notes payable .............................. 5,441 5,811 250
Other ......................................................... 3,768 5,439 4,354
--------- --------- ---------
Total liabilities
62,357 100,981 129,775
--------- --------- ---------
Minority interest in consolidated subsidiary ........................ 16 -- --
--------- --------- ---------
Commitments and contingencies
Stockholder's equity:
Common stock, no par value, 100,000,000 ....................... 1,000 1,000 1,000
shares authorized, 7,000,000 issued and outstanding
Additional paid-in capital .................................... 3,130 3,130 3,130
Unrealized loss on investments, net of deferred
tax benefit of $260 in 1994, $23 in 1995
and $66 at March 31, 1996 ........................... (504) (45) (128)
Retained earnings ............................................. 629 5,450 7,036
--------- --------- ---------
Total stockholder's equity ............................... 4,255 9,535 11,038
--------- --------- ---------
Total liabilities and stockholder's equity ............... $ 66,628 $ 110,516 $ 140,813
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
Consolidated Statements of Operations for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1995 and 1996 (in thousands,
except per share data)
<TABLE>
<CAPTION>
Three
Years ended months
December 31, ended March 31,
------------------------------------- -------------------------
1993 1994 1995 1995 1996
--------- ---------- --------- --------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Gross premiums written ............................... $ 88,936 $ 103,134 $ 124,634 $ 28,272 $ 41,422
Less ceded premiums .................................. (57,176) (67,995) (71,187) (17,972) (22,692)
--------- --------- --------- --------- ---------
Net premiums written ...................... 31,760 35,139 53,447 10,300 18,730
Change in unearned premiums .......................... (332) (3,013) (3,806) (1,651) (4,945)
--------- --------- --------- --------- ---------
Net premiums earned ....................... 31,428 32,126 49,641 8,649 13,785
Net investment income
1,489 1,241 1,173 319 558
Other income ......................................... 886 1,622 2,174 592 977
Net realized capital loss ............................ (119) (159) (344) (45) (36)
--------- --------- --------- --------- ---------
Total revenues
33,684 34,830 52,644 9,515 15,284
--------- --------- --------- --------- ---------
Expenses:
Losses and loss adjustment
expenses ....................................... 25,080 26,470 35,971 5,648 8,963
Policy acquisition and general and
administrative expenses ........................ 8,914 5,801 7,981 2,045 3,669
Interest expense ............................... 996 1,184 1,248 272 249
--------- --------- --------- --------- ---------
Total expenses ............................ 34,990 33,455 45,200 7,965 12,881
--------- --------- --------- --------- ---------
Income (loss) before taxes,
discontinued operations, cumulative
effect of a change in accounting principle,
and minority interest ..................... (1,306) 1,375 7,444 1,550 2,403
--------- --------- --------- --------- ---------
Income taxes:
Current income tax expense ..................... (530) 462 2,275 577 754
(benefit)
Deferred income tax expense .................... 613 (1,180) 344 (77) 63
(benefit)
--------- --------- --------- --------- ---------
Total income taxes ........................ 83 (718) 2,619 500 817
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before discontinued
operations, cumulative effect of
a change in accounting principle,
and minority interest ..................... (1,389) 2,093 4825 1,050 1,586
Income (loss) from discontinued ...................... (160) 10 (4) 19 --
operations, net of income taxes
--------- --------- --------- --------- ---------
Net income (loss) before
cumulative effect of a change in
accounting principle and
minority interest ................ (1,549) 2,103 4,821 1,069 1,586
Cumulative effect on prior years of .................. 1,175 -- -- -- --
accounting change
--------- --------- --------- --------- ---------
Net income (loss) before minority ......... (374) 2,103 4,821 1,069 1,586
interest
Minority interest .................................... 51 14 -- (3) --
--------- --------- --------- --------- ---------
Net income (loss) ......................... $ (323) $ 2,117 $ 4,821 $ 1,066 $ 1,586
========= ========= ========= ========= =========
Weighted average shares
outstanding .......................................... 7,000 7,000 7,000 7,000 7,000
========= ========= ========= ========= =========
Per common share data:
Income (loss) from continuing
operations before discontinued
operations, cumulative effect of a change in
accounting principle ........................... $ (0.20) $ 0.30 $ 0.69 $ 0.15 $ 0.23
Income (loss) from discontinued ................ (0.02) -- -- -- --
operations, net of income taxes
Cumulative effect on prior years of ............ 0.17 -- -- -- --
accounting change --------- --------- --------- --------- ---------
Net income (loss) ......................... $ (0.05) $ 0.30 $ 0.69 $ 0.15 $ 0.23
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
Consolidated Statement of Changes in Stockholder's Equity for the years ended
December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995 and
1996 (in thousands)
<TABLE>
<CAPTION>
Unrealized
Additional Loss Retained Total
Common Paid-in on Earnings Stockholder's
Stock Capital Investments (Deficit) Equity
----- ------- ----------- --------- ------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 ............. 7,000 $ 1,530 $ (172) $ (1,165) $ 1,193
Additional paid-in capital ............. -- 1,600 -- -- 1,600
Change in unrealized loss on
equity securities, net of deferred taxes -- -- (251) -- (251)
Net loss ............................... -- -- -- (323) (323)
-------- -------- -------- -------- --------
Balance at December 31, 1993 ........... 7,000 3,130 (423) (1,488) 2,219
Unrealized gain on fixed
maturities, resulting from a change in
accounting principle, net of -- -- 139 -- 139
deferred taxes
Change in unrealized loss on
investments, net of deferred taxes ... -- -- (220) -- (220)
Net income ............................. -- -- -- 2,117 2,117
-------- -------- -------- -------- --------
Balance at December 31, 1994 ........... 7,000 3,130 (504) 629 4,255
Change in unrealized loss on
investments, net of deferred taxes
(unaudited) ................. -- -- (75) -- (75)
Net income (unaudited) ................. -- -- -- 1,066 1,066
-------- -------- -------- -------- --------
Balance at March 31, 1995 .............. 7,000 $ 3,130 $ (579) $ 1,695 $ 5,246
(unaudited) ===== ======== ======== ======== ========
Balance at December 31, 1994 ........... 7,000 $ 3,130 $ (504) $ 629 $ 4,255
Change in unrealized loss on ........... -- -- 459 -- 459
investments, net of deferred taxes
Net income ............................. -- -- -- 4,821 4,821
-------- -------- -------- -------- --------
Balance at December 31, 1995 ........... 7,000 3,130 (45) 5,450 9,535
Change in unrealized loss on
investments, net of deferred taxes
(unaudited) ................. -- -- (83) -- (83)
Net income (unaudited) ................. -- -- -- 1,586 1,586
-------- -------- -------- -------- --------
Balance at March 31, 1996 (unaudited) .. 7,000 $ 3,130 $ (128) $ 7,036 $ 11,038
===== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
Consolidated Statements of Cash Flows for the years ended December 31, 1993,1994
and 1995 and the three months ended March 31, 1995 and 1996 (in thousands)
<TABLE>
<CAPTION>
Three months
Years ended December 31, ended March 31,
---------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- ---------- ---------- --------- ---------
Cash flows from operating activities:
<S> <C> <C> <C> <C> <C>
Net income (loss) ................................... $ (323) $ 2,117 $ 4,821 $ 1,066 $ 1,586
Adjustments to reconcile net income
(loss) to net cash provided from
(used in) operations:
Minority interest .............................. (51) (14) -- (3) --
Depreciation and amortization .................. 913 690 742 155 143
Deferred income tax expense .................... (562) (1,180) 344 (77) 63
(benefit)
Net realized capital loss ...................... 119 159 344 45 36
Net changes in operating assets and liabilities:
Receivables ................................ (6,965) (9,057) 6,462 (4,968) (7,390)
Reinsurance recoverable on paid
and unpaid losses, net ..................... (18,681) 25,130 (41,250) 3,331 (5,435)
Prepaid reinsurance premiums ............... (14) (3,343) 725 (3,034) (18,444)
Federal income taxes ....................... (890) 759 325 592 331
recoverable (payable)
Deferred policy acquisition costs .......... (249) (727) (900) (199) (706)
Other assets ............................... (409) 98 1,019 2,296 1,037
Losses and loss adjustment
expenses .............................. 15,527 (2,874) 30,152 (3,509) (9,412)
Unearned premiums .......................... 346 6,356 3,081 4,683 23,387
Reinsurance payables ........................ (7,464) 1,982 2,133 2,797 16,675
Other liabilities .......................... (2,788) (1,398) 1,656 865 (1,085)
-------- -------- -------- -------- --------
Net cash provided from (used
in) operations ........................ (7,561) (3,302) (9,654) 4,040 786
-------- -------- -------- -------- --------
Cash flow provided from (used in) investing activities:
Net (purchases) sales of short-term
investments .................................... 2,194 (308) (4,493) (1,038) 4,348
Purchases of fixed maturities ....................... (7,855) (7,587) (12,517) (1,753) (5,069)
Proceeds from sales, calls and
maturities of fixed maturities ................. 11,702 8,460 8,603 2,321 6,457
Proceeds from sales of equity
securities ..................................... 18,393 10,510 29,599 7,237 2,370
Purchase of equity securities ....................... (17,729) (10,122) (28,173) (8,642) (9,768)
Proceeds from the sale of real ...................... -- 1,166 -- -- --
estate
Purchase of real estate ............................. (730) (1) -- -- --
Purchases of mortgage loans ......................... -- (50) (100) -- --
Proceeds from repayment of .......................... -- 60 120 30 230
mortgage loans
Purchase of property and equipment .................. (509) (655) (1,874) (537) (522)
-------- -------- -------- -------- --------
Net cash provided from (used
in) investing activities .............. 5,466 1,473 (8,835) (2,382) (1,954)
-------- -------- -------- -------- --------
Cash flow provided from (used in) financing activities:
Proceeds from additional paid-in .................... 1,600 -- -- -- --
capital
Proceeds from line of credit and
notes payable ....................................... 4,000 26,900 1,620 -- 250
Payments on line of credit and notes
payable ............................................. (5,800) (26,459) (1,250) (1,797) (5,811)
Repayments from related parties ..................... 1,188 711 44 93 4,418
Loans from related parties .......................... 344 425 1,036 189 --
-------- -------- -------- -------- --------
Net cash provided from (used
in) financing activities .............. 1,332 1,577 1,450 (1,515) (1,143)
-------- -------- -------- -------- --------
Increase (decrease) in cash and
cash equivalents ...................... (763) (252) 143 2,269 (2,311)
Cash and cash equivalents, beginning of year .............. 1,057 294 42 42 2,311
-------- -------- -------- -------- --------
Cash and cash equivalents, end of year .................... $ 294 $ 42 $ 2,311 $ 185 $ --
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
Symons International Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1.Nature of Operations and Significant Accounting Policies:
Symons International Group, Inc. (the "Company") is a wholly owned subsidiary of
Goran Capital, Inc. ("Goran"), a Canadian insurance holding company. The Company
is primarily involved in the sale of personal nonstandard automobile insurance
and crop insurance. Nonstandard automobile represents approximately 51% of the
Company's volume. The Company's products are marketed through independent agents
and brokers, within a 31 state area, primarily in the Midwest and Southern
United States.
The following is a description of the significant accounting policies and
practices employed:
a. Principles of Consolidation: The consolidated financial statements include
the accounts, after intercompany eliminations, of the Company and its
wholly owned subsidiaries as follows:
o Pafco General Insurance Company ("PGIC")--an insurance company
domiciled in Indiana;
o IGF Insurance Company ("IGF")--an insurance company domiciled in
Indiana;
o Pafco Premium Finance Company--an Indiana-based premium finance
company;
o Hail Plus Corp.--an Iowa-based premium finance company; and
o Symons International Group, Inc. of Ft. Lauderdale, Florida
("SIG-FL")--a managing general insurance agency.
In 1995, PGIC acquired the remaining 1.2%, or 28,335 shares, of voting
interest IGF common stock for $56,670.
b. Basis of Presentation: The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles
("GAAP") which differ from statutory accounting practices ("SAP")
prescribed or permitted for insurance companies by regulatory authorities
in the following respects:
o Certain assets are included in the balance sheet that are excluded as
"Nonadmitted Assets" under statutory accounting.
o Costs incurred by the Company relating to the acquisition of new
business which are expensed for statutory purposes are deferred and
amortized on a straight-line basis over the term of the related
policies. Commissions allowed by reinsurers on business ceded are
deferred and amortized with policy acquisition costs.
o The investment in wholly owned subsidiaries is consolidated for GAAP
rather than valued on the statutory equity method. The net income or
loss and changes in unassigned surplus of the subsidiaries is
reflected in net income for the period rather than recorded directly
to unassigned surplus.
F-7
<PAGE>
Notes to Consolidated Financial Statements, Continued
1. Nature of Operations and Significant Accounting Policies, continued:
o Investments in bonds are designated at purchase as held to
maturity, trading, or available for sale. Held-to-maturity fixed
maturity investments are reported at amortized cost, and the
remaining fixed maturity investments are reported at fair value
with unrealized holding gains and losses reported in operations
for those designated as trading and as a separate component of
stockholder's equity for those designated as available for sale.
All securities have been designated as available for sale. For
SAP, such fixed maturity investments would be reported at
amortized cost or market value based on their NAIC rating.
o The liability for losses and loss adjustment expenses and
unearned premium reserves are recorded net of their reinsured
amounts for statutory accounting purposes.
o Deferred income taxes are not recognized on a statutory basis.
o Credits for reinsurance are recorded only to the extent
considered realizable. Under SAP, credit for reinsurance ceded
are allowed to the extent the reinsurers meet the statutory
requirements of the Insurance Department of the State of Indiana,
principally statutory solvency.
Net income and capital and surplus for PGIC and IGF reported on the
statutory accounting basis is as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1993 1994 1995
---------------- --------------- -----------------
Capital and surplus:
<S> <C> <C> <C>
PGIC $ 8,132 $ 7,848 $ 11,875
IGF 2,789 4,512 9,219
Years Ended December 31,
----------------------------------------------------------
1993 1994 1995
---------------- --------------- -----------------
Net income (loss):
PGIC $ 1,943 $ (571) $ (553)
IGF (3,020) 1,511 6,574
</TABLE>
c. Use of Estimates: The preparation of financial statements of insurance
companies requires management to make estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes. Such
estimates and assumptions could change in the future as more information
becomes known which could impact the amounts reported and disclosed herein.
d. Premiums: Premiums are recognized as income ratably over the life of the
related policies and are stated net of ceded premiums. Unearned premiums
are computed on the semimonthly pro rata basis.
F-8
<PAGE>
Notes to Consolidated Financial Statements, Continued
1. Nature of Operations and Significant Accounting Policies, continued:
e. Investments: Investments are presented on the following bases:
o Fixed maturities and equity securities--at market value--all such
securities are classified as available for sale and are carried
at market value with the unrealized gain or loss as a component
of stockholder's equity, net of deferred tax, and accordingly,
have no effect on net income.
o Real estate--at cost, less allowances for depreciation.
o Mortgage loans--at outstanding principal balance. Realized gains
and losses on sales of investments are recorded on the trade date
and are recognized in net income on the specific identification
basis. Interest and dividend income are recognized as earned.
f. Cash and Cash Equivalents: For purposes of the statement of cash
flows, the Company includes in cash and cash equivalents all cash on
hand and demand deposits with original maturities of three months or
less.
g. Deferred Policy Acquisition Costs: Deferred policy acquisition costs
are comprised of agents' commissions, premium taxes and certain other
costs which are related directly to the acquisition of new and renewal
business, net of expense allowances received in connection with
reinsurance ceded, which have been accounted for as a reduction of the
related policy acquisition costs and are deferred and amortized
accordingly. These costs, to the extent that they are considered
recoverable, are deferred and amortized over the terms of the policies
to which they relate.
h. Property and Equipment: Property and equipment are recorded at cost.
Depreciation for buildings is based on the straight-line method over
31.5 years and the declining balance method for other property and
equipment over their estimated useful lives ranging from five to seven
years. Asset and accumulated depreciation accounts are relieved for
dispositions, with resulting gains or losses reflected in net income.
i. Losses and Loss Adjustment Expenses: Reserves for losses and loss
adjustment expenses include estimates for reported unpaid losses and
loss adjustment expenses and for estimated losses incurred but not
reported. These reserves have not been discounted. The Company's
losses and loss adjustment expense reserves include an aggregate
stop-loss program. The Company retains an independent actuarial firm
to estimate reserves. Reserves are established using individual
case-basis valuations and statistical analysis as claims are reported.
Those estimates are subject to the effects of trends in loss severity
and frequency. While management believes the reserves are adequate,
the provisions for losses and loss adjustment expenses are necessarily
based on estimates and are subject to considerable variability.
Changes in the estimated reserves are charged or credited to
operations as additional information on the estimated amount of a
claim becomes known during the course of its settlement. The reserves
for losses and loss adjustment expenses are reported net of the
receivables for salvage and subrogation of approximately $795,000 and
$948,000, at December 31, 1994 and 1995, respectively.
F-9
<PAGE>
Notes to Consolidated Financial Statements, Continued
1. Nature of Operations and Significant Accounting Policies, continued:
j. Income Taxes: During January 1992, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes. The Company adopted SFAS No. 109 for
the year ended December 31, 1993. The Statement adopts the liability
method of accounting for deferred income taxes. Under the liability
method, companies will establish a deferred tax liability or asset for
the future tax effects of temporary differences between book and
taxable income. Changes in future tax rates will result in immediate
adjustments to deferred taxes. (See Note 8.) Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
k. Reinsurance: Reinsurance premiums, commissions, expense
reimbursements, and reserves related to reinsured business are
accounted for on bases consistent with those used in accounting for
the original policies and the terms of the reinsurance contracts.
Premiums ceded to other companies have been reported as a reduction of
premium income.
l. Accounting Changes: On January 1, 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities,
("Statement 115"). In accordance with Statement 115, prior period
financial statements have not been restated to reflect the change in
accounting principle. The cumulative effect as of January 1, 1994 of
adopting Statement 115 has no effect on net income. The effect of this
change in accounting principle was an increase to stockholder's equity
of approximately $139,000, net of deferred taxes of approximately
$73,000, of net unrealized gains on fixed maturities classified as
available for sale that were previously carried at amortized cost.
m. Recently Issued Accounting Pronouncements: In March 1995, SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, was issued. SFAS No. 121 requires
that long-lived assets to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. This
Statement is effective for financial statements for fiscal years
beginning after December 31, 1995. The Company intends to adopt SFAS
No. 121 in 1996. Based upon management's review and analysis, adoption
of SFAS No. 121 is not expected to have a material impact on the
Company's results
F-10
<PAGE>
Notes to Consolidated Financial Statements, Continued
1. Nature of Operations and Significant Accounting Policies, continued:
In December 1995, SFAS No. 123, Accounting for Stock-Based Compensation,
was issued. It introduces the use of a fair-value-based method of accounting for
stock-based compensation. It encourages, but does not require, companies to
recognize compensation expense for stock-based compensation to employees based
on the new fair value accounting rules. Companies that choose not to adopt the
new rules will continue to apply the existing accounting rules contained in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. However, SFAS No. 123 requires companies that choose not to adopt the
new fair value accounting rules to disclose pro forma net income and earnings
per share under the new method. SFAS No. 123 is effective for financial
statements for fiscal years beginning after December 15, 1995.
On May 1, 1996, GGS Management Holdings, Inc., a recently formed
subsidiary of the Company, adopted a stock option plan. The purpose of the plan
is to provide an incentive to the officers and employees based on the success of
the Company's business enterprises. The Company has not yet quantified the
impact on the adoption of SFAS No. 123.
n. Vulnerability from Concentration: At December 31, 1995, the Company
did not have a material concentration of financial instruments in an
industry or geographic location. Also at December 31, 1995, the
Company did not have a concentration of (1) business transactions with
a particular customer, lender or distributor, (2) revenues from a
particular product or service, (3) sources of supply of labor or
services used in the business, or (4) a market or geographic area in
which business is conducted that makes it vulnerable to an event that
is at least reasonably possible to occur in the near term and which
could cause a serious impact to the Company's financial condition.
o. Earnings Per Share: The Company's net income per share calculations
are based upon the weighted average number of shares of common stock
outstanding during each period, as restated for the 7,000-for-1 stock
split.
p. Unaudited Interim Financial Statements: The consolidated financial
statements for the three months ended March 31, 1995 and March 31,
1996 have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. These statements are unaudited
but, in the opinion of management, include all adjustments (consisting
only of normal recurring adjustments and accruals) necessary for a
fair presentation of the financial information set forth herein. The
operating results for the three months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 1996.
F-11
<PAGE>
2. Investments:
Investments are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Cost or Estimated
December 31, 1994 Amortized Unrealized Market
Cost Gain Loss Value
---- ---- ---- -----
Fixed maturities:
U.S. Treasury securities and obligations of
<S> <C> <C> <C> <C>
U.S. government corporations and agencies . $ 6,956 $ 12 $ (169) $ 6,799
Obligations of states and political ....... 311 -- -- 311
subdivisions
Corporate securities ...................... 1,779 -- (28) 1,751
------- ------- ------- -------
Total fixed maturities ................ 9,046 12 (197) 8,861
------- ------- ------- -------
Equity securities:
Preferred stocks .......................... 1,502 -- (11) 1,491
Common stocks ............................. 4,501 234 (802) 3,933
------- ------- ------- -------
6,003 234 (813) 5,424
------- ------- ------- -------
Short-term investments .......................... 790 -- -- 790
Real estate ..................................... 507 -- -- 507
Mortgage loan ................................... 2,940 -- -- 2,940
Other loans ..................................... 50 -- -- 50
------- ------- ------- -------
Total investments ..................... $19,336 $ 246 $(1,010) $18,572
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
Fixed maturities:
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies . $10,978 $ 63 $ (1) $11,040
Obligations of states and political ....... 1,470 57 (1) 1,526
subdivisions
Corporate securities ...................... 364 1 -- 365
------- ------- ------- -------
Total fixed maturities ................ 12,812 121 (2) 12,931
------- ------- ------- -------
Equity securities:
Preferred stocks .......................... 100 1 (4) 97
Common stocks ............................. 4,318 108 (292) 4,134
------- ------- ------- -------
4,418 109 (296) 4,231
------- ------- ------- -------
Short-term investments .......................... 5,283 -- -- 5,283
Real estate ..................................... 487 -- -- 487
Mortgage loans .................................. 2,920 -- -- 2,920
Other loans ..................................... 50 -- -- 50
------- ------- ------- -------
Total investments ..................... $25,970 $ 230 $ (298) $25,902
======= ======= ======= =======
</TABLE>
F-12
2. Investments, continued:
At December 31, 1995 67.67% (remainder were not rated) of the Company's fixed
maturities were considered investment grade by The Standard & Poors Corporation
or Moody's Investor Services, Inc., and 64.97% were rated at least AA by those
agencies. Securities with quality ratings Baa and above are considered
investment grade securities. In addition, the Company's investments in fixed
maturities did not contain any significant geographic or industry concentration
of credit risk.
The amortized cost and estimated market value of fixed maturities by contractual
maturity, are shown in the table which follows. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without penalty (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1994 1995
--------------------------- ---------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
Maturity:
<S> <C> <C> <C> <C>
Due in one year or less .............. $ 1,569 $ 1,573 $ 4,609 $ 4,610
Due after one year through five years 4,181 4,074 4,988 5,051
Due after five years through ten years 1,807 1,724 3,215 3,270
Due after ten years .................. 1,489 1,490 -- --
------- ------- ------- -------
Total ........................... $ 9,046 $ 8,861 $12,812 $12,931
======= ======= ======= =======
</TABLE>
Gains and losses realized on sales of investments in fixed maturities are as
follows (dollars in thousands):
Years ended December 31,
----------------------------
1993 1994 1995
------ -----------------
Proceeds from sales $6,630 $4,083 $7,903
Gross gains realized 132 119 106
Gross losses realized 91 29 291
Real estate is reported net of accumulated depreciation of approximately
$131,000 and $143,000 for December 31, 1994 and 1995, respectively.
F-13
<PAGE>
Notes to Consolidated Financial Statements, Continued
2.Investments, continued:
Investments in a single issuer greater than 10% of shareholder's equity at
December 31, 1995 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------------------------------------
Fixed Equity Mortgage Short-term Total
Maturities Securities Loans Investments Investments
---------- ---------- ----- ----------- -----------
Description
United States Treasury
<S> <C> <C> <C> <C> <C>
Notes........................ $ 3,126 $ -- $ -- $ -- $ 3,126
Federal Home Loan Bank ...... 4,116 -- -- -- 4,116
Federal National Mortgage
Association.................. 3,018 -- -- -- 3,018
Federal Government
Obligation Fd 395 ........... -- 1,556 -- -- 1,556
United States Treasury Bill.. -- -- -- 2,666 2,666
Dreyfus Treasury
Cash Management............ -- -- -- 1,242 1,242
Comfort Inn ................. -- -- 2,820 -- 2,820
------- ------- ------- ------- -------
$10,260 $ 1,556 $ 2,820 $ 3,908 $18,544
======= ======= ======= ======= =======
</TABLE>
An analysis of net investment income follows (dollars in thousands):
Year Ended December 31,
------------------------------------
1993 1994 1995
--------- --------- ----------
Fixed maturities .............. $ 745 $ 470 $ 534
Equity securities ............. 362 677 256
Cash and short-term
investments............... 78 99 194
Real estate ................... 558 273 52
Mortgage loans ................ 2 132 231
Other ......................... 322 96 270
------- ------- -------
Total investment income..... 2,067 1,747 1,537
Investment expenses ........... (578) (506) (364)
------- ------- -------
Net investment income ... $ 1,489 $ 1,241 $ 1,173
======= ======= =======
F-14
<PAGE>
Notes to Consolidated Financial Statements, Continued
2. Investments, continued:
In 1992, PGIC acquired a hotel property through a deed in lieu of
foreclosure on a mortgage it held in the amount of approximately
$2,985,000. In 1993, the property was renovated and changed to a Comfort
Inn. In June 1994, the property was sold for net proceeds of approximately
$4,166,000, resulting in a gain on sale of approximately $147,000. Upon the
sale, PGIC issued an 8% mortgage loan due in the year 2001 in the amount of
approximately $3,000,000. It calls for monthly principal payments of
approximately $10,000 plus interest. All payments on the mortgage were
current at December 31, 1995.
In 1995 a note with a balance outstanding of approximately $40,000 at
December 31, 1994 was repaid in full. The note was guaranteed by a foreign
corporation, which is 50% owned by a related party. The loan bore interest
at 10% per annum and was repayable at approximately $10,000 per month plus
interest. Investments with a market value of approximately $6,180,000 and
$6,410,000 (amortized cost of approximately $6,245,000 and $6,296,000) as
of December 31, 1994 and 1995, respectively, were on deposit in the United
States and Canada. The deposits are required by law to support certain
reinsurance contracts, performance bonds and outstanding loss reserves on
assumed business.
Fixed maturities and short-term investments with a market value of
approximately $1,636,000 (amortized cost of approximately $1,619,000) as of
December 31, 1995 were pledged as collateral on the unused letter of credit
of approximately $1,500,000 issued to a ceding reinsurer.
3. Deferred Policy Acquisition Costs:
Policy acquisition costs are capitalized and amortized over the life of the
policies. Policy acquisition costs are those costs directly related to the
issuance of insurance policies including commissions and underwriting expenses
net of reinsurance commission income on such policies. Policy acquisition costs
deferred and the related amortization charged to income were as follows (dollars
in thousands):
December 31,
------------------------------------
1993 1994 1995
----------- --------- --------
Balance, beginning of year $ 503 $ 752 $ 1,479
Costs deferred during year 9,211 5,579 8,050
Amortization during year . (8,962) (4,852) (7,150)
------- ------- -------
Balance, end of year ..... $ 752 $ 1,479 $ 2,379
======= ======= =======
F-15
<PAGE>
Notes to Consolidated Financial Statements, Continued
4.Property and Equipment:
Property and equipment at are summarized as follows (dollars in thousands):
December 31,
----------------------------------------------
1994 1995 Accumulated 1995
Net Cost Depreciation Net
-------- -------- --------- -------
Land ......................... $ 226 $ 226 $ -- $ 226
Buildings .................... 3,180 4,006 (797) 3,209
Office furniture and equipment 229 1,256 (646) 610
Automobiles .................. 2 5 (4) 1
Computer equipment ........... 599 2,235 (779) 1,456
------- ------- ------- -------
$ 4,236 $ 7,728 $(2,226) $ 5,502
======= ======= ======= =======
Accumulated depreciation at December 31, 1994 was approximately $1,589,000.
Depreciation expense related to property and equipment for the years ended
December 31, 1993, 1994 and 1995 were approximately $294,000, $374,000, and
$637,000, respectively.
5. Other Assets:
Included in other assets in the accompanying Consolidated Balance Sheets are
intangible assets composed of goodwill of approximately $150,000 at December 31,
1994. Goodwill was amortized on a straight-line basis over a two- to five-year
period. Amortization of intangible assets were approximately $439,000, $178,000,
and $150,000 in 1993, 1994 and 1995, respectively.
6. Line of Credit and Notes Payable:
Line of credit and notes payable consists of the following (dollars in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------
1994 1995
-------------- --------------
<S> <C> <C>
Term loan note, bank, due in quarterly
installments of $500 commencing
June 30, 1993, plus interest at
prime plus 2% 10.5% at December 31, 1994),
maturing June 30, 1995. $ 1,000 $ --
Revolving line of credit, not to exceed
$6,000, due May 15, 1996.
Interest payable monthly at prime
plus 0.5% (9% and 9.5% at December
31, 1995 and 1994, respectively).
See below for collateralization and
restrictive covenants. 4,191 5,811
Promissory note, maturing July 1, 1996,
at prime plus 1% (9.5% at December 31, 1994). 250 --
----------- -------
$ 5,441 $ 5,811
=========== =======
</TABLE>
F-16
<PAGE>
6. Line of Credit and Notes Payable, continued:
At December 31, 1995, IGF maintained a revolving bank line of credit in the
amount of $6,000,000. At December 31, 1995, the outstanding balance was
approximately $5,811,000. Interest on this line of credit was at the bank's
prime rate (8.5% at December 31, 1995) plus 0.5% adjusted daily. This line is
collateralized by the crop-related uncollected premiums, reinsurance recoverable
on paid losses, Federal Crop Insurance Corporation ("FCIC") annual settlement
and FCIC premium tax recoverable, and a first lien on the real estate owned by
IGF. The line requires IGF to maintain its primary banking relationship with the
issuing bank, limits dividend payments and capital purchases and requires the
maintenance of certain financial ratios. At December 31, 1995, IGF was in
compliance with or had obtained waivers for all covenants associated with the
line.
In May 1996, IGF renewed its line of credit with the same bank expiring in June
1997. The new facility is in the amount of $7,000,000 and bears an interest rate
of .25% above the New York prime rate. The weighted average interest rate on the
line of credit was 6.0%, 8.1%, and 9.7% during December 31, 1993, 1994 and 1995,
respectively.
7. Unpaid Losses and Loss Adjustment Expenses:
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows (dollars in thousands):
Years Ended December 31,
--------------------------------
1993 1994 1995
------- ------- ---------
Balance at January 1 ................ $30,924 $54,143 $29,269
Less reinsurance recoverables ....... 11,643 36,891 12,542
------- ------- -------
Net balance at January 1 . 19,281 17,252 16,727
------- ------- -------
Incurred related to:
Current year .................. 23,931 26,268 35,184
Prior years ................... 1,149 202 787
------- ------- -------
Total incurred ........... 25,080 26,470 35,971
------- ------- -------
Paid related to:
Current year .................. 14,877 16,647 21,057
Prior years ................... 12,232 10,348 10,018
------- ------- -------
Total paid ............... 27,109 26,995 31,075
------- ------- -------
Net balance at December 31 17,252 16,727 21,623
Plus reinsurance recoverables ....... 36,891 12,542 37,798
------- ------- -------
Balance at December 31 .............. $54,143 $29,269 $59,421
======= ======= =======
F-17
<PAGE>
7. Unpaid Losses and Loss Adjustment Expenses, continued:
The foregoing reconciliation shows that deficiencies of approximately
$1,149,000, $202,000, and $787,000 in the December 31, 1992, 1993, and 1994
liability for losses and loss adjustment expenses, respectively, emerged in the
following year. These deficiencies resulted from higher than anticipated losses
resulting from a change in settlement costs relating to those estimates.
The anticipated effect of inflation is implicitly considered when estimating
liabilities for losses and LAE. While anticipated price increases due to
inflation are considered in estimating the ultimate claim costs, the increase in
average severities of claims is caused by a number of factors that vary with the
individual type of policy written. Future average severities are projected based
on historical trends adjusted for implemented changes in underwriting standards,
policy provisions, and general economic trends. Those anticipated trends are
monitored based on actual development and are modified if necessary.
Liabilities for loss and loss adjustment expenses have been established when
sufficient information has been developed to indicate the involvement of a
specific insurance policy. In addition, a liability has been established to
cover additional exposure on both known and unasserted claims. These liabilities
are reviewed and updated continually.
8. Income Taxes:
The Company files a consolidated federal income tax return with its
subsidiaries. An intercompany tax sharing agreement between the Company and its
subsidiaries provides that income taxes will be allocated based upon separate
return calculations in accordance with the Internal Revenue Code of 1986, as
amended. Intercompany tax payments are remitted at such times as estimated taxes
would be required to be made to the Internal Revenue Service.
A reconciliation of the differences between federal tax computed by applying the
federal statutory rate of 34% to income before income taxes and the income tax
provision is as follows (dollars in thousands):
Years Ended
December 31,
----------------------------------
1993 1994 1995
---- ---- ----
Computed income taxes at statutory rate $ (444) $ 468 $ 2,531
Dividends received deduction .......... (25) (30) (54)
Tax-exempt interest ................... (37) (36) (32)
Change in valuation allowance ......... 696 (1,492) (237)
Other ................................. (107) 372 411
------- ------- -------
Income taxes .................... $ 83 $ (718) $ 2,619
======= ======= =======
State income taxes for the years ended December 31, 1993, 1994 and 1995 and for
the three months ended March 31, 1995 and 1996 are not significant. Therefore,
state income taxes have been recorded in general and administrative expenses and
not as part of income taxes.
F-18
<PAGE>
Notes to Consolidated Financial Statements, Continued
8. Income Taxes, continued:
As described in Note 1, the Company adopted SFAS No. 109 effective in 1993. The
effect on years prior to 1993 of changing to this method was approximately
$1,175,000 and is reflected in the Consolidated Statement of Operations as the
cumulative effect of a change in accounting principle. The current or deferred
tax consequences of a transaction are measured by applying the provisions of
enacted tax laws to determine the amount of taxes payable currently or in future
years. The method of accounting for income taxes prior to SFAS No. 109 provided
that deferred taxes, once recorded, were not adjusted for changes in tax rates.
The net deferred tax asset is comprised of the following (dollars in thousands):
December 31,
---------------------
1994 1995
--------- --------
Deferred tax assets:
Unpaid losses and loss adjustment expenses $ 750 $ 422
Unearned premiums 505 764
Allowance for doubtful accounts 411 315
Unrealized losses on investments 260 23
Net operating loss carryforwards 595 457
Other 374 411
------- -------
2,895 2,392
Valuation allowance 260 23
------- -------
Net deferred tax asset 2,635 2,369
------- -------
Deferred tax liabilities:
Deferred policy acquisition costs (503) (809)
Other (130) (139)
------- -------
(633) (948)
------- -------
Net deferred tax asset $ 2,002 $ 1,421
======= =======
The Company is required to establish a "valuation allowance" for any portion of
its deferred tax assets which is unlikely to be realized. At December 31, 1994
and 1995, approximately $260,000 and $23,000 respectively, of deferred tax
assets relating to net unrealized capital losses on fixed maturity and equity
securities available for sale were available to be recorded in shareholder's
equity before considering a valuation allowance. For federal income tax
purposes, capital losses may be used only to offset capital gains in the current
year or during a three-year carryback and five-year carryforward period. Due to
these restrictions, and the uncertainty at that time of future capital gains,
these deferred tax assets were fully offset in 1994 and 1995 by a valuation
allowance of approximately $260,000 and $23,000, respectively. No additional
valuation allowance was established as of December 31, 1994 or 1995 on the
remaining deferred tax assets, since management believes it is more likely than
not that the Company will realize the benefit of its deferred tax assets. During
1994, as a result of the Company's improved operations, the valuation allowance
related to the net operating loss carryforwards was reduced. Management
considers primarily the scheduled reversal of deferred tax liabilities and
carryback provisions in making this assessment.
F-18
<PAGE>
Notes to Consolidated Financial Statements, Continued
8.Income Taxes, continued:
As of December 31, 1995, the Company has unused net operating loss carryovers
available as follows (dollars in thousands):
Amount
---------------
Years ending not later than December 31:
2000 $ 1,217
2002 126
---------------
Total $ 1,343
==============
Federal income tax attributed to the Company has been examined through 1993. In
the opinion of management, the Company has adequately provided for the possible
effects of future assessments related to prior years.
9. Reinsurance:
The Company limits the maximum net loss that can arise from a large risk, or
risks in concentrated areas of exposure, by reinsuring (ceding) certain levels
of risks with other insurers or reinsurers, either on an automatic basis under
general reinsurance contracts known as "treaties" or by negotiation on
substantial individual risks. Such reinsurance includes quota share, excess of
loss, stop-loss and other forms of reinsurance on essentially all property and
casualty lines of insurance. In addition, the Company assumes reinsurance on
certain risks. The Company remains contingently liable with respect to
reinsurance, which would become an ultimate liability of the Company in the
event that such reinsuring companies might be unable, at some later date, to
meet their obligations under the reinsurance agreements.
Approximately 77% of amounts recoverable from reinsurers are with the FCIC, a
branch of the federal government. Another 12% of uncollateralized recoverable
amounts are with a company which maintains an A.M. Best rating of A+. Company
management believes amounts recoverable from reinsurers are collectible.
Amounts recoverable from reinsurers relating to unpaid losses and loss
adjustment expenses were approximately $36,891,000, $12,542,000, and
$37,798,000, as of December 31, 1993, 1994 and 1995, respectively. These amounts
are reported gross of the related reserves for unpaid losses and loss adjustment
expenses in the accompanying Consolidated Balance Sheets.
F-20
<PAGE>
Notes to Consolidated Financial Statements, Continued
9. Reinsurance, continued:
Reinsurance activity for 1993, 1994 and 1995, which includes reinsurance with
related parties, is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1993 Direct Assumed Ceded Net
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Premiums written $ 88,847 $ 89 $(57,176) $ 31,760
Premiums earned 88,506 84 (57,162) 31,428
Incurred losses and loss adjustment 106,871 4,728 (86,519) 25,080
expenses
Commission expenses (income) 15,787 149 (17,195) (1,259)
December 31, 1994
Premiums written $102,178 $ 956 $(67,995) $ 35,139
Premiums earned 96,053 1,308 (65,235) 32,126
Incurred losses and loss adjustment 57,951 1,588 (33,069) 26,470
expenses
Commission expenses (income) 19,619 48 (24,174) (4,507)
December 31, 1995
Premiums written $123,381 $ 1,253 $(71,187) $ 53,447
Premiums earned 116,860 1,256 (68,475) 49,641
Incurred losses and loss adjustment 125,382 2,839 (92,250) 35,971
expenses
Commission expenses (income) 17,177 174 (27,092) (9,741)
</TABLE>
10. Related-party Transactions:
The Company and its subsidiaries have entered into transactions with various
related parties including transactions with Goran, and its affiliates, Symons
International Group, Ltd. ("SIG Ltd."), Goran's parent, Granite Insurance
Company ("Granite"), and Granite Reinsurance Company, Ltd. ("Granite Re"),
Goran's subsidiaries.
F-21
<PAGE>
Notes to Consolidated Financial Statements, Continued
10.Related-party Transactions, continued:
The following balances were outstanding (dollars in thousands):
December 31,
------------------
1994 1995
------ ------
Investments in and advances to related parties:
Nonredeemable, nonvoting preferred stock of Granite $ 702 $ 702
Secured notes receivable from related parties 1,395 1,355
Unsecured mortgage loan from director and officer 278 278
Due from directors and officers 212 199
Other receivables from related parties 361 418
------ ------
$2,948 $2,952
====== ======
Payable to affiliates:
Loan and related interest payable to Goran $2,024 $2,232
Loan and related interest payable to Granite Re 3,218 3,733
Other payables to Goran 146 500
Other payables to related parties 2 9
------ ------
$5,390 $6,474
====== ======
The following transactions occurred with related parties (dollars in thousands):
Years Ended
December 31,
------------------------------
1993 1994 1995
------ ------ ------
Management fees charged by Goran $ 300 $ 494 $ 414
Reinsurance under various treaties, net:
Ceded premiums earned (23) (73) 5,235
Ceded losses and loss
adjustment expenses incurred 44 -- 2,612
Ceded commissions -- -- 1,142
Consulting fees charged by
various related parties 50 75 26
Interest charged by Goran 188 188 208
Dividend income from Granite Re 70 18 --
Interest charged by Granite Re 283 312 346
Included in Secured notes receivable from related parties is a note for
approximately $1,700,000 to a third-party corporation ("TPC") carrying a
principal balance with capitalized interest of approximately $1,355,000 at
December 31, 1995 and 1994. The loan is collateralized by a guarantee and a
collateral mortgage from a corporation, one-third of which is owned by an
individual who is related to the majority shareholder of SIG Ltd. The TPC loaned
the approximately $1,700,000 to SIG Ltd. The renewed promissory note is payable
on demand and bears interest at 7.8% per annum. The guarantee is collateralized
by 200,000 common shares of Goran common stock. Also included in Secured notes
receivable from related parties is a loan receivable held by PGIC in the amount
of approximately $40,000 as of December 31, 1994.
F-22
<PAGE>
Notes to Consolidated Financial Statements, Continued
10.Related-party Transactions, continued:
The unsecured mortgage loan to the Chairman and CEO of the Company was amended
in 1995 to extend the payment terms. The loan is due and payable on May 8, 1999
and bears interest at 7% per annum. Interest payments on the loan are due
monthly.
Amounts due from directors and officers of the Company bear interest at 6.11%
per annum, payable semiannually. Subsequent to year end, the rate was changed to
the 180-day treasury bill rate. Loan principal is payable on demand.
The loan payable, including accrued interest, to Goran of approximately
$2,024,000 and $2,232,000, at December 31, 1994 and 1995, respectively, bears
interest at 10% per annum. The loan plus accrued interest is payable on demand.
The balance at December 31, 1994 and 1995 includes accrued interest of
approximately $188,000 and $396,000, respectively.
During 1992, Granite Re loaned the Company approximately $2,500,000. An
additional approximately $200,000 was loaned to Granite Re in 1995. The loan
bears interest at 10% per annum and is due on demand. The balance at December
31, 1994 and 1995 includes accrued interest of approximately $718,000 and
$1,064,000, respectively.
11. Effects of Statutory Accounting Practices and Dividend Restrictions:
At December 31, 1994 and 1995, PGIC's statutory capital and surplus was
approximately $7,848,000 and $11,875,000, respectively, and IGF's statutory
capital and surplus was approximately $4,512,000 and $9,219,000, respectively.
The minimum regulatory requirement for capital and surplus is approximately
$1,250,000. The Indiana statute allows 10% of surplus as regards policyholders
or 100% of net income, whichever is greater, to be paid as dividends only from
earned surplus. Statutory requirements place limitations on the amount of funds
which can be remitted to the Company from PGIC and to PGIC from IGF.
Subsequent to Board of Directors and regulatory approval, IGF declared and paid
in December 1995 an extraordinary dividend to PGIC in the amount of $2 million
on the 2,494,000 shares of convertible preferred stock owned by PGIC. In
December 1995, upon Board of Directors of PGIC and regulatory approval, PGIC
declared and paid to the Company a $1.5 million extraordinary dividend on the
common stock owned by the Company.
F-23
<PAGE>
Notes to Consolidated Financial Statements, Continued
12.Regulatory Matters:
PGIC and IGF, domiciled in Indiana, prepare their statutory financial statements
in accordance with accounting practices prescribed or permitted by the Indiana
Department of Insurance ("IDOI"). Prescribed statutory accounting practices
include a variety of publications of the National Association of Insurance
Commissioners ("NAIC"), as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
IGF received written approval through June 30, 1996 from the IDOI to reflect its
business transacted with the FCIC as a 100% cession with any net underwriting
results recognized in ceding commissions for statutory accounting purposes,
which differs from prescribed statutory accounting practices. As of December 31,
1995, that permitted transaction had no effect on statutory surplus or net
income. The underwriting profit (loss) results of the FCIC business, net of
reinsurance, of approximately $(1,515,000), $3,257,000, and $9,653,000, are
netted with policy acquisition and general and administrative expenses for the
years ended December 31, 1993, 1994, and 1995, respectively, in the accompanying
Consolidated Statements of Operations.
During the year, IGF and PGIC entered into a reinsurance agreement in which IGF
ceded approximately $17,696,000 of multi-peril crop business to PGIC, who in
turn ceded it to the FCIC. As a matter of course, intercompany reinsurance
agreements are filed with the IDOI for their approval. IDOI approval has not yet
been received with respect to this agreement; however, management believes it
will be received in due course.
The NAIC has promulgated risk-based capital ("RBC") requirements for
property/casualty insurance companies to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks, such as asset
quality, asset and liability matching, loss reserve adequacy and other business
factors. The RBC information is used by state insurance regulators as an early
warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. In addition,
the formula defines new minimum capital standards that will supplement the
current system of fixed minimum capital and surplus requirements on a
state-by-state basis. Regulatory compliance is determined by a ratio (the
"Ratio") of the enterprise's regulatory total adjusted capital, as defined by
the NAIC, to its authorized control level RBC, as defined by the NAIC,
Generally, a Ratio in excess of 200% of authorized control level RBC requires no
corrective actions by PGIC, IGF or regulators. PGIC'S Ratio was 163% at December
31, 1995, respectively, which is at the "company action level" as defined by the
NAIC RBC model law. At this level, PGIC must submit a corrective action plan.
After the spin-off of IGF (see Note 18), PGIC's Ratio will be 342%, well above
the minimum of 200%. As of December 31, 1995, IGF had a Ratio that was in excess
of the minimum RBC requirements.
F-24
<PAGE>
Notes to Consolidated Financial Statements, Continued
13. Leases:
The Company has certain commitments under long-term operating leases,
principally for equipment. Rental expense under these commitments were
approximately $186,000, $248,000, and $297,000 for 1993, 1994 and 1995,
respectively. Future minimum lease payments required under these noncancelable
operating leases are as follows (dollars in thousands):
1996 $ 181
1997 89
1998 26
1999 8
2000 8
--------------
Total $ 312
--------------
14.Contingencies:
The Company, and its subsidiaries, are named as defendants in various lawsuits
relating to their business. Legal actions arise from claims made under insurance
policies issued by the subsidiaries. These actions were considered by the
Company in establishing its loss reserves. The Company believes that the
ultimate disposition of these lawsuits will not materially affect the Company's
operations or financial position.
IGF is responsible for the administration of a run-off book of business. FCIC
has requested that IGF take responsibility for the claim liabilities under its
administration of these policies, and IGF has requested reimbursement of certain
expenses from the FCIC with respect to this run-off activity. It is the
Company's opinion, and that of its legal counsel, that there is no material
liability on the part of the Company for claim liabilities of other companies
under IGF's administration.
The increase in number of insurance companies that are under regulatory
supervision has resulted, and is expected to continue to result, in increased
assessments by state guaranty funds to cover losses to policyholders of
insolvent or rehabilitated insurance companies. Those mandatory assessments may
be partially recovered through a reduction in future premium taxes in certain
states. The Company recognized its obligations for guaranty fund assessments
when it received notice that an amount is payable to a guaranty fund. The
ultimate amount of these assessments may differ from that which has already been
assessed.
F-25
<PAGE>
Notes to Consolidated Financial Statements, Continued
15. Supplemental Cash Flow Information:
Cash paid for interest and income taxes are summarized as follows (dollars in
thousands):
December 31,
----------------------------
1993 1994 1995
------ ------ ------
Cash paid for interest $1,217 $ 685 $ 553
Cash paid for income taxes,
net of refunds 372 166 1,953
During 1994, IGF exchanged 700,000 shares of Granite Reinsurance Company, Ltd.
stock for 9,800 shares of Granite Insurance Company stock, recording no gain or
loss. In addition, PGIC exchanged an investment in real estate for a mortgage
loan of approximately $3,000,000 plus cash of approximately $1,166,000.
16. Disclosures About Fair Values of Financial Instruments:
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of the Company's financial instruments.
Considerable judgment is required to develop these fair values and,
accordingly, the estimates shown are not necessarily indicative of the
amounts that would be realized in a one-time, current market exchange of
all of the Company's financial instruments.
a. Fixed Maturity and Equity Securities: Fair values for fixed maturity
and equity securities are based on market values obtained from the
NAIC Securities Valuation Office. Such values approximate quoted
market prices from published information.
b. Mortgage Loan: The estimated fair value of the mortgage loan on real
estate on the Comfort Inn property was established using a discounted
cash flow method based on credit rating, maturity and future income
when compared to the expected yield for mortgages having similar
characteristics. The ratings for mortgages in good standing are based
on property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment
record. Fair values for impaired mortgage loans are measured based
either on the present value of expected future cash flows discounted
at the loan's effective interest rate, at the loan's market price or
the fair value of the collateral if the loan is collateral dependent.
c. Short-term Investments, and Cash and Cash Equivalents: The carrying
value for assets classified as short-term investments, and cash and
cash equivalents in the accompanying balance sheets approximates their
fair value.
d. Short-term and Long-term Debt: Fair values for long-term debt issues
are estimated using discounted cash flow analysis based on the
Company's current incremental borrowing rate for similar types of
borrowing arrangements. In 1994, the rates on long-term debt ranged
from 9% to 9.5%, which approximates the current rate for similar types
of borrowing arrangements. For short-term debt, the carrying value
approximates fair value.
F-26
<PAGE>
Notes to Consolidated Financial Statements, Continued
16. Disclosures About Fair Values of Financial Instruments, continued:
e. Advances to Related Parties and Payables to Affiliates: It is not
practicable to determine the fair value of the advances to related
parties or the payables to affiliates as of December 31, 1995, because
these are related party obligations and no comparable fair value
measurement is available.
17. Segment Information:
The Company has two business segments: Nonstandard automobile and Crop
insurance. The Nonstandard automobile segment offers personal nonstandard
automobile coverages through a network of independent general agencies. These
products are sold throughout the Midwest by PGIC in eight states and IGF in two
states. Effective in the first quarter of 1996, all nonstandard automobile
business will be retained in PGIC (see Note 18). The Crop segment writes
Multi-peril crop insurance ("MPCI") and crop hail insurance in 31 states through
independent agencies with its primary concentration in the Midwest. Activity
which is not included in the major business segments is shown as "Corporate and
Other."
"Corporate and Other" includes operations not directly related to the business
segments and unallocated corporate items (i.e., corporate investment income,
interest expense on corporate debt and unallocated overhead expenses).
The revenue and pre-tax income by segment are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1993 1994 1995
-------- -------- --------
Revenue:
<S> <C> <C> <C>
Nonstandard automobile $ 28,733 $ 27,784 $ 36,363
Crop 4,742 4,873 12,830
Corporate and other 209 2,173 3,451
-------- -------- --------
Total revenue $ 33,684 $ 34,830 $ 52,644
======== ======== ========
Income (loss) before income taxes, discontinued
operations, cumulative effect of a change in accounting
principle, and minority interest:
Nonstandard automobile $ 5,726 $ 772 $ (1,989)
Crop (3,735) 2,152 11,040
Corporate and other (3,297) (1,549) (1,607)
-------- -------- --------
Total income (loss) from continuing operations before taxes,
discontinued operations, cumulative effect of a change in
accounting principle, and minority interest $ (1,306) $ 1,375 $ 7,444
======== ======== ========
</TABLE>
F-27
<PAGE>
18. Subsequent Events (Unaudited):
On May 1, 1996, the Company entered into an agreement ("Agreement") with GS
Capital Partners II, L.P. to create a company, GGS Management Holdings, Inc.
("GGSH") to be owned 52% by the Company and 48% owned by investment funds
associated with Goldman, Sachs & Co. ("Goldman Funds"). In accordance with the
Agreement, the Company contributed certain fixed assets and PGIC with a combined
book value, determined in accordance with generally accepted accounting
principles, of at least $15,300,000, to GGSH. If the contribution of the Company
is less than $15,300,000, Goran will be required to contribute the amount of the
deficiency in cash to GGSH. If the contribution of the Company to GGSH is more
than $15,300,000, the Company will be permitted to pay a dividend in the amount
of the excess of $15,300,000 with priority given to certain assets up to the
amount of the excess. Goldman Funds contributed approximately $21,200,000 to
GGSH, in accordance with the Agreement.
In connection with the above transactions, GGSH acquired all of the outstanding
shares of common stock of Superior Insurance Company and its wholly owned
subsidiaries, Superior American Insurance Company and Superior Guaranty
Insurance Company, insurance companies domiciled in Florida, (collectively
referred to as "Superior") for cash of approximately $66,390,650. In conjunction
with the acquisition, the Company's funding was through a senior bank facility
of approximately $48,000,000 and a cash contribution from Goldman Funds of
approximately $21,200,000. PGIC also transferred all of the outstanding shares
of IGF capital stock to the Company's newly formed subsidiary, IGF Holdings,
Inc. Although the Company believes the plan of reorganization or spin off did
not result in gain or loss, no assurance can be given that the Internal Revenue
Service will not challenge the transaction.
The contribution of PGIC common stock to GGS Holdings is being accounted for in
a manner similar to a pooling-of-interests. Accordingly, no gain or loss shall
be recognized in connection with this transaction. The purchase of Superior
shall be accounted for in accordance with the purchase method of accounting. In
April 1996, the Board of Directors declared an $11,000,000 distribution to Pafco
in the form of cash of $7,500,000 and a note payable of $3,500,000. The sale of
IGF will increase PGIC's statutory surplus by approximately $1,756,000.
Effective January 1, 1996, the Company transferred SIG-FL to Goran at its net
book value. At December 31, 1995, the net book value of SIG-FL was approximately
$2,000. The Company received approximately $2,000 consideration. Accordingly, no
gain or loss was recognized in 1996 on the transaction.
In July 1996, the Company expects to file an initial draft of Form S-1
Registration Statement with the Securities and Exchange Commission in
anticipation of an initial public offering ("IPO") of common stock. The Company
intends to sell up to 3,000,000 shares of newly issued common stock to the
general public. A maximum of 30% (not assuming any of the underwriters'
overallotment is exercised) of the total outstanding common shares will be sold.
After completion of the IPO, it is expected that Goran will own 70% of the total
common stock outstanding. It is uncertain at this time what the total net sale
proceeds to the Company will be from the IPO.
F-28
<PAGE>
Notes to Consolidated Financial Statements, Continued
18. Subsequent Events (Unaudited), continued:
On July 29, 1996, the Board of Directors approved an increase in the authorized
common stock of the Company from 1,000 shares to 100,000,000 shares. The common
stock remains at no par value. On July 29, 1996, the Board approved a
7,000-for-1 stock split of the Company's issued and outstanding shares. All
share and per share amounts have been restated to retroactively reflect the
stock split. On July 29, 1996, the Board of Directors authorized the issuance of
50,000,000 shares of Preferred Stock. No Shares of Preferred Stock have been
issued.
On April 29, 1996, PGIC and IGF entered into a 100% quota share reinsurance
agreement, whereby all of IGF's nonstandard automobile business from 1996 and
forward will be ceded to PGIC effective January 1, 1996.
On April 29, 1996, PGIC retroactively ceded all of its commercial business
relating to 1995 and previous years to Granite Re, with an effective date of
January 1, 1996. Amounts ceded for outstanding losses and loss adjustment
expenses and unearned premiums were approximately $3,519,000 and $2,380,000,
respectively. On this date, PGIC also entered into a 100% quota share
reinsurance agreement with Granite Re, whereby all of PGIC's commercial business
from 1996 and forward will be ceded to Granite Re effective January 1, 1996.
For purposes of disclosing the pro forma effect of the Company's ownership
interest in GGSH, the Company has reflected GGSH as a consolidated entity of the
Company. There can be no assurance, however, that the Company will consolidate
GGSH into the historical consolidated financial statements of the Company in
future periods, as the Company has not yet determined the impact of this
transaction.
Assuming that the above transactions took place (excluding the IPO) at December
31, 1995, the pro forma effect on selected accounts on the Company's
consolidated balance sheet is as follows (dollars in thousands):
December 31,
1995
----------------------
(unaudited)
Total invested assets and cash $ 155,758
Total assets 320,774
Total liabilities 309,736
Total stockholders' equity 11,038
Assuming that these transactions took place (excluding the IPO) at January 1,
1995 or at January 1, 1996, the pro forma effect of these transactions on the
Company's consolidated statement of operations is as follows:
December 31, March 31,
1995 1996
------------------- -----------------
(unaudited)
Revenues $ 160,179 $ 47,322
Net income 5,640 2,295
Net income per common share 0.81 0.33
The pro forma results are not necessarily indicative of what actually would have
occurred if these transactions had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results.
F-29
<PAGE>
Report of Independent Accountants
Board of Directors and Stockholders of
Superior Insurance Company, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Superior
Insurance Company, Inc. and Subsidiaries as of December 31, 1994 and 1995, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Superior Insurance Company, Inc. and Subsidiaries as of December 31, 1994 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board's Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities in 1993.
As discussed in Notes 1 and 6 to the consolidated financial statements, the
Company adopted Financial Accounting Standards Board's Statement No. 109
Accounting for Income Taxes during the year ended December 31, 1993.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
June 14, 1996
F-30
<PAGE>
Superior Insurance Company, Inc. and Subsidiaries
Consolidated Balance Sheets
as of December 31, 1994 and 1995 and March 31, 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, March 31,
--------------------------------
ASSETS 1994 1995 1996
-------------- -------------- ----------
Assets: (unaudited)
Investments:
Available for sale:
<S> <C> <C> <C>
Fixed maturities, at market $93,860 $99,556 $101,013
Equity securities, at market 7,140 8,070 8,639
Short-term investments, at amortized cost, 5,538 8,462 10,852
which approximates market
Other investment, at cost 808 274 274
Cash and cash equivalents 11 1,430 108
Receivables (net of allowance for doubtful
accounts of $310 and
$500 at December 31, 1994 and 1995,
respectively, and $500 (unaudited) at 31,425 30,209 31,543
March 31, 1996)
Reinsurance recoverable on unpaid losses 1,099 987 987
Federal income tax receivable 3521 - -
Accrued investment income 1,888 1,602 1,979
Deferred policy acquisition costs 9,004 7,574 7,853
Deferred income taxes 3,785 44 1,309
Property and equipment 357 697 654
Other assets 3,428 1,225 1,165
-------- -------- --------
Total assets $161,864 $160,130 $166,376
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses $54,577 $47,112 $45,700
Unearned premiums 44,593 41,048 44,516
Draft payables 6,509 6,070 6,680
Accrued expenses 4,307 4,107 5,542
Federal income tax payable - 177 1,185
-------- -------- --------
Total liabilities
109,986 98,514 103,623
-------- -------- --------
Stockholders' equity:
Common stock, $100 par value, 30,000 3,000 3,000 3,000
shares authorized, issued and outstanding
outstanding
Additional paid-in capital 37,025 37,025 37,025
Unrealized (loss) gain on investments, net of
deferred tax (benefit) expense of
$(412) in 1994, $2,605 in 1995 and $1,702 (765) 4,838 3,161
(unaudited) at March 31, 1996
Retained earnings 12,618 16,753 19,567
-------- -------- --------
Total stockholders' equity 51,878 61,616 62,753
-------- -------- --------
Total liabilities and stockholders' equity $161,864 $160,130 $166,376
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-31
<PAGE>
Superior Insurance Company, Inc. and Subsidiaries
Consolidated Statements of Operations
for the years ended December 31, 1993, 1994 and 1995
and the three months ended March 31, 1995
and 1996
(in thousands)
<TABLE>
<CAPTION>
Years ended Three months ended
----------------------
December 31, March 31,
------------------------------------ ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross premiums written $115,660 $112,906 $94,756 $21,954 $32,289
Less ceded premiums (366) (391) (686) - (163)
--------- --------- --------- --------- ---------
Net premiums written 115,294 112,515 94,070 21,954 32,126
Change in unearned premiums 2,842 322 3,544 3,712 (3,467)
--------- --------- --------- --------- ---------
Net premiums earned 118,136 112,837 97,614 25,666 28,659
Net investment income 8,170 7,024 7,093 1,826 1,807
Other income 5,879 3,344 4,171 1,285 1,473
Net realized capital gain (loss) 3,559 (200) 1954 103 29
--------- --------- --------- --------- ---------
Total revenues 135,744 123,005 110,832 28,880 31,968
--------- --------- --------- --------- ---------
Expenses:
Losses and loss adjustment
expenses 85,902 92,378 72,343 19,364 19,511
Policy acquisition and general and
administrative expenses 36,292 38,902 32,705 8,864 8,188
--------- --------- --------- --------- ---------
Total expenses 122,194 131,280 105,048 28,228 27,699
--------- --------- --------- --------- ---------
Income (loss) before income
taxes and cumulative
effect of change in 13,550 (8,275) 5,784 652 4,269
accounting principle --------- --------- --------- --------- ---------
Income taxes:
Current income tax expense 3,207 (2,770) 925 (596) 1,817
(benefit)
Deferred income tax expense (benefit) 774 (1,030) 724 689 (362)
--------- --------- --------- --------- ---------
Total income taxes 3,981 (3,800) 1,649 93 1,455
--------- --------- --------- --------- ---------
Income (loss) before
cumulative effect of a
change in accounting 9,569 (4,475) 4,135 559 2,814
principle
Cumulative effect of a 1,389 - - - -
change in accounting principle
--------- --------- --------- --------- ---------
Net income (loss) $10,958 $(4,475) $4,135 $559 $2,814
========= ======= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-32
<PAGE>
Superior Insurance Company, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995 and
1996 (in thousands)
<TABLE>
<CAPTION>
Unrealized
Additional (Loss) Total
Common Paid-in on Retained Stockholders'
Stock Capital Investment Earnings Equity
----- ------- ---------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 1,500 $37,025 $655 $29,635 $68,815
Change in unrealized (loss)
gain on investments,
net of deferred taxes - - 3,983 - 3,983
Cash dividends paid - - - (10,000) (10,000)
Common stock dividends 1,500 - - (1,500) -
paid
Net income - - - 10,958 10,958
-------- -------- -------- -------- --------
Balance at December 31, 1993 3,000 37,025 4,638 29,093 73,756
Change in unrealized (loss)
gain on investments,
net of deferred taxes - - (5,403) - (5,403)
Cash dividends paid - - - (12,000) (12,000)
Net loss - - - (4,475) (4,475)
-------- -------- -------- -------- --------
Balance at December 31, 1994 3,000 37,025 (765) 12,618 51,878
Change in unrealized (loss)
gain on investments,
net of deferred taxes - - 2,166 - 2,166
(unaudited)
Net income (unaudited) - - - 559 559
-------- -------- -------- -------- --------
Balance at March 31, 1995 (unaudited) 3,000 $3,025 $1,401 $13,177 $54,603
===== ====== ====== ======= =======
Balance at December 31, 1994 3,000 $37,025 $(765) $12,618 $51,878
Change in unrealized (loss)
gain on investments,
net of deferred taxes - - 5,603 - 5,603
Net income - - - 4,135 4,135
-------- -------- -------- -------- --------
Balance at December 31, 1995 3,000 37,025 4,838 16,753 61,616
-------- -------- -------- -------- --------
Change in unrealized (loss)
gain on investments
net of deferred taxes - - (1,677) - (1,677)
(unaudited)
Net income (unaudited) - - - 2,814 2,814
-------- -------- -------- -------- --------
Balance at March 31, 1996 3,000 $37,025 $3,161 $19,567 $62,753
(unaudited) ====== ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
Superior Insurance Company, Inc. and Subsidiaries
Consolidated Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1995 and 1996 (in thousands)
<TABLE>
<CAPTION>
Years ended Three months ended
December 31, March 31,
----------------------------- -----------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(unaudited)
Cash flows from operating activities:
<S> <C> <C> <C> <C> <C>
Net income (loss) $10,958 $(4,475) $4,135 $559 $2,814
Adjustments to reconcile net income
to net cash provided from
(used in) operations:
Net amortization on fixed maturities 909 499 205 46 67
Depreciation of property and 128 185 214 40 64
equipment
Deferred income tax expense (615) 724 689 -
(benefit) (1,030)
Net (gain) loss on sale of fixed (3,546) 210 (1,940) (67) (29)
assets and investments
Net changes in operating assets and liabilities:
Receivables (4,052) (1,303) 1,216 4,547 (1,334)
Reinsurance recoverable on (12) - 49 18 -
unpaid losses
Accrued investment income 504 524 286 48 (377)
Federal income taxes receivable (23) 3,698 (597) 646 (4,075)
(payable)
Deferred policy acquisition costs 248 (78) 1,430 814 (279)
Other assets 89 (2,382) 2,203 4,528 60
Losses and loss adjustment
expenses (4,260) 985 (7,402) (3,323) (1,412)
Unearned premiums (2,842) (322) (3,545) (3,712) 3,468
Drafts payable
(2,091) (1,897) (439) (196) 610
Accrued expenses - 4,307 (200) (994) 1,435
--------- --------- --------- --------- ---------
Net cash provided from (used
in) operations (4,605) (8,852) 634 1,793 5,733
--------- --------- --------- --------- ---------
Cash flow from investing activities:
Net (purchases) sales of short-term 5,322 1,845 (2,924) 1,360 (2,390)
investments
Proceeds from sales, calls and
maturities of fixed maturities 9,866 77,224 58,725 17,621 17,131
Purchases of fixed maturities
(76,991) (64,678) (56,222) (21,223) (21,460)
Proceeds from sales of equity
securities 91,397 136,121 87,319 21,003 22,768
Purchase of equity securities
(92,605) (133,482) (86,663) (21,187) (23,083)
Proceeds from the sale of other - - 1,105 953 -
investments
Proceeds from sales of property and 30 33 - - -
equipment
Purchases of property and equipment (388) (198) (555) (107) (21)
--------- --------- --------- --------- ---------
Net cash provided from (used
in) investing activities 18,631 16,865 785 (1,580) (7,055)
--------- --------- --------- --------- ---------
Cash flow from financing activities:
Payment of dividends - - - (10,000) (12,000)
--------- --------- --------- --------- ---------
Net cash (used in) financing - - - (10,000) (12,000)
activities
--------- --------- --------- --------- ---------
Increase (decrease) in cash 4,026 (3,987) 1,419 213 (1,322)
and cash equivalents
Cash and cash equivalents, beginning (28) 3,998 11 11 1,430
of year
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of year $3,998 $11 $1,430 $224 $108
--------- --------- --------- --------- ---------
Supplemental cash flow information:
Cash paid for income taxes, net of refunds $3,230 $1,305 $(2,773) $0 $809
========= ========= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE>
Superior Insurance Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
1. Nature of Operations and Significant Accounting Policies:
Superior Insurance Company, Inc. ("Superior" or the "Company") was a
wholly-owned subsidiary of Interfinancial Inc. (the "Parent").
Interfinancial Inc. is a wholly-owned subsidiary of Fortis, Inc. Fortis,
Inc. is equally owned by Fortis AMEV, The Netherlands ("AMEV") and Fortis
AG, Brussels, Belgium. As further discussed in Note 14 the Company was sold
by the Parent to GGS Holdings on May 1, 1996.
The Company writes primarily private passenger automobile insurance
coverage. Approximately one-half of the Company's business is written in
the State of Florida. As such, a significant portion of agents' balances
and uncollected premiums is due from Florida policyholders.
The following is a description of the significant accounting policies and
practices employed:
Principles of Consolidation
The consolidated financial statements include the accounts, after intercompany
eliminations, of the Company and its wholly owned subsidiaries as follows:
Superior American Insurance Company ("Superior American") and Superior Guaranty
Insurance Company ("Superior Guaranty").
Basis of Presentation
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP") which differ from statutory
accounting practices ("SAP") prescribed or permitted for insurance companies by
regulatory authorities in the following respects:
o Certain assets are included in the balance sheet that are excluded as
"Nonadmitted Assets" under statutory accounting.
o Costs incurred by the Company relating to the acquisition of new
business which are expensed for statutory purposes are deferred and
amortized on a straight-line basis over the term of the related
policies. Commissions allowed by reinsurers on business ceded are
deferred and amortized with policy acquisition costs.
o The investment in wholly owned subsidiaries is consolidated for GAAP
rather than valued on the statutory equity method. The net income or
loss and changes in unassigned surplus of the subsidiaries is
reflected in net income for the period rather than recorded directly
to unassigned surplus.
F-35
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
1. Nature of Operations and Significant Accounting Policies, continued:
o Investments in bonds are designated at purchase as held to maturity,
trading, or available for sale. Held-to-maturity fixed maturity
investments are reported at amortized cost, and the remaining fixed
maturity investments are reported at fair value with unrealized
holding gains and losses reported in operations for those designated
as trading and as a separate component of stockholder's equity for
those designated as available for sale. All securities have been
designated as available for sale. For SAP, such fixed maturity
investments would be reported at amortized cost or market value based
on their NAIC rating.
o The liability for losses and loss adjustment expenses and unearned
premium reserves are recorded net of their reinsured amounts for
statutory accounting purposes.
o Deferred income taxes are not recognized on a statutory basis.
o Credits for reinsurance are recorded only to the extent considered
realizable. Under SAP, credit for reinsurance ceded are allowed to the
extent the reinsurers meet the statutory requirements of the Insurance
Department of the State of Florida, principally statutory solvency.
A reconciliation of statutory net income and capital and surplus to GAAP net
income and stockholders' equity for Superior Insurance Company is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------------------------- ------------------------- ---------------------
Capital Capital Net Capital
and Net and Income and Net
Surplus Income Surplus (Loss) Surplus Income
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Statutory balance $56,656 $10,597 $43,577 $201 $49,277 $5,639
Non-admitted assets 130 - 225 - 472 -
Investments market 5,571 - (1,988) - 5,279 -
value adjustment
Deferred acquisition 8,926 (248) 9,004 78 7,574 (1,430)
costs
Losses and loss 2,677 59 (1,600) (4,822) - 600
adjustment expense
Deferred income tax (154) 615 3,785 1,030 44 (724)
Rent rebate - - (333) (333) (277) 55
Pension and other (50) 49 (548) (479) (667) (120)
postretirement benefits
Other - (114) (244) (150) (86) 115
-------- -------- -------- -------- -------- --------
GAAP balance $73,756 $10,958 $51,878 $(4,475) $61,616 $4,135
======= ======= ======= ======= ======= ======
</TABLE>
Premiums
Premiums are recognized as income ratably over the life of the related policies
and are stated net of ceded premiums. Unearned premiums are computed on the
semimonthly pro rata basis.
F-36
<PAGE>
1. Nature of Operations and Significant Accounting Policies, continued:
Investments
During 1993, the Company adopted Financial Accounting Standards Board's
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Accordingly, invest- ments are presented on the following bases: o
Fixed maturities and equity securities - at market value - all such securities
are classified as available for sale and are carried at market value with the
unrealized gain or loss as a component of stockholder's equity.
o Short-term investments - at amortized cost, which approximates market
o Other investment - at cost
Realized gains and losses on sales of investments are recorded on the
trade date and are recognized in net income on the specific
identification basis. Other than temporary market value declines are
recognized in the period in which they are determined. Other changes in
market values of debt and equity securities are reflected as unrealized
gain or loss directly in stockholders' equity, net of deferred tax, and,
accordingly, have no effect on net income. Interest and dividend income
are recognized as earned.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company includes in cash
and cash equivalents all cash on hand and demand deposits with original
maturities of three months or less.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs are comprised of agents' commissions,
premium taxes and certain other costs which are related directly to the
acquisition of new and renewal business, net of expense allowances
received in connection with reinsurance ceded, which have been accounted
for as a reduction of the related policy acquisition costs and are
deferred and amortized accordingly. These costs, to the extent that they
are considered recoverable, are deferred and amortized over the terms of
the policies to which they relate.
Property and Equipment
Property and equipment are recorded at cost. All additions to property
and equipment made in 1995 are depreciated based on the straight-line
method over their estimated useful lives. Additions made prior to 1995
are depreciated using the declining balance method over their estimated
useful lives ranging from five to seven years. Asset and accumulated
depreciation accounts are relieved for dispositions, with resulting gains
or losses reflected in net income.
F-37
<PAGE>
Notes to Consolidated Financial Statements, Continued (Dollars in thousands)
1. Nature of Operations and Significant Accounting Policies, continued:
Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses includes estimates
for reported unpaid losses and loss adjustment expenses and for estimated
losses incurred, but not reported. This liability has not been
discounted. The Company's losses and loss adjustment expense liability
includes an aggregate stop-loss program. The Company retains an
independent actuarial firm to estimate the liability. The liability is
established using individual case-basis valuations and statistical
analysis as claims are reported. Those estimates are subject to the
effects of trends in loss severity and frequency. While management
believes the liability is adequate, the provisions for losses and loss
adjustment expenses are necessarily based on estimates and are subject to
considerable variability. Changes in the estimated liability are charged
or credited to operations as additional information on the estimated
amount of a claim becomes known during the course of its settlement. The
liability for losses and loss adjustment expenses is reported net of the
receivables for salvage and subrogation of approximately $1,622 and
$2,242 at December 31, 1995 and 1994, respectively.
Income Taxes
During January 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes. The Company adopted SFAS No. 109 during the year ended
December 31, 1993. The Statement adopts the liability method of
accounting for deferred income taxes. Under the liability method,
companies establish a deferred tax liability or asset for the future tax
effects of temporary differences between book and taxable income. Changes
in future tax rates result in immediate adjustments to deferred taxes.
(See Note 6.) Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income
tax expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
Reinsurance
Reinsurance premiums, commissions, expense reimbursements, and reserves
related to reinsured business are accounted for on bases consistent with
those used in accounting for the original policies and the terms of the
reinsurance contracts. Premiums ceded to other companies have been
reported as a reduction of premium income.
Other Income
Other income consists of finance and service fees paid by policyholders
in relation to installment billings.
F-38
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
1. Nature of Operations and Significant Accounting Policies, continued:
Recently Issued Accounting Pronouncements:
In March 1995, SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, was issued. SFAS No.
121 requires that long-lived assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
This Statement is effective for financial statements for fiscal years
beginning after December 31, 1995. The Company intends to adopt SFAS No.
121 in 1996. Based upon management's review and analysis, adoption of
SFAS No. 121 is not expected to have a material impact on the Company's
results of operations in 1996.
Vulnerability from Concentration
At December 31, 1995, the Company did not have a material concentration
of financial instruments in a single investee, industry or geographic
location. Also at December 31, 1995, the Company did not have a
concentration of (1) business transactions with a particular customer,
lender or distributor, (2) revenues from a particular product or service,
(3) sources of supply of labor or services used in the business, or (4) a
market or geographic area in which business is conducted that makes it
vulnerable to an event that is at least reasonably possible to occur in
the near term and which could cause a serious impact to the Company's
financial condition, except for the market and geographic concentration
described in the following paragraph.
The Company writes nonstandard automobile insurance primarily in
California and Florida. As a result, the Company is always at risk that
there could be significant losses arising in certain geographic areas.
The Company protects itself from such events by purchasing catastrophe
insurance.
Use of Estimates
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported
in the financial statements and accompanying notes. Such estimates and
assumptions could change in the future as more information becomes known
which could impact the amounts reported and disclosed herein.
F-39
<PAGE>
2. Investments: Investments are summarized as follows:
<TABLE>
<CAPTION>
Unrealized Estimated
Amortized ------------------------ Market
December 31, 1994 Cost Gain Loss Value
- ----------------- ---- ---- ---- -----
Fixed maturities:
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S.
government corporations and $ 25,312 $31 $(767) $24,576
Obligations of states and
political subdivisions 30,567 380 (680) 30,267
Corporate securities 39,969 292 (1,244) 39,017
--------- --------- --------- ---------
Total fixed maturities 95,848 703 (2,691) 93,860
--------- --------- --------- ---------
Equity securities:
Preferred stocks 713 32 - 745
Common stocks 5,616 1,201 (422) 6,395
--------- --------- --------- ---------
6,329 1,233 (422) 7,140
Short-term investments 5,538 - - 5,538
Other investments 808 - - 808
--------- --------- --------- ---------
Total investments $108,523 $1,936 $(3,113) $107,346
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Unrealized Estimated
Amortized ------------------------ Market
December 31, 1995 Cost Gain Loss Value
- ----------------- ---- ---- ---- -----
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Treasury securities and
obligations of U.S.
government corporations and $28,612 $1,057 $ - $29,669
agencies
Obligations of states and
political subdivisions 24,595 1,251 (15) 25,831
Corporate securities
41,070 2,988 (2) 44,056
------- ------ ----- --------
Total fixed maturities 5,296 (17) 94,277 99,556
------- ------ ----- --------
Equity securities:
Preferred stocks 713 25 - 738
Common stocks 5,193 2,370 (231) 7,332
------- ------ ----- --------
5,906 2,395 (231) 8,070
Short-term investments 8,462 - - 8,462
Other investments 274 - - 274
------- ------ ----- --------
Total investments $108,919 $7,691 $(248) $116,362
======= ====== ===== ========
</TABLE>
F-40
<PAGE>
2. Investments, continued:
The amortized cost and estimated market value of fixed maturities at
December 31, 1995 and 1994, by contractual maturity, are shown in the
table which follows. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without penalty:
<TABLE>
<CAPTION>
1994 1995
-------------------------- ---------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ----------- --------- ----------
Maturity:
<S> <C> <C> <C> <C>
Due in one year or less $5,514 $5,521 $2,508 $2,510
Due after one year through five
years 20,403 20,086 31,166 32,164
Due after five years through ten
years 33,522 32,550 33,012 35,338
Due after ten years
36,409 35,703 27,591 29,544
------- ------- ------- --------
Total $95,848 $93,860 $94,277 $ 99,556
======= ======= ======= ========
</TABLE>
Gains and losses realized on sales of investments are as follows:
1993 1994 1995
------ ------ ------
Gross gains realized on fixed matur$ $3,040 $779 $1,442
Gross losses realized on fixed maturities 95 1,270 322
Gross gains realized on equity securities 637 694 507
Gross losses realized on equity securities 28 457 256
An analysis of net investment income for the years ended December 31, 1993,
1994, and 1995 follows:
1993 1994 1995
------ ------ ------
Fixed maturities $7,939 $6,691 $6,630
Equity securities 461 538 603
Short-term investments 141 106 68
------ ------ ------
Total investment income 8,541 7,335 7,301
Investment expenses 371 311 208
------ ------ ------
Net investment income $8,170 $7,024 $7,093
------ ------ ------
Investments with an approximate market value of $17,384 and $2,366 (amortized
cost of $16,907 and $2,362) as of December 31, 1995 and 1994, respectively, were
on deposit in the United States and Canada. The deposits are required by law to
support certain reinsurance contracts, performance bonds and outstanding loss
liabilities on assumed business.
F-41
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
2. Investments, continued:
In May 1990, Superior entered into a limited partnership agreement with
AMEV Venture Management ("AVM"), an AMEV affiliate. The Limited
Partnership, AMEV Venture III, is an investment pool which is managed by
AVM as a general partner. The purpose of the pool is to make speculative
investments in small business, with the partners sharing in the
profits/losses resulting from the pool. Superior committed to an
investment of $2,000,000 which is approximately 8% of the total pool.
This investment is carried at cost and included in, "other investment."
As of May, 1996, the Company had disposed of its remaining interest in
this investment.
3. Deferred Policy Acquisition Costs:
Policy acquisition costs are capitalized and amortized over the life of
the policies. Policy acquisition costs are those costs directly related
to the issuance of insurance policies including commissions and
underwriting expenses net of reinsurance commission income on such
policies. Policy acquisition costs deferred and the related amortization
charged to income were as follows:
1993 1994 1995
------ ------ ------
Balance, beginning of year $9,174 $8,926 $9,004
Costs deferred during year
23,561 23,029 17,606
Amortization during year
(23,809) (22,951) (19,036)
------ ------ ------
Balance, end of year $8,926 $9,004 $7,574
====== ====== ======
4. Property and Equipment:
Property and equipment at December 31 are summarized as follows:
1995
----------------------------------
1994 Accumulated
Net Cost Depreciation Net
--- ---- ------------ ---
Office furniture and $62 $1,099 $723 $376
equipment
Automobiles - 20 20 -
Computer equipment 295 1,086 765 321
Leasehold improvements - 6 6 -
------ ------ ------ ------
$357 $2,211 $1,514 $697
==== ====== ====== ====
Accumulated depreciation at December 31, 1994 was $1,370. Depreciation expense
related to property and equipment for the years ended December 31, 1995, 1994
and 1993 was $214, $185 and $128, respectively.
F-42
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
5. Unpaid Losses and Loss Adjustment Expenses:
Activity in the liability for unpaid losses and loss adjustment expenses
is summarized as follows:
1993 1994 1995
-------- -------- --------
Balance at January 1 $57,164 $52,610 $54,577
Less reinsurance recoverables 361 68 1,099
-------- -------- --------
Net balance at January 1 56,803 52,542 53,478
-------- -------- --------
Incurred related to:
Current year 92,619 91,064 77,266
Prior years (6,717) 1,314 (4,923)
-------- -------- --------
Total incurred 85,902 92,378 72,343
-------- -------- --------
Paid related to:
Current year 57,929 56,505 48,272
Prior years 32,234 34,937 31,424
-------- -------- --------
Total paid 90,163 91,442 79,696
-------- -------- --------
Net balance at December 31 52,542 53,478 46,125
Plus reinsurance recoverables 68 1,099 987
-------- -------- --------
Balance at December 31 $52,610 $54,577 $47,112
-------- -------- --------
The foregoing reconciliation shows that redundancies of $4,923 and $6,717
in the December 31, 1994 and 1992 liabilities, respectively, emerged in
the following year. These redundancies resulted from lower than
anticipated losses resulting from a change in settlement costs relating
to those estimates. The reconciliation shows that a deficiency of $1,314
in the December 31, 1993 liability emerged in the following year. This
deficiency resulted from higher than anticipated losses resulting
primarily from a change in the settlement cost of loss reported in 1990.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and loss adjustment expenses. While
anticipated price increases due to inflation are considered in estimating
the ultimate claim costs, the increase in average severities of claims is
caused by a number of factors that vary with the individual type of
policy written. Future average severities are projected based on
historical trends adjusted for implemented changes in underwriting
standards, policy provisions, and general economic trends. Those
anticipated trends are monitored based on actual development and are
modified if necessary.
F-43
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
5. Unpaid Losses and loss Adjustment Expenses, continued:
Case liabilities (and costs of related litigation) have been established
when sufficient information has been developed to indicate the
involvement of a specific insurance policy. In addition, incurred but not
reported liabilities have been established to cover additional exposure
on both known and unasserted claims. Those liabilities are reviewed and
updated continually.
6. Income Taxes:
For the year ended December 31, 1995, the Company will file a
consolidated federal income tax return with its former subsidiaries owned
by Fortis, Inc. An intercompany tax sharing agreement between the Company
and its subsidiaries provided that income taxes will be allocated based
upon the percentage that each subsidiary's separate return tax liability
bears to the total amount of tax liability calculated for all members of
the group in accordance with the Internal Revenue Code of 1986, as
amended. Intercompany tax payments are remitted at such times as
estimated taxes would be required to be made to the Internal Revenue
Service. A reconciliation of the differences between federal tax computed
by applying the federal statutory rate of 35% to income before income
taxes and the income tax provision is as follows:
1993 1994 1995
------- ------- -------
Computed income taxes at statutory rate $4,743 $(2,896) $2,024
Dividends received deduction (118) (69) (53)
Tax-exempt interest (1,136) (866) (538)
Proration 188 140 89
Other 304 (109) 127
------- ------- -------
Income tax expense (benefit) $3,981 $(3,800) $1,649
------- ------- -------
As described in Note 1, the Company adopted SFAS No. 109 effective in 1993. The
effect on years prior to 1993 of changing to this method was a benefit of $1,389
and is reflected in the consolidated statement of operations as the cumulative
effect of a change in accounting principle. The current or deferred tax
consequences of a transaction are measured by applying the provisions of enacted
tax laws to determine the amount of taxes payable currently or in future years.
The method of accounting for income taxes prior to SFAS No. 109 provided that
deferred taxes, once recorded, were not adjusted for changes in tax rates.
F-44
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
6. Income Taxes, continued:
The net deferred tax asset at December 31, 1995 and 1994 is comprised of the
following:
1994 1995
------ ------
Deferred tax assets:
Unpaid losses and loss adjustment expenses $1,848 $1,454
Unearned premiums 3,122 2,873
Allowance for doubtful accounts 109 175
Unrealized losses on investments 412 -
Salvage and subrogation 694 541
Other 751 257
------ ------
Net deferred tax asset 6,936 5,300
------ ------
Deferred tax liabilities: -
Deferred policy acquisition costs 3,151 2,651
Unrealized gain on investments - 2,605
------ ------
3,151 5,256
------ ------
Net deferred tax asset $3,785 $44
====== ===
The Company is required to establish a "valuation allowance" for any
portion of its deferred tax assets which is unlikely to be realized. No
valuation allowance was established as of December 31, 1995 or 1994 on
the deferred tax assets, since management believes it is more likely than
not that the Company will realize the benefit of its deferred tax assets.
Federal income tax attributed to the Company has been examined through
1993. In the opinion of management, the Company has adequately provided
for the possible effects of future assessments related to prior years.
F-45
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
7. Retirement and Other Employee Benefits:
As part of the sale of the Company, as described in Note 14, the Company
withdrew from all of the plans mentioned below and paid Fortis $557 to
assume the related liabilities.
Superior participated in a non-contributory defined benefit pension plan
("the Pension Plan") administered by Fortis, Inc., covering substantially
all employees who were at least 21 years of age and who had one year of
service with Superior. The Pension Plan provided benefits payable to
participants on retirement or disability and to beneficiaries of
participants in the event of death. The benefits were based on years of
service and the employee's compensation during such years of service. The
Company's funding policy was to contribute annually at least the amount
required to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974. Contributions were
intended to provide not only for benefits attributed to service to date,
but also for those expected to be earned in the future. The net periodic
pension cost allocated to Superior under the Pension Plan for 1993, 1994
and 1995 was $206, $186 and $119, respectively. In 1993, pension expense
includes a one-time accrual for implementation of SFAS 106 of $81.
Superior also participated in a contributory profit sharing plan ("the
Profit Sharing Plan") sponsored by Fortis, Inc. This Profit Sharing Plan
covered all employees with one year of service to the Company and
provided benefits payable to participants on retirement or disability and
to beneficiaries of participants in the event of death. The amount
expensed for the Profit Sharing Plan for 1993, 1994 and 1995 was $252,
$381 and $146, respectively.
In addition to retirement benefits, the Company participated in other
health care and life insurance benefit plans ("postretirement benefits")
for retired employees, sponsored by Fortis, Inc. Health care benefits,
either through a Fortis-sponsored retiree plan for retirees under age 65
or through a cost offset for individually purchased Medigap policies for
retirees over age 65, were available to employees who retired on or after
January 1, 1993, at age 55 or older, with 15 or more years of service.
Life insurance, on a retiree pay all basis, was available to those who
retired on or after January 1, 1993. Both the retiree medical and retiree
life programs were implemented in 1993. The Company made contributions to
these plans as claims were incurred; no claims were incurred during 1993,
1994 or 1995. In 1993, the NAIC issued new rules that required the
projected future cost of providing postretirement benefits, such as
health care and life insurance, be recognized as an expense as employees
render service instead of when the benefits are paid.
As required, Superior complied with the new rules beginning in 1995 and
elected to record these costs on a prospective basis. The effect of this
accounting change on the financial statements of the Company was not
material.
F-46
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
8. Reinsurance:
The Company limits the maximum net loss that can arise from a large risk, or
risks in concentrated areas of exposure, by reinsuring (ceding) certain levels
of risks with other insurers or reinsurers. Superior has a casualty excess of
loss treaty which covers losses in excess of $100,000 up to a maximum of
$4,000,000. Superior maintains both auto and property catastrophe excess
reinsurance. Superior's first automobile casualty excess contains limits of
$200,000 excess of $100,000, its second casualty excess contains limits of
$700,000 excess of $300,000 and its third casualty excess has a limit of $4
million excess of $1 million. Further, Superior's first layer of property
catastrophe excess reinsurance covers 95% of $500,000 with an annual limit of $1
million and its second layer or property catastrophe excess reinsurance covers
95% of $2 million excess of $1 million with an annual limit of $4 million. The
Company remains contingently liable with respect to reinsurance, which would
become an ultimate liability of the Company in the event that such reinsuring
companies might be unable, at some later date, to meet their obligations under
the reinsurance agreements. In 1993, 1994 and 1995, 100% of amounts recoverable
from reinsurers are with Prudential Re, which maintains an A.M. Best rating of
A. Company management believes amounts recoverable from reinsurers are
collectible. Amounts recoverable from reinsurers relating to unpaid losses and
loss adjustment expenses were $1,099 and $987 as of December 31, 1994 and 1995,
respectively. Reinsurance activity for 1993, 1994 and 1995, which includes
reinsurance with related parties, is summarized as follows:
Direct Assumed Ceded Net
------ ------- ----- ---
1993
Premiums written $88,877 $26,783 $366 115,294
Premiums earned 87,618 31,183 665 118,136
Incurred losses and loss
adjustment expenses 64,228 21,896 222 85,902
Commission expenses 13,700 4,570 18,270
1994
Premiums written $92,540 $20,366 $391 $112,515
Premiums earned 89,755 23,437 355 112,837
Incurred losses and loss
adjustment expenses 73,181 20,244 1,047 92,378
Commission expenses 14,165 3,192 17,357
1995
Premiums written $84,840 $9,916 $686 $94,070
Premiums earned 84,641 13,592 619 97,614
Incurred losses and loss
adjustment expenses 63,462 8,777 (104) 72,343
Commission expenses 12,314 1,324 13,638
F-47
<PAGE>
9. Related-Party Transactions:
The Company and its subsidiaries have entered into transactions with various
related parties including transactions with its affiliated companies and Fortis,
Inc. The following transactions occurred with related parties in the years ended
December 31, 1993, 1994, and 1995:
1993 1994 1995
------ ------ ------
Management fees charged by Fortis $832 $842 $729
Reinsurance with affiliated companies, net:
Assumed premiums earned 8,321 9,092 7,786
Assumed losses and loss adjustment
expenses incurred 8,480 6,266 5,847
Assumed commissions 1,337 1,755 1,112
10. Effects of Statutory Accounting Practices and Dividend Restrictions:
Under state of Florida insurance regulations, the maximum amount of
dividends Superior, Superior American and Superior Guaranty can pay to
their stockholders without prior approval of the Insurance Commissioner
of the State of Florida is limited. The maximum amount of dividends which
Superior can pay to its stockholders during 1996 is approximately $4,900.
The maximum amount of dividends which Superior American can pay to its
stockholder during 1996 is approximately $320. The maximum amount of
dividends which Superior Guaranty can pay to its stockholder during 1996
is approximately $277.
11. Regulatory Matters:
Superior, Superior American and Superior Guaranty, domiciled in Florida,
prepare their statutory financial statements in accordance with
accounting practices prescribed or permitted by the Florida Department of
Insurance ("FDOI"). Prescribed statutory accounting practices include a
variety of publications of the National Association of Insurance
Commissioners ("NAIC"), as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed. Superior, Superior American
and Superior Guaranty utilize no significant permitted practices.
F-48
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
11. Regulatory Matters, continued:
The NAIC has promulgated risk-based capital ("RBC") requirements for
property/casualty insurance companies to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks, such as asset
quality, asset and liability matching, loss reserve adequacy and other business
factors. The RBC information is used by state insurance regulators as an early
warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. In addition,
the formula defines new minimum capital standards that will supplement the
current system of fixed minimum capital and surplus requirements on a
state-by-state basis. Regulatory compliance is determined by a ratio (the
"Ratio") of the enterprise's regulatory total adjusted capital, as defined by
the NAIC, to its authorized control level RBC, as defined by the NAIC.
Generally, a Ratio in excess of 200% of authorized control level RBC (the
"company action level") requires no corrective actions by Superior, Superior
American, Superior Guaranty, or regulators. As of December 31, 1995, all three
company's RBC level were in excess of the company action level.
12. Leases:
The Company has certain commitments under long-term operating leases for
its home and sales offices. Rental expense under these commitments was
$800, $483 and $1,012 for 1993, 1994 and 1995, respectively. Future
minimum lease payments required under these noncancelable operating
leases are as follows:
1996 $ 948
1997 921
1998 440
1999 350
2000 and thereafter 58
------
Total $2,717
======
F-49
<PAGE>
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
13. Contingencies:
The Company, and its subsidiaries, are named as defendants in various
lawsuits relating to their business. Legal actions arise from claims made
under insurance policies issued by the Company and its subsidiaries.
These actions were considered by the Company in establishing its loss
liabilities. The Company believes that the ultimate disposition of these
lawsuits will not materially affect the Company's operations or financial
position.
The increase in number of insurance companies that are under regulatory
supervision has resulted, and is expected to continue to result, in
increased assessments by state guaranty funds to cover losses to
policyholders of insolvent or rehabilitated insurance companies. Those
mandatory assessments may be partially recovered through a reduction in
future premium taxes in certain states. The Company recognizes its
obligations for guaranty fund assessments when it receives notice that an
amount is payable to a guaranty fund. The ultimate amount of these
assessments may differ from that which has already been assessed.
14. Subsequent Event (unaudited):
On May 1, 1996, the Symons International Group Incorporated entered into
an agreement ("Agreement") with GS Capital Partners II, L.P. to create a
company, GGS Management Holdings, Inc. ("GGS Holdings") to be owned 52%
by Symons and 48% by investment funds associated with Goldman, Sachs &
Co.
In connection with the above transaction, GGS Holdings acquired all of
the outstanding shares of common stock of the Company and its wholly
owned subsidiaries, Superior American and Superior Guaranty, for cash of
$65,057.
The purchase of the Company shall be accounted for in accordance with the
purchase method of accounting.
F-50
<PAGE>
[LEFT COLUMN OF BACK COVER]
================================================================================
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this Prospectus in
connection with the offering covered by this Prospectus. If given or made, such
information or representations must not be relied upon as having been authorized
by the Company or the Underwriters. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, the Common Stock in any
jurisdiction where, or to any person to whom, it is unlawful to make such offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create an implication that there has
not been any change in the affairs of the Company since the date hereof.
----------------------
TABLE OF CONTENTS
Page
Available Information 2
Organizational Structure of SIG and
Its Principal Subsidiaries 3
Prospectus Summary 4
Risk Factors 9
The Company 18
Use of Proceeds 20
Dividend Policy 20
Dilution 21
Capitalization 22
Unaudited Pro Forma Consolidated
Financial Statements 23
Selected Consolidated Historical Financial
Data of Symons International Group, Inc. 30
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations of the Company 32
Selected Consolidated Historical Financial
Data of Superior Insurance Company 43
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of Superior 44
Business 48
Management 73
Certain Relationships and
Related Transactions 81
Securities Ownership of
Management and Goran 89
Description of Capital Stock 91
Shares Eligible for Future Sale 93
Underwriting 94
Legal Matters 95
Experts 95
Glossary of Selected Insurance
and Certain Defined Terms 96
Index to Financial Statements F-1
----------------------
Until , 1996, all dealers effecting transactions in the Common Stock, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
<PAGE>
[RIGHT COLUMN, BACK COVER]
================================================================================
3,000,000 Shares
SYMONS INTERNATIONAL
GROUP, INC.
Common Stock
----------
PROSPECTUS
----------
Advest, Inc.
Mesirow Financial, Inc.
, 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution (1).
Blue Sky Legal Services and Registration Fees $
Nasdaq Listing Fee
NASD Fee 4,640
Securities and Exchange Commission Registration Fee 14,276
Legal Services and Disbursements - Issuer's counsel
Auditing and Accounting Services
Transfer Agent Fee
Printing and engraving costs
Postage
Other expenses
TOTAL (2) $
(1) Costs represented by salaries and wages of regular employees and
officers of the Registrant are excluded.
(2) All the above items, except the SEC Registration Fee, Nasdaq Listing
Fee and NASD Fee, are estimated.
Item 14. Indemnification of Directors and Officers.
Chapter 37 of the Indiana Business Corporation Law, as amended (the
"ICBL"), grants to each corporation broad powers to indemnify directors,
officers, employees or agents against liabilities and expenses incurred in
certain proceedings if the conduct in question was found to be in good faith and
was reasonably believed to be in the corporation's best interests. The
idemnification rights provided by the Registrant's articles of incorporation and
by-laws provide the maximum indemnification protection available under law to
the directors and officers of the Registrant. Directors, officers employees or
agents of the Registrant who also are directors, officers, employees or agents
of Goran receive similar indemnification protection under Goran's by-laws. In
addition, Goran carries directors and officers insurance policies.
Pursuant to the provisions of the Underwriting Agreement among the
Registrant, Goran and the Underwriters, the Underwriters severally agree to
indemnify the Registrant, its directors, its officers who signed the
Registration Statement and its controlling persons against any and all loss,
liability, claim, damage or expense, as incurred, but only with respect to
untrue statements or omissions, or alleged untrue statements or omissions, made
in the Registration Statement and prospectus (or any amendment thereto),
including filings made under Rule 430A and Rule 434 of the Securities Act of
1933, if applicable, or any preliminary prospectus (or any amendment and
supplement thereto) (collectively, the "Documents") in reliance upon and in
conformity with written information furnished to the Registrant by such
Underwriter through Advest, Inc. or Mesirow Financial, Inc. expressly for use in
the Documents.
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
The Registrant was incorporated on March 30, 1987. The Registrant is a
wholly-owned, direct subsidiary of Goran Capital Inc. ("Goran") and will remain
so until consummation of the Offering. The original issuance of 1,000 shares of
Common Stock to Goran upon the Registrant's incorporation did not involve any
public offering and was exempt from registration under section 4(2) of the
Securities Act of 1933, as amended ("Securities Act").
Effective immediately upon the filing of the Restated Articles of
Incorporation of the Registrant with the Secretary of State of the State of
Indiana on July ___, 1996, the Board of Directors of the Registrant declared a
7,000-to-1 stock split whereby each outstanding share of Common Stock will be
converted into 7,000 shares of Common Stock, such stock split to be payable to
Goran as the Registrant's sole shareholder immediately prior to consummation of
the Offering.
S-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) The exhibits furnished with this Registration Statement are listed
beginning on page E-l.
(b) The following financial statement schedules of the Registrant are
included in the Registration Statement beginning on page S-5:
Schedule I -- Summary of Investments - Other than Investments in
Related Parties
Schedule II -- Condensed Financial Information of Registrant
Schedule IV -- Reinsurance
Schedule V -- Valuation and Qualifying Accounts
Schedule VI -- Supplemental Information Concerning Property-Casualty
Insurance Operations
S-2
<PAGE>
Item 17. Undertakings.
(1) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of an action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(3) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Toronto, Province of
Ontario, Canada, on July 29, 1996.
SYMONS INTERNATIONAL GROUP, INC.
By /s/ Alan G. Symons
Alan G. Symons,
Chief Executive Officer
Each person whose signature appears below hereby severally constitutes and
appoints Alan G. Symons and Douglas H. Symons, and each of them, as
attorney-in-fact for the undersigned, in any and all capacities, with full power
of substitution, to sign any amendments to this Registration Statement
(including post-effective amendments) and any subsequent registration statement
filed by the Registrant pursuant to Rule 462(b) of the Securities Act of 1933,
and to file the same with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each said attorney-in-fact, or
any of them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
- --------------------------------------------------------------------------------
(1) Principal
Executive Officer:
/s/ Alan G. Symons Chief Executive Officer )
Alan G. Symons )
)
)
)
(2) Principal Financial )
and Accounting Officer: )
)
)
/s/ Gary P. Hutchcraft Vice President )
Gary P. Hutchcraft Chief Financial Officer )
)
)
)
(3) The Board of Directors: ) July 29, 1996
)
)
/s/ G. Gordon Symons Director )
G. Gordon Symons )
)
)
/s/ Alan G. Symons Director )
Alan G. Symons )
)
S-3
<PAGE>
)
/s/ Douglas H. Symons Director )
Douglas H. Symons )
)
)
/s/ John J. McKeating Director )
John J. McKeating )
) July 29 1996
)
Director )
Robert C. Whiting )
)
)
/s/ James G. Torrance Director )
James G. Torrance )
)
)
/s/ David R. Doyle Director )
David R. Doyle )
)
)
S-4
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
As at December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
Estimated
Market Amount on
Type of Investment Cost Value Balance Sheet
- ------------------ ---- ----- -------------
Fixed maturities:
Bonds:
<S> <C> <C> <C>
Government and government agencies.............. $10,978 $11,040 $11,040
States and municipalities....................... 1,142 1,198 1,198
Public utilities................................ 328 328 328
All other corporate bonds....................... 364 365 365
Redeemable preferred stock........................ --- --- ---
Total fixed maturities........................ 12,812 12,931 12,931
Equity securities:
Common stocks..................................... 4,318 4,134 4,134
Preferred stocks.................................. 100 97 97
Total equity securities....................... 4,418 4,231 4,231
Mortgage loans on real estate..................... 2,920 2,920 2,920
Real Estate....................................... 487 487 487
Other long-term investments....................... 50 50 50
Short-term investments............................ 5,283 5,283 5,283
Total investments............................. $25,970 $25,970 $25,902
======= ======= =======
</TABLE>
S-5
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
As at December 31, 1995
(in thousands)
1994 1995
------- -------
ASSETS
Assets:
Investments in and advances to related parties $13,306 $18,589
Cash and cash equivalents 0 0
Deferred income taxes 0 52
Property and equipment 194 337
Other 274 57
------- -------
Intangible Assets 88 0
Total Assets 13,862 19,035
======= =======
LIABILITIES AND STOCKHOLDERS EQUITY
Liabilities:
Payables to affiliates $7,870 $8,671
Federal income tax payable 176 0
Line of credit and notes payable 1,250 0
Other 311 829
------- -------
Total Liabilities 9,607 9,500
------- -------
Stockholder's equity:
Common Stock, no par, 7,000,000 shares
authorized, issued and outstanding 1,000 1,000
Additional paid-in capital 3,130 3,130
Unrealized loss on investments(net of
deferred taxes of
-$260 in 1994, and $23 in 1995) (504) (45)
Retained Earnings 629 5,450
------- -------
Total Stockholders equity 4,255 9,535
------- -------
Total liabilities and stockholders equity $13,862 $19,035
======= =======
S-6
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II (Continued)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
For the years ended December 31, 1993, 1994 and 1995
(in thousands)
1993 1994 1995
------- -------- --------
Net investment income 20 37 1,522
Net realized investment gains/(losses) (189) (8) 0
Other income / (expenses) 9,062 8,533 7,574
------ ------ ------
Total revenue 8,893 8,562 9,096
------ ------ ------
Expenses:
Policy acquisition and general and
administrative expenses 7,935 7,528 7,891
Interest expense 763 874 621
------ ------ ------
Total expenses 8,698 8,402 8,512
------ ------ ------
Income before taxes & minority interest 195 160 584
Provision for income taxes
Current 220 176 293
Prior Yr 76 (70) 0
------ ------ ------
Provision for income taxes 296 106 293
------ ------ ------
Net income before equity in net
income of subsidiaries (101) 54 291
Equity in net income of subsidiaries (222) 2,063 4,530
Net income for the period (323) 2,117 4,821
====== ====== ======
S-7
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II (Continued)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
For the years ended December 31, 1993, 1994 and 1995
(in thousands)
1993 1994 1995
---- ---- ----
NET INCOME (323) 2,117 4,821
CASH FLOWS FROM OPERATING ACTIVITIES:
ADJUSTMENTS TO RECONCILE NET CASH PROVIDED
(USED IN) OPERATIONS:
EQUITY IN NET INCOME OF SUBSIDIARIES 222 (2,063) (4,530)
DEPRECIATION OF PROPERTY & EQUIPMENT 83 91 37
NET REALIZED CAPITAL LOSS 0 8 (52)
AMORTIZATION OF INTANGIBLE ASSETS 252 169 88
NET CHANGES IN OPERATING ASSETS AND LIABILITIES:
FEDERAL INCOME TAXES RECOVERABLE (PAYABLE) (122) 206 (176)
OTHER ASSETS (120) (70) 216
OTHER LIABILITIES 214 (1,060) 518
------ ------ ------
NET CASH PROVIDED FROM (USED IN) OPERATIONS 206 (602) 922
CASH FLOW PROVIDED (USED IN) INVESTING ACTIVITIES:
PURCHASE OF PROPERTY AND EQUIPMENT (27) (58) (179)
NET CASH PROVIDED (USED IN) INVESTING ACTIVITIES (27) (58) (179)
------ ------ ------
CASH FLOWS PROVIDED FROM (USED IN)
FINANCING ACTIVITIES:
REPAYMENT OF LOANS (2,000) (1,750) (1,250)
CONTRIBUTED CAPITAL 1,600 0 0
LOANS FROM RELATED PARTIES 200 2,410 507
------ ------ ------
NET CASH PROVIDED (USED IN) FINANCING ACTIVITIES (200) 660 (743)
------ ------ ------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (21) 0 0
------ ------ ------
CASH AND CASH EQUIVALENTS - beginning of year 21 0 0
------ ------ ------
CASH AND CASH EQUIVALENTS - end of year 0 0 0
====== ====== ======
S-8
<PAGE>
SYMONS INTERNATIONAL GROUP, INC., AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
For the Years Ended December 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
Percentage
Assumed Ceded of Amount
Direct from Other to Other Net Assumed
Amount Companies Companies Amount to Net
Property and liability
insurance premiums:
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995............ $123,381 $1,253 $71,187 $53,447 2.3%
Year ended December 31, 1994............ 102,178 956 67,995 35,139 2.7%
Year ended December 31, 1993............ 88,847 89 57,176 31,760 0.3%
</TABLE>
S-9
<PAGE>
SYMONS INTERNATIONAL GROUP, INC., AND SUBSIDIARIES
SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
Additions
---------------------------------
Balance at Charged to Charged to Deductions Balance
Beginning Costs and Other from at End
Description of Period Expenses Accounts Reserves of Period
- ----------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended
December 31, 1993
Allowance for
doubtful accounts $345 $1,397 - $563 (1) $1,179
Year Ended
December 31, 1994
Allowance for
doubtful accounts 1,179 (86) - (116) (1) 1,209
Year Ended
December 31, 1995
Allowance for
doubtful accounts 1,209 2,523 - 2,805 (1) 927
- ----------
(1) Uncollectible accounts written off, net of recoveries.
S-10
<PAGE>
SYMONS INTERNATIONAL GROUP, INC., AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY - CASUALTY INSURANCE OPERATIONS
For the Years Ended December 31, 1995, 1994 and 1993
(in thousands)
</TABLE>
<TABLE>
<CAPTION>
Reserves Losses and Loss
Deferred for Losses Adjustment Expenses
Policy and Loss Net Incurred Related to
Acquisition Adjustment Unearned Earned Investment Current Prior
Costs Expenses Premiums Premiums Income Years Years
Year Ended
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995......... $2,379 $59,421 $17,497 $49,641 $1,173 $36,184 $787
Year Ended
December 31, 1994......... 1,479 29,269 14,416 32,126 1,241 26,268 202
Year Ended
December 31, 1993......... 31,428 1,489 23,931 1,149
</TABLE>
Amortization Paid
of Deferred Losses
Policy and Loss
Acquisition Adjustment Premiums
Costs Expenses Written
Year Ended
December 31, 1995......... $7,150 $31,075 $124,634
Year Ended
December 31, 1994......... 4,852 26,995 103,134
Year Ended
December 31, 1993......... 8,962 27,109 88,936
Note: All amounts in the above table are net of the effects of reinsurance
and related commission income, except for net investment income
regarding which reinsurance is not applicable, premiums written,
liabilities for losses and loss adjustment expenses, and unearned
premiums which are stated on a gross basis.
S-11
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
1.1 Form of Underwriting Agreement, dated _____, 1996, **
among the Registrant, Goran Capital Inc., Advest, Inc.
and Mesirow Financial, Inc.
3.1 Registrant's Restated Articles of Incorporation. ----
3.2 Registrant's Restated Code of Bylaws. ----
4.1 Article V - "Number, Terms and Voting Rights of Shares"
of the Registrant's Restated Articles of Incorporation,
incorporated by reference to the Registrant's Articles of
Incorporation filed hereunder as Exhibit 3.1.
4.2 Article I - "Shareholders" and Article VI -
"Stock Certificates, Transfer of Shares, Stock Records"
of the Registrant's Restated Code of Bylaws,
incorporated by reference to the Registrant's Restated
Code of Bylaws filed hereunder as Exhibit 3.2
5 Opinion of Barnes & Thornburg re legality of the securities **
being registered.
10.1 Stock Purchase Agreement among Goran Capital Inc., *
Registrant, Fortis, Inc. and Interfinancial, Inc.
dated January 31, 1996.
10.2 Stock Purchase Agreement among GGS Management *
Holdings, Inc., GS Capital Partners II, L.P.,
Goran Capital Inc. and Registrant
dated January 31, 1996.
10.3 Stockholder Agreement among GGS Management Holdings, Inc., *
GS Capital Partners II, L.P., Registrant and Goran Capital
Inc. dated April 30, 1996.
10.4 Registration Rights Agreement among GGS Management *
Holdings, Inc., GS Capital Partners II, L.P., Goran
Capital Inc. and Registrant dated April 30, 1996.
10.5 Management Agreement among Superior Insurance Company, ----
Superior American Insurance Company, Superior Guaranty
Insurance Company and GGS Management, Inc. dated
April 30, 1996.
E-1
<PAGE>
10.6 Management Agreement between Pafco General Insurance ----
Company and Registrant dated May 1, 1987, as assigned to
GGS Management, Inc. effective April 30, 1996.
10.7 Administration Agreement between IGF Insurance ----
Company and Registrant dated February 26, 1990, as amended.
10.8 Agreement between IGF Insurance ----
Company and Registrant dated November 1, 1990.
10.9 Subordinated Promissory Note of IGF Holdings, Inc. **
dated April 29, 1996.
10.10(1) Promissory Note of IGF Holdings, Inc. **
dated April 29, 1996.
10.10(2) Commercial Guaranty of Symons International Group, Ltd. dated **
April 29, 1996.
10.10(3) Intercreditor and Subordination Agreement between **
IGF Holdings, Inc. and Union Federal Savings Bank of
Indianapolis dated April 29, 1996.
10.10(4) Pledge Agreement between IGF Holdings, Inc. **
and Union Federal Savings Bank of Indianapolis
dated April 29, 1996.
10.10(5) Pledge Agreement between IGF Holdings, Inc. and Pafco General **
Insurance Company dated April 29, 1996.
10.11(1) Credit Agreement between GGS Management, Inc., *
various Lenders and The Chase Manhattan Bank (National
Association), as Administrative Agent, dated April 30, 1996.
10.11(2) Pledge Agreement between GGS Management Holdings, Inc. **
and Chase Manhattan Bank., N.A. dated April 30, 1996.
10.11(3) Pledge Agreement between GGS Management, Inc. and Chase **
Manhattan Bank., N.A. dated April 30, 1996.
10.12(1) Promissory Note of Registrant to Goran Capital Inc. **
10.12(2) Promissory Note of Registrant to Granite **
Reinsurance Company Ltd.
10.13 Registration Rights Agreement between Goran
Capital, Inc. and Registrant dated ____________. **
10.14(1) License, Improvement and Support Agreement **
between Tritech Financial Systems, Inc. and Registrant
dated August 30, 1995.
10.14(2) License of Computer Software between Tritech Financial **
Systems, Inc. and Registrant dated August 30, 1995.
10.15(1) Agreement among Cliffstan Investments, Inc., **
Pafco General Insurance Company and Gage North
Holdings, Inc. dated September 1, 1989.
10.15(2) Purchase of Promissory Note and Assignment of **
Security Agreement between Pafco General Insurance
Company and Granite Reinsurance
Company, Ltd., dated September 30, 1992.
10.15(3) Guarantee of Alan G. Symons dated April 22, 1994. **
10.15 (4) Share Pledge Agreement between Symons **
International Group, Ltd., and Pafco General
Insurance Company dated April 22, 1994.
10.16(1) Employment Agreement between GGS Management Holdings, Inc. **
and Alan G. Symons dated _________.
10.16(2) Employment Agreement between GGS Management Holdings, Inc. **
and Douglas H. Symons dated __________.
E-2
<PAGE>
10.17(1) Employment Agreement between IGF Insurance Company and **
Dennis G. Daggett effective February 1, 1996.
10.17(2) Employment Agreement between IGF Insurance Company and **
Thomas F. Gowdy effective February 1, 1996.
10.18 Employment Agreement between Superior Insurance Company **
and Roger C. Sullivan, Jr. dated ________.
10.19 Employment Agreement between Goran Capital, Inc. and **
Gary P. Hutchcraft dated ___________.
10.20 Goran Capital, Inc. Stock Option Plan. **
10.21 GGS Management Holdings, Inc. 1996 Stock Option Plan. **
10.22 Registrant's Stock Option Incentive Plan. **
10.23 Registrant's Director Option Plan. **
10.24 Registrant's Retirement Savings Plan. **
10.25 Insurance Service Agreement between Mutual Service Casualty **
Company and IGF Insurance Company dated May 20, 1996
10.26 Amended and Restated Trust Indenture between Goran **
Capital Inc. and Montreal Trust Company of Canada dated
December 29, 1992.
10.27 Reinsurance Agreements by and between **
Registrant and Affiliates.
21 Subsidiaries of the Registrant. ----
23.1 Consent of Coopers & Lybrand L.L.P. ----
23.2 Consent of Barnes & Thornburg (contained in Exhibit 5).
24 Power of Attorney (included on page S-3 of the
Registration Statement).
27 Financial Data Schedules (to be filed electronically). **
28 Information from Reports Furnished to State **
Insurance Regulatory Authorities.
- ----------
* Incorporated by reference as an Exhibit to the Current Report on Form
8-K of Goran Capital Inc. originally filed as of May 14, 1996 and
amended as of July 15, 1996.
** To be filed by amendment.
E-3
Exhibit 3.1
RESTATED
ARTICLES OF INCORPORATION
OF
SYMONS INTERNATIONAL GROUP, INC.
ARTICLE I
Name
The name of the Corporation is Symons International Group, Inc.
ARTICLE II
Purpose
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Indiana Business
Corporation Law, as amended from time to time.
ARTICLE III
Term of Existence
The period during which the Corporation shall continue is perpetual.
ARTICLE IV
Registered Office and Registered Agent
The address of the Corporation's registered office in Indiana is 4720
Kingsway Drive, Indianapolis, Indiana 46205, and the name of the Corporation's
registered agent is Douglas H. Symons.
<PAGE>
ARTICLE V
Number, Terms and Voting Rights of Shares
Section 1. Number and Classes of Shares. The total number of shares
which the Corporation shall have authority to issue is One Hundred Fifty Million
(150,000,000) shares, consisting of One Hundred Million (100,000,000) shares of
a single class of shares to be known as Common Stock, and Fifty Million
(50,000,000) shares of a single class of shares to be known as Preferred Stock.
Section 2. Terms of Common Stock. Only when all dividends accrued on
all preferred or special classes of shares entitled to preferential dividends
shall have been paid or declared and set apart for payment, but not otherwise,
then the holders of Common Stock shall be entitled to receive dividends, when
and as declared by the Board of Directors. In event of any dissolution,
liquidation or winding up of the Corporation, the holders of the Common Stock
shall be entitled, after due payment or provision for payment of the debts and
other liabilities of the Corporation, and the amounts to which the holders of
preferred or special classes of shares may be entitled, to share ratably in the
remaining net assets of the Corporation.
Section 3. Voting Rights of Common Stock. Except as otherwise provided
by law, every holder of Common Stock of the Corporation shall have the right at
every shareholders' meeting to one vote for each share of Common Stock standing
in his name on the books of the Corporation on the date established by the Board
of Directors as the record date for determination of shareholders entitled to
vote at such meeting.
Section 4. Terms of Preferred Stock. The Board of Directors shall have
authority to determine and state in the manner provided by law the rights,
preferences, qualifications, limitations and restrictions (including voting
rights) of the Preferred Stock. The Preferred Stock may be issued in one or more
series for such an amount of consideration as may be fixed from time to time by
the Board of Directors, and the Board of Directors shall have authority to
determine and state in the manner provided by law the designations and the
relative rights, preferences, qualifications, limitations and restrictions
(including voting rights) of each series.
Section 5. Class Voting. The holders of the outstanding shares of a
class, or of any series thereof, shall not be entitled to vote as a class except
as shall be expressly provided by this Article or by law.
-2-
<PAGE>
ARTICLE VI
Directors
Section 1. Number. The number of Directors may from time to time be
fixed by the bylaws of the Corporation at any number not less than three and not
more than twenty-five. In the absence of a bylaw fixing the number of Directors,
the number shall be seven.
Section 2. Qualifications. Directors need not be shareholders of the
Corporation, but shall have other qualifications as the bylaws of the
Corporation prescribe.
Section 3. Classification. The bylaws of the Corporation may provide
that the Directors shall be divided into two or more classes whose terms of
office shall expire at different times, but no term shall continue longer than
three years.
Section 4. Removal. Any or all of the members of the Board of Directors
may be removed, with or without cause, at a meeting of shareholders called
expressly for that purpose by a vote of the holders of a majority of the shares
of the Corporation outstanding and then entitled to vote at an election of
Directors.
Section 5. Amendment, Repeal, etc. Notwithstanding anything contained
in these Articles of Incorporation to the contrary, the affirmative vote of the
holders of at least a majority of the shares of the Corporation outstanding and
then entitled to vote at an election of Directors, voting together and not by
class, shall be required to alter, amend, repeal, or adopt provisions
inconsistent with, this Article VI of these Articles of Incorporation.
ARTICLE VII
Indemnification
Section 1. Actions by a Third Party. The corporation shall, to the
fullest extent to which it is empowered to do so by the Indiana Business
Corporation Law, or any other applicable laws, as from time to time in effect,
indemnify any person who is or was a party, or is threatened to be made a
defendant or respondent, to a proceeding, including any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than actions by or in the right of the corporation), and
whether formal or informal, who is or was a director, officer, employee, or
agent of the corporation or who, while a director, officer, employee, or agent
of the corporation, is or was serving at the corporation's request as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise, whether for profit or not, against:
-3-
<PAGE>
(a) any reasonable expenses (including attorneys' fees) incurred
with respect to a proceeding, if such person is wholly
successful on the merits or otherwise in the defense of such
proceeding, or
(b) judgments, settlements, penalties, fines (including excise
taxes assessed with respect to employee benefit plans) and
reasonable expenses (including attorneys fees) incurred with
respect to a proceeding where such person is not wholly
successful on the merits or otherwise in the defense of the
proceeding if:
(i) the individual's conduct was in good faith; and
(ii) the individual reasonably believed:
(A) in the case of conduct in the individual's
official capacity as a director, officer,
employee or agent of the corporation, that
the individual's conduct was in the
corporation's best interests; and
(B) in all other cases, that the individual's
conduct was at least not opposed to the
corporation's best interests; and
(iii) in the case of any criminal proceeding, the
individual either:
(A) had reasonable cause to believe the
individual's conduct was lawful; or
(B) had no reasonable cause to believe the
individual's conduct was unlawful;
except that the foregoing shall not apply to a director or officer of the
corporation with respect to a proceeding that was commenced by such director or
officer prior to a Change in Control (as defined in Section 9 to this Article
VII).
The termination of a proceeding by a judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent is not, of itself,
determinative that the director, officer, or employee did not meet the standard
of conduct described in this section.
Section 2. Actions by or in the Right of the Corporation. The
corporation shall, to the fullest extent to which it is empowered to do so by
the Indiana Business Corporation Law, or any other applicable laws, as from time
to time in effect, indemnify any person who is or was a party, or is threatened
to be made a defendant or respondent, to a proceeding, including any threatened,
pending or completed action, suit or proceeding, by or in the right of the
corporation to procure a judgment in its favor, by reason of the fact that such
person is or was a director, officer, employee, or agent of the corporation or
is or was serving at
-4-
<PAGE>
the request of the corporation as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust, employee benefit plan, or other enterprise, whether for
profit or not, against any reasonable expenses (including attorneys' fees):
(a) if such person is wholly successful on the merits or otherwise
in the defense of such proceeding, or
(b) if not wholly successful:
(i) the individual's conduct was in good faith; and
(ii) the individual reasonably believed:
(A) in the case of conduct in the individual's
official capacity as a director, officer, or
employee of the corporation, that the
individual's conduct was in the
corporation's best interests; and
(B) in all other cases, that the individual's
conduct was at least not opposed to the
corporation's best interests;
except that the foregoing shall not apply to a director or officer of the
corporation with respect to a proceeding that was commenced by such director or
officer prior to a Change in Control.
Section 3. Good Faith Defined. For purposes of any determination under
Section 1 or 2, a person shall be deemed to have acted in good faith and to have
otherwise met the applicable standard of conduct set forth in such section if
his action is based on information, opinions, reports, or statements, including
financial statements and other financial data, if prepared or presented by (1)
one or more officers or employees of the corporation or another enterprise whom
he reasonably believes to be reliable and competent in the matters presented;
(2) legal counsel, public accountants, appraisers or other persons as to matters
he reasonably believes are within the person's professional or expert
competence; or (3) a committee of the board of directors of the corporation or
another enterprise of which the person is not a member if he reasonably believes
the committee merits confidence. The term "another enterprise" as used in this
Section 3 shall mean any other corporation or any partnership, joint venture,
trust, employee benefit plan or other enterprise of which such person is or was
serving at the request of the corporation as a director, officer, partner,
trustee, employee or agent. The provisions of this Section 3 shall not be deemed
to be exclusive or to limit in any way the circumstances in which a person may
be deemed to have met the applicable standards of conduct set forth in Section 1
or 2.
Section 4. Advancement of Defense Expenses. The corporation shall pay
for or reimburse the reasonable expenses incurred by a director, officer,
employee or agent who is a party to a proceeding described in Section 1 or 2 of
this Article VII in advance of the final disposition of said proceeding if:
-5-
<PAGE>
(a) the director, officer, employee or agent furnishes the
corporation a written affirmation of his good faith belief
that he has met the standard of conduct described in Section 1
or 2; and
(b) the director, officer, employee or agent furnishes the
corporation a written undertaking, executed personally or on
his behalf, to repay the advance if it is ultimately
determined that the director, officer, employee or agent did
not meet the standard of conduct; and
(c) a determination is made that the facts then known to those
making the determination would not preclude indemnification
under Section 1 or 2.
The undertaking required by this Section 4 must be an unlimited general
obligation of the director, officer, employee or agent but need not be secured
and may be accepted by the corporation without reference to the financial
ability of such person to make repayment.
Section 5. Non-Exclusiveness of Indemnification. The indemnification
and advancement of expenses provided for or authorized by this Article VII do
not exclude any other rights to indemnification or advancement of expenses that
a person may have under:
(a) the corporation's articles of incorporation or bylaws;
(b) any resolution of the board of directors or the shareholders
of the corporation;
(c) any other authorization adopted by the shareholders;
(d) any director and officer insurance policy, or any other type
of insurance policy; or
(e) otherwise as provided by law, both as to such person's actions
in his capacity as a director, officer, employee or agent of
the corporation and as to actions in another capacity while
holding such office.
Such indemnification shall continue as to a person who has ceased to be a
director, officer, or employee, and shall inure to the benefit of the heirs and
personal representatives of such person.
Section 6. Vested Right to Indemnification. The right of any individual
to indemnification under this Article VII shall vest at the time of occurrence
or performance of any event, act or omission giving rise to any action, suit or
proceeding of the nature referred to in Section 1 or 2 and, once vested, shall
not later be impaired as a result of any amendment, repeal, alteration or other
modification of any or all of these provisions, whether or not any such
amendment, repeal, alteration or other modification occurs after
-6-
<PAGE>
a Change in Control. Notwithstanding the foregoing, the indemnification afforded
under this Article VII shall be applicable to all alleged prior acts or
omissions of any individual seeking indemnification hereunder, regardless of the
fact that such alleged acts or omissions may have occurred prior to the adoption
of this Article VII. To the extent such prior acts or omissions cannot be deemed
to be covered by this Article VII, the right of any individual to
indemnification shall be governed by the indemnification provisions in effect at
the time of such prior acts or omissions.
Section 7. Insurance. The corporation may purchase and maintain
insurance covering any person who is or was a director, officer, employee or
agent of the corporation, or who is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against any liability asserted against or incurred by the
individual in that capacity or arising from the individual's status as a
director, officer, employee or agent, whether or not the corporation would have
power to indemnify the individual against the same liability under this Article
VII.
Section 8. Additional Definitions. For purposes of this Article VII,
references to the "corporation" shall include any domestic or foreign
predecessor entity of the corporation in a merger or other transaction in which
the predecessor's existence ceased upon consummation of the transaction.
For purposes of this Article VII, "Change in Control" shall mean a
change in control of the corporation of a nature that would be required to be
reported in response to Item 6(e) (or any successor provision) of Schedule 14A
of Regulation 14A (or any amendment or successor provision thereto) promulgated
under the Securities Exchange Act of 1934 (the "1934 Act"), whether or not the
corporation is then subject to such reporting requirement; provided that,
without limitation, such a change in control shall be deemed to have occurred if
(A) any "person" (as such term is used in Sections 13(d) and 14(d) of the 1934
Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
1934 Act), directly or indirectly, of securities of the corporation representing
20% or more of the voting power of all outstanding shares of stock of the
corporation entitled to vote generally in an election of directors without the
prior approval of at least two-thirds of the members of the board of directors
in office immediately prior to such acquisition; (B) the corporation is a party
to any merger or consolidation in which the corporation is not the continuing or
surviving corporation or pursuant to which shares of the corporation's common
stock would be converted into cash, securities or other property, other than a
merger of the corporation in which the holders of the corporation's common stock
immediately prior to the merger have the same proportionate ownership of common
stock of the surviving corporation immediately after the merger, (C) there is a
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, the assets of the
corporation, or liquidation or dissolution of the corporation; (D) the
corporation is a party to a merger, consolidation, sale of assets or other
reorganization, or a proxy contest, as a consequence of which members of the
board of directors in office immediately prior to such
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transaction or event constitute less than a majority of the board of directors
thereafter; or (E) during any period of two consecutive years, individuals who
at the beginning of such period constituted the board of directors (including
for this purpose any new director whose election or nomination for election by
the shareholders was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of such period) cease
for any reason to constitute at least a majority of the board of directors.
For purposes of this Article VII, "serving an employee benefit plan at
the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent with respect to
an employee benefit plan, its participants, or beneficiaries. A person who acted
in good faith and in a manner he reasonably believed to be in the best interests
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interest of the
corporation" referred to in this Article VII.
For purposes of this Article VII, "official capacity," when used with
respect to a director, shall mean the office of director of the corporation; and
when used with respect to an individual other than a director, shall mean the
office in the corporation held by the officer or the employment or agency
relationship undertaken by the employee or agent on behalf of the corporation.
"Official capacity" does not include service for any other foreign or domestic
corporation or any partnership, joint venture, trust, employee benefit plan, or
other enterprise, whether for profit or not.
Section 9. Payments a Business Expense. Any payments made to any
indemnified party under this Article VII or under any other right to
indemnification shall be deemed to be an ordinary and necessary business expense
of the corporation, and payment thereof shall not subject any person responsible
for the payment, or the board of directors, to any action for corporate waste or
to any similar action.
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Exhibit 3.2
BYLAWS
OF
SYMONS INTERNATIONAL GROUP, INC.
(As Restated July 29, 1996)
ARTICLE I
Shareholders
Section 1. Annual Meeting. An annual meeting of the shareholders shall
be held at such hour as shall be designated by the board of directors on the
third Thursday of May, or such other date within five months after the close of
the fiscal year of the corporation as the board of directors may select, in each
year for the purpose of electing directors for the terms hereinafter provided
and for the transaction of such other business as may properly come before the
meeting. If the day fixed for the annual meeting shall be a legal holiday in the
State of Indiana, such meeting shall be held on the next succeeding full
business day.
Section 2. Special Meetings. Special meetings of the shareholders may
be called by the chief executive officer, by the board of directors, or by
shareholders holding not less than a majority of all votes entitled to be cast
on any issue to be considered at the special meeting who sign, date and deliver
to the secretary of the corporation one or more written demands for the meeting
describing the purpose or purposes for which it is to be held. Only business
within the purpose or purposes described in the meeting notice may be conducted
at a special shareholders' meeting.
Section 3. Place of Meetings. All meetings of shareholders shall be
held at the principal office of the corporation in Indianapolis, Indiana, or at
such other place, either within or without the State of Indiana, as may be
designated by the board of directors.
Section 4. Notice of Meetings. A written or printed notice, stating the
place, day and hour of the meeting, and in the case of a special meeting or when
required by law or by the articles of incorporation or these bylaws, the purpose
or purposes for which the meeting is called, shall be delivered or mailed or
sent by facsimile transmission by or at the direction of the secretary no fewer
than ten nor more than sixty days before the date of the meeting, to each
shareholder of record entitled to vote at such meeting at such address as
appears upon the stock records of the corporation.
Section 5. Quorum. Unless otherwise provided by the articles of
incorporation or these bylaws, at any meeting of shareholders, the majority of
the outstanding shares entitled to vote at such meeting, represented in person
or by proxy or by any means of communication by which all shareholders
participating in the meeting may simultaneously hear each other during the
meeting, shall constitute a quorum. If less than a majority of such shares are
represented at a meeting, a majority of the shares so represented may adjourn
the meeting from time to time. The shareholders present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum.
<PAGE>
Section 6. Adjourned Meetings. At any adjourned meeting at which a
quorum shall be represented, any business may be transacted as might have been
transacted at the meeting as originally notified. If a new record date is or
must be established pursuant to law, notice of the adjourned meeting must be
given to persons who are shareholders as of the new record date.
Section 7. Proxies. At all meetings of shareholders, a shareholder may
vote either in person or by proxy executed in writing by the shareholder or a
duly authorized attorney in fact. No proxy shall be valid after eleven months
from the date of its execution, unless otherwise provided in the proxy.
Section 8. Voting of Shares. Except as otherwise provided by law, by
the articles of incorporation, or by these bylaws, every shareholder shall have
the right at every shareholders' meeting to one vote for each share standing in
his name on the books of the corporation on the date established by the board of
directors as the record date for determination of shareholders entitled to vote
at such meeting.
Section 9. Order of Business. The order of business at each
shareholders' meeting shall be established by the person presiding at the
meeting.
Section 10. Notice of Shareholder Business. At any meeting of the
shareholders, only such business may be conducted as shall have been properly
brought before the meeting, and as shall have been determined to be lawful and
appropriate for consideration by shareholders at the meeting. To be properly
brought before a meeting, business must be (a) specified in the notice of
meeting given in accordance with Section 4 of this Article I, (b) otherwise
properly brought before the meeting by or at the direction of the board of
directors or the chief executive officer, or (c) otherwise properly brought
before the meeting by a shareholder. For business to be properly brought before
a meeting by a shareholder pursuant to clause (c) above, the shareholder must
have given timely notice thereof in writing to the secretary of the corporation.
To be timely, a shareholder's notice must be delivered to or mailed and received
at the principal office of the corporation not less than fifty days nor more
than ninety days prior to the meeting; provided, however, that in the event that
less than sixty days' notice of the date of the meeting is given to
shareholders, notice by the shareholder to be timely must be so received not
later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was given. A shareholder's notice to the
secretary shall set forth as to each matter the shareholder proposes to bring
before the meeting (i) a brief description of the business desired to be brought
before the meeting, (ii) the name and address, as they appear on the
corporation's stock records, of the shareholder proposing such business, (iii)
the class and number of shares of the corporation which are beneficially owned
by the shareholder, and (iv) any interest of the shareholder in such business.
Notwithstanding anything in these bylaws to the contrary, no business shall be
conducted at a meeting except in accordance with the procedures set forth in
this Section 10. The person presiding at the meeting shall, if the facts
warrant, determine and declare to the meeting that business was not brought
before the meeting in accordance with the bylaws, or that business was not
lawful or appropriate for consideration by shareholders at the meeting, and if
he should so determine, he shall so declare to the meeting and any such business
shall not be transacted.
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Section 11. Notice of Shareholder Nominees. Nominations of persons for
election to the board of directors of the corporation may be made at any meeting
of shareholders by or at the direction of the board of directors or by any
shareholder of the corporation entitled to vote for the election of directors at
the meeting. Shareholder nominations shall be made pursuant to timely notice
given in writing to the secretary of the corporation in accordance with Section
10 of this Article I. Such shareholder's notice shall set forth, in addition to
the information required by Section 10, as to each person whom the shareholder
proposes to nominate for election or re-election as a director, (i) the name,
age, business address and residence address of such person, (ii) the principle
occupation or employment of such person, (iii) the class and number of shares of
the corporation which are beneficially owned by such person, (iv) any other
information relating to such person that is required to be disclosed in
solicitation of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including without limitation such person's written consent to being
named in the proxy statement as a nominee and to serving as a director if
elected), and (v) the qualifications of the nominee to serve as a director of
the corporation. No shareholder nomination shall be effective unless made in
accordance with the procedures set forth in this Section 11. The person
presiding at the meeting shall, if the facts warrant, determine and declare to
the meeting that a shareholder nomination was not made in accordance with the
bylaws, and if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.
Section 12. Control Share Acquisitions. As used in this Section 12, the
terms, "control shares" and "control share acquisition" shall have the same
meanings as set forth in Indiana Code Section 23-1-42-1 et seq. (the "Act").
Control shares of the corporation acquired in a control share acquisition shall
have only such voting rights as are conferred by the Act. Control shares of the
corporation acquired in a control share acquisition with respect to which the
acquiring person has not filed with the corporation the statement required by
the Act may, at any time during the period ending sixty days after the last
acquisition of control shares by the acquiring person, be redeemed by the
corporation at the fair value thereof pursuant to procedures authorized by a
resolution of the board of directors. Such authority may be general or confined
to specific instances.
ARTICLE II
Board of Directors
Section 1. General Powers, Number Classes and Tenure. The business of
the corporation shall be managed by a board of directors. The number of
directors which shall constitute the whole board of directors of the corporation
shall be seven. The number of directors may be increased or decreased from time
to time by amendment of these bylaws, but no decrease shall have the effect of
shortening the term of any incumbent director. The directors shall be divided
into three classes, each class to consist, as nearly as may be, of one-third of
the number of directors then constituting the whole board of directors, with one
class to be elected annually by shareholders for a term of three years, to hold
office until their respective successors are elected and qualified; except that
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(1) the terms of office of directors initially elected shall be
staggered so that the term of office of one class shall expire
in each year;
(2) the term of office of a director who is elected by either the
directors or shareholders to fill a vacancy in the board of
directors shall expire at the end of the term of office of the
succeeded director's class or at the end of the term of office
of such other class as determined by the board of directors to
be necessary or desirable in order to equalize the number of
directors among the classes; and
(3) the board of directors may adopt a policy limiting the time
beyond which certain directors are not to continue to serve,
the effect of which may be to produce classes of unequal size
or to cause certain directors either to be nominated for
election for a term of less than three years or to cease to be
a director before expiration of the term of the director's
class.
In case of any increase in the number of directors, the additional directors
shall be distributed among the several classes to make the size of the classes
as equal as possible.
Section 2. Regular Meetings. A regular meeting of the board of
directors shall be held without other notice than this bylaw immediately after,
and at the same place as, the annual meeting of shareholders. The board of
directors may provide, by resolution, the time and place, either within or
without the State of Indiana, for the holding of additional regular meetings
without other notice than such resolution.
Section 3. Special Meetings. Special meetings of the board of directors
may be called by the chief executive officer. The secretary shall call special
meetings of the board of directors when requested in writing to do so by a
majority of the members thereof. Special meetings of the board of directors may
be held either within or without the State of Indiana.
Section 4. Notice of Meetings. Except as otherwise provided in these
bylaws, notice of any meeting of the board of directors shall be given not less
than two days before the date fixed for such meeting by oral, telegraphic,
telephonic, electronic or written communication stating the time and place
thereof and delivered personally to each member of the board of directors or
telegraphed or mailed to him at his business address as it appears on the books
of the corporation; provided, that in lieu of such notice, a director may sign a
written waiver of notice either before the time of the meeting, at the time of
the meeting or after the time of the meeting.
Section 5. Quorum. A majority of the whole board of directors,
represented in person or by any means of communication by which all directors
participating may simultaneously hear each other, shall be necessary to
constitute a quorum for the transaction of any business except the filling of
vacancies, but if less than such majority is present at a meeting, a majority of
the directors present may adjourn the meeting from time to time without further
notice.
Section 6. Manner of Acting. The act of a majority of the directors
present at any meeting at which a quorum is present shall be the act of the
board of directors, unless the act of a greater number is required by law or by
the articles of incorporation or these bylaws.
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Unless otherwise provided by the articles of incorporation, any action required
or permitted to be taken at any meeting of the board of directors may be taken
without a meeting, if such action is evidenced by one or more written consents,
describing the action taken, signed by all members of the board of directors and
such written consent is filed with the minutes of proceedings of the board of
directors. Action taken by means of a written consent is effective when the last
member of the board of directors signs a written consent, unless the written
consent specifies a different prior or subsequent date. Written consents may be
signed in counterparts. Unless otherwise provided by the article of
incorporation, any or all members of the board of directors may participate in a
meeting of the board of directors by means of a conference telephone or similar
communications equipment by which all persons participating in the meeting can
communicate with each other, and participation in this manner constitutes
presence in person at the meeting.
Section 7. Vacancies. Except as otherwise provided in the articles of
incorporation, any vacancy occurring in the board of directors may be filled by
a majority vote of the remaining directors, though less than a quorum of the
board of directors, or, at the discretion of the board of directors, any vacancy
may be filled by a vote of the shareholders.
Section 8. Notice to Shareholders. Shareholders shall be notified of
any increase in the number of directors and the name, address, principal
occupation and other pertinent information about any director elected by the
board of directors to fill any vacancy. Such notice shall be given in the next
mailing sent to shareholders following any such increase or election, or both,
as the case may be.
ARTICLE III
Officers
Section 1. Elected Officers. The elected officers of the corporation
shall be a chief executive officer, president, a secretary, and a treasurer, and
may also include a chairman of the board, a vice chairman, one or more vice
presidents as the board of directors may determine, and such other officers as
the board of directors may determine. The chairman of the board and the vice
chairman, if any, shall be chosen from among the directors. Any two or more
offices may be held by the same person.
Section 2. Appointed Officers. The appointed officers of the
corporation shall be a controller and one or more assistant vice presidents,
assistant treasurers, assistant secretaries and assistant controllers.
Section 3. Election or Appointment and Term of Office. The elected
officers of the corporation shall be elected annually by the board of directors
at the first meeting of the board of directors held after each annual meeting of
the shareholders. The appointed officers of the corporation shall be appointed
annually by the chief executive officer immediately following the first meeting
of the board of directors held after each annual meeting of the shareholders.
Additional elected officers may be elected at any regular or special meeting of
the board of directors to serve until the regular meeting of the board held
after the next annual meeting of
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shareholders, and additional appointed officers may be appointed by the chief
executive officer at any time to serve until the next annual appointment of
officers. Each officer shall hold office until his successor shall have been
duly elected or appointed and shall have been qualified or until his death or
until he shall resign or retire or shall have been removed.
Section 4. Removal. Any officer may be removed by the board of
directors and any appointed officer may be removed by the chief executive
officer, whenever in their judgment the best interests of the corporation will
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed.
Section 5. Vacancies. A vacancy in the office of chief executive
officer, president, secretary or treasurer because of death, resignation,
retirement, removal or otherwise, shall be filled by the board of directors, and
a vacancy in any other elected office may be filled by the board of directors.
Section 6. Chief Executive Officer. The chief executive officer of the
corporation shall be, subject to the board of directors, in general charge of
the affairs of the corporation. The chief executive officer shall also have the
authority to contract loans and issue evidences of indebtedness on behalf of the
corporation on a per transaction basis in a principal amount not in excess of
one million dollars ($1,000,000). In the absence of the chairman of the board,
or if such office be vacant, the chief executive officer shall have all the
powers of the chairman of the board and shall perform all his duties.
Section 7. Chairman of the Board. The chairman of the board shall
preside at all meetings of the shareholders and of the board of directors at
which he may be present and shall have such other powers and duties as may be
determined by the board of directors.
Section 8. Vice Chairman. The vice chairman, if any, shall have such
powers and duties as may be determined by the board of directors or the chief
executive officer.
Section 9. President. The president shall have such powers and duties
as may be determined by the board of directors or the chief executive officer.
Section 10. Vice Presidents. A vice president shall perform such duties
as may be assigned by the chief executive officer or the board of directors. In
the absence of the president and in accordance with such order of priority as
may be established by the board of directors, he may perform the duties of the
president, and when so acting, shall have all the powers of, and be subject to
all the restrictions upon, the president.
Section 11. Assistant Vice Presidents. An assistant vice president
shall perform such duties as may be assigned by the chief executive officer or
the board of directors.
Section 12. Secretary. The secretary shall (a) keep the minutes of the
shareholders' and board of directors' meetings in one or more books provided for
that purpose, (b) see that all notices are duly given in accordance with the
provisions of these bylaws or as required by law, (c) be custodian of the
corporate records and of the seal, if any, of the corporation, and (d) in
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general perform all duties incident to the office of secretary and such other
duties as may be assigned by the chief executive officer or the board of
directors.
Section 13. Assistant Secretaries. In the absence of the secretary, an
assistant secretary shall have the power to perform his duties including the
certification, execution and attestation of corporate records and corporate
instruments. Assistant secretaries shall perform such other duties as may be
assigned to them by the chief executive officer or the board of directors.
Section 14. Treasurer. The treasurer shall (a) have charge and custody
of all funds and securities of the corporation, (b) receive and give receipts
for the monies due and payable to the corporation from any source whatsoever,
(c) deposit all such monies in the name of the corporation in such depositories
as are selected by the board of directors or chief executive officer, and (d) in
general perform all duties incident to the office of treasurer and such other
duties as may be assigned by the chief executive officer or the board of
directors. If required by the board of directors, the treasurer shall give a
bond for the faithful discharge of his duties in such form and with such surety
or sureties as the board of directors shall determine.
Section 15. Assistant Treasurers. In the absence of the treasurer, an
assistant treasurer shall have the power to perform his duties. Assistant
treasurers shall perform such other duties as may be assigned to them by the
chief executive officer or the board of directors.
Section 16. Controller. The controller shall perform such duties as may
be assigned by the chief executive officer or the board of directors.
Section 17. Assistant Controller. In the absence of the controller, an
assistant controller shall have the power to perform his duties. Assistant
controllers shall perform such other duties as may be assigned to them by the
chief executive officer or the board of directors.
ARTICLE IV
Committees
Section 1. Board Committees. The board of directors may, by resolution
adopted by a majority of the whole board of directors, from time to time
designate from among its members one or more committees each of which, to the
extent provided in such resolution and except as otherwise provided by law,
shall have and exercise all the authority of the board of directors. Each such
committee shall serve at the pleasure of the board of directors. The designation
of any such committee and the delegation thereto of authority shall not operate
to relieve the board of directors, or any member thereof, of any responsibility
imposed by law. Each such committee shall keep a record of its proceedings and
shall adopt its own rules of procedure. It shall make such reports to the board
of directors of its actions as may be required by the board.
Section 2. Advisory Committees. The board of directors may, by
resolution adopted by a majority of the whole board of directors, from time to
time designate one or more advisory committees, a majority of whose members
shall be directors. An advisory committee shall serve at the pleasure of the
board of directors, keep a record of its proceedings and adopt its own rules
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of procedure. It shall make such reports to the board of directors of its
actions as may be required by the board.
Section 3. Manner of Acting. Unless otherwise provided by the articles
of incorporation, any action required or permitted to be taken at any meeting of
a committee established under this Article IV may be taken without a meeting if
such action is evidenced by one or more written consents, describing the action
taken, signed by all members of the committee, and such written consent is filed
with the minutes of proceedings of the committee. Action taken by means of a
written consent is effective when the last member of the committee signs a
written consent, unless the written consent specifies a different prior or
subsequent date. Written consents may be signed in counterparts. Unless
otherwise provided by the articles of incorporation, any or all members of such
committee may participate in a meeting of the committee by means of a conference
telephone or similar communications equipment by which all persons participating
in the meeting can communicate with each other, and participation in this manner
constitutes presence in person at the meeting.
ARTICLE V
Corporate Instruments and Loans
Section 1. Corporate Instruments. The board of directors may authorize
any officer or officers to execute and deliver any instrument in the name of or
on behalf of the corporation, and such authority may be general or confined to
specific instances.
Section 2. Loans. No loans the principal amount of which is in excess
of one million dollars ($1,000,000) shall be contracted on behalf of the
corporation and no evidences of indebtedness the principal amount of which is in
excess of one million dollars ($1,000,000) shall be issued in its name unless
authorized by a resolution of the board of directors. Such authority may be
general or confined to specific instances.
ARTICLE VI
Stock Certificates, Transfer of Shares, Stock Records
Section 1. Certificates for Shares. Each shareholder shall be entitled
a certificate, signed by the chief executive officer, president or a vice
president and the secretary or any assistant secretary of the corporation,
certifying the number of shares owned by him in the corporation. If such
certificate is countersigned by the written signature of a transfer agent other
than the corporation or its employee, the signatures of the officers of the
corporation may be facsimiles. If such certificate is countersigned by the
written signature of a registrar other than the corporation or its employee, the
signatures of the transfer agent and the officers of the corporation may be
facsimiles. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent, or registrar at the date of its issue.
Certificates representing shares of the corporation shall be in such form
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consistent with the laws of the State of Indiana as shall be determined by the
board of directors. All certificates for shares shall be consecutively numbered
or otherwise identified. The name and address of the person to whom the shares
represented thereby are issued, with the number of shares and date of issue,
shall be entered on the stock transfer records of the corporation.
Section 2. Transfer of Shares. Transfer of shares of the corporation
shall be made on the stock transfer records of the corporation by the holder of
record thereof or by his legal representative who shall furnish proper evidence
of authority to transfer, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the corporation, and, except as otherwise
provided in these bylaws, on surrender for cancellation of the certificates for
such shares.
Section 3. Lost, Destroyed or Wrongfully Taken Certificates. Any person
claiming a certificate of stock to have been lost, destroyed or wrongfully
taken, and who requests the issuance of a new certificate before the corporation
has notice that the certificate alleged to have been lost, destroyed or
wrongfully taken has been acquired by a bona fide purchaser, shall make an
affidavit of that fact and shall give the corporation and its transfer agents
and registrars a bond of indemnity with unlimited liability, in form and with
one or more corporate sureties satisfactory to the chief executive officer or
treasurer of the corporation (except that the chief executive officer or
treasurer may authorize the acceptance of a bond of different amount, or a bond
with personal surety thereon, or a personal agreement of indemnity), whereupon
in the discretion of the chief executive officer or the treasurer and except as
otherwise provided by law a new certificate may be issued of the same tenor and
for the same number of shares as the one alleged to have been lost, destroyed or
wrongfully taken. In lieu of a separate bond of indemnity in each case, the
chief executive officer of the corporation may accept an assumption of liability
under a blanket bond issued in favor of the corporation and its transfer agents
and registrars by one or more corporate sureties satisfactory to him.
Section 4. Transfer Agent and Registrars. The board of directors by
resolution may appoint a transfer agent or agents or a registrar or registrars
of transfer, or both. All such appointments shall confer such powers, rights,
duties and obligations consistent with the laws of the State of Indiana as the
board of directors shall determine. The board of directors may appoint the
treasurer of the corporation and one or more assistant treasurers to serve as
transfer agent or agents. Any signature required of a transfer agent or
registrar may be accomplished manually or by facsimile.
Section 5. Record Date. For the purposes of determining shareholders
entitled to vote at any meeting of shareholders or any adjournment thereof, or
shareholders entitled to receive payment of any dividend, or in order to make a
determination of shareholders for any other proper purpose, the board of
directors shall fix in advance a date as a record date for any such
determination of shareholders, such date in any case to be not more than seventy
days before the meeting or action requiring a determination of shareholders.
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ARTICLE VII
Liability
No person or his personal representatives shall be liable to the
corporation for any loss or damage suffered by it on account of any action taken
or omitted to be taken by such person in good faith as an officer or employee of
the corporation, or a director, officer, partner, trustee, employee, or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan, or other enterprise, whether for profit or not, which he
serves or served at the request of the corporation, if such person (a) exercised
and used the same degree of care and skill as a prudent man would have exercised
and used under like circumstances, charged with a like duty, or (b) took or
omitted to take such action in reliance upon advice of counsel for the
corporation or such enterprise or upon statements made or information furnished
by persons employed or retained by the corporation or such enterprise upon which
he had reasonable grounds to rely. The foregoing shall not be exclusive of other
rights and defenses to which such person or his personal representatives may be
entitled under law.
ARTICLE VIII
Indemnification
Section 1. Actions by a Third Party. The corporation shall, to the
fullest extent to which it is empowered to do so by the Indiana Business
Corporation Law, or any other applicable laws, as from time to time in effect,
indemnify any person who is or was a party, or is threatened to be made a
defendant or respondent, to a proceeding, including any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than actions by or in the right of the corporation), and
whether formal or informal, who is or was a director, officer, employee, or
agent of the corporation or who, while a director, officer, employee, or agent
of the corporation, is or was serving at the corporation's request as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise, whether for profit or not, against:
(a) any reasonable expenses (including attorneys' fees) incurred
with respect to a proceeding, if such person is wholly
successful on the merits or otherwise in the defense of such
proceeding, or
(b) judgments, settlements, penalties, fines (including excise
taxes assessed with respect to employee benefit plans) and
reasonable expenses (including attorneys fees) incurred with
respect to a proceeding where such person is not wholly
successful on the merits or otherwise in the defense of the
proceeding if:
(i) the individual's conduct was in good faith; and
(ii) the individual reasonably believed:
10
<PAGE>
(A) in the case of conduct in the individual's
official capacity as a director, officer,
employee or agent of the corporation, that
the individual's conduct was in the
corporation's best interests; and
(B) in all other cases, that the individual's
conduct was at least not opposed to the
corporation's best interests; and
(iii) in the case of any criminal proceeding, the
individual either:
(A) had reasonable cause to believe the
individual's conduct was lawful; or
(B) had no reasonable cause to believe the
individual's conduct was unlawful;
except that the foregoing shall not apply to a director or officer of the
corporation with respect to a proceeding that was commenced by such director or
officer prior to a Change in Control (as defined in Section 9 to this Article
VIII).
The termination of a proceeding by a judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent is not, of itself,
determinative that the director, officer, or employee did not meet the standard
of conduct described in this section.
Section 2. Actions by or in the Right of the Corporation. The
corporation shall, to the fullest extent to which it is empowered to do so by
the Indiana Business Corporation Law, or any other applicable laws, as from time
to time in effect, indemnify any person who is or was a party, or is threatened
to be made a defendant or respondent, to a proceeding, including any threatened,
pending or completed action, suit or proceeding, by or in the right of the
corporation to procure a judgment in its favor, by reason of the fact that such
person is or was a director, officer, employee, or agent of the corporation or
is or was serving at the request of the corporation as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise,
whether for profit or not, against any reasonable expenses (including attorneys'
fees):
(a) if such person is wholly successful on the merits or otherwise
in the defense of such proceeding, or
(b) if not wholly successful:
(i) the individual's conduct was in good faith; and
(ii) the individual reasonably believed:
(A) in the case of conduct in the individual's
official capacity as a director, officer, or
employee of the corporation, that the
individual's conduct was in the
corporation's best interests; and
11
<PAGE>
(B) in all other cases, that the individual's
conduct was at least not opposed to the
corporation's best interests;
except that the foregoing shall not apply to a director or officer of the
corporation with respect to a proceeding that was commenced by such director or
officer prior to a Change in Control.
Section 3. Good Faith Defined. For purposes of any determination under
Section 1 or 2, a person shall be deemed to have acted in good faith and to have
otherwise met the applicable standard of conduct set forth in such section if
his action is based on information, opinions, reports, or statements, including
financial statements and other financial data, if prepared or presented by (1)
one or more officers or employees of the corporation or another enterprise whom
he reasonably believes to be reliable and competent in the matters presented;
(2) legal counsel, public accountants, appraisers or other persons as to matters
he reasonably believes are within the person's professional or expert
competence; or (3) a committee of the board of directors of the corporation or
another enterprise of which the person is not a member if he reasonably believes
the committee merits confidence. The term "another enterprise" as used in this
Section 3 shall mean any other corporation or any partnership, joint venture,
trust, employee benefit plan or other enterprise of which such person is or was
serving at the request of the corporation as a director, officer, partner,
trustee, employee or agent. The provisions of this Section 3 shall not be deemed
to be exclusive or to limit in any way the circumstances in which a person may
be deemed to have met the applicable standards of conduct set forth in Section 1
or 2.
Section 4. Advancement of Defense Expenses. The corporation shall pay
for or reimburse the reasonable expenses incurred by a director, officer,
employee or agent who is a party to a proceeding described in Section 1 or 2 of
this Article VIII in advance of the final disposition of said proceeding if:
(a) the director, officer, employee or agent furnishes the
corporation a written affirmation of his good faith belief
that he has met the standard of conduct described in Section 1
or 2; and
(b) the director, officer, employee or agent furnishes the
corporation a written undertaking, executed personally or on
his behalf, to repay the advance if it is ultimately
determined that the director, officer, employee or agent did
not meet the standard of conduct; and
(c) a determination is made that the facts then known to those
making the determination would not preclude indemnification
under Section 1 or 2.
The undertaking required by this Section 4 must be an unlimited general
obligation of the director, officer, employee or agent but need not be secured
and may be accepted by the corporation without reference to the financial
ability of such person to make repayment.
Section 5. Non-Exclusiveness of Indemnification. The indemnification
and advancement of expenses provided for or authorized by this Article VIII do
not exclude any other rights to indemnification or advancement of expenses that
a person may have under:
(a) the corporation's articles of incorporation or bylaws;
(b) any resolution of the board of directors or the shareholders
of the corporation;
(c) any other authorization adopted by the shareholders;
12
<PAGE>
(d) any director and officer insurance policy, or any other type
of insurance policy; or
(e) otherwise as provided by law, both as to such person's actions
in his capacity as a director, officer, employee or agent of
the corporation and as to actions in another capacity while
holding such office.
Such indemnification shall continue as to a person who has ceased to be a
director, officer, or employee, and shall inure to the benefit of the heirs and
personal representatives of such person.
Section 6. Vested Right to Indemnification. The right of any individual
to indemnification under this Article VIII shall vest at the time of occurrence
or performance of any event, act or omission giving rise to any action, suit or
proceeding of the nature referred to in Section 1 or 2 and, once vested, shall
not later be impaired as a result of any amendment, repeal, alteration or other
modification of any or all of these provisions, whether or not any such
amendment, repeal, alteration or other modification occurs after a Change in
Control. Notwithstanding the foregoing, the indemnification afforded under this
Article VIII shall be applicable to all alleged prior acts or omissions of any
individual seeking indemnification hereunder, regardless of the fact that such
alleged acts or omissions may have occurred prior to the adoption of this
Article VIII. To the extent such prior acts or omissions cannot be deemed to be
covered by this Article VIII, the right of any individual to indemnification
shall be governed by the indemnification provisions in effect at the time of
such prior acts or omissions.
Section 7. Insurance. The corporation may purchase and maintain
insurance covering any person who is or was a director, officer, employee or
agent of the corporation, or who is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against any liability asserted against or incurred by the
individual in that capacity or arising from the individual's status as a
director, officer, employee or agent, whether or not the corporation would have
power to indemnify the individual against the same liability under this Article
VIII.
Section 8. Additional Definitions. For purposes of this Article VIII,
references to the "corporation" shall include any domestic or foreign
predecessor entity of the corporation in a merger or other transaction in which
the predecessor's existence ceased upon consummation of the transaction.
For purposes of this Article VIII, "Change in Control" shall mean a
change in control of the corporation of a nature that would be required to be
reported in response to Item 6(e) (or any successor provision) of Schedule 14A
of Regulation 14A (or any amendment or successor provision thereto) promulgated
under the Securities Exchange Act of 1934 (the "1934 Act"), whether or not the
corporation is then subject to such reporting requirement; provided that,
without limitation, such a change in control shall be deemed to have occurred if
(A) any "person" (as such term is used in Sections 13(d) and 14(d) of the 1934
Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
1934 Act), directly or indirectly, of securities of the corporation representing
20% or more of the voting power of all outstanding
13
<PAGE>
shares of stock of the corporation entitled to vote generally in an election of
directors without the prior approval of at least two-thirds of the members of
the board of directors in office immediately prior to such acquisition; (B) the
corporation is a party to any merger or consolidation in which the corporation
is not the continuing or surviving corporation or pursuant to which shares of
the corporation's common stock would be converted into cash, securities or other
property, other than a merger of the corporation in which the holders of the
corporation's common stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger, (C) there is a sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
the assets of the corporation, or liquidation or dissolution of the corporation;
(D) the corporation is a party to a merger, consolidation, sale of assets or
other reorganization, or a proxy contest, as a consequence of which members of
the board of directors in office immediately prior to such transaction or event
constitute less than a majority of the board of directors thereafter; or (E)
during any period of two consecutive years, individuals who at the beginning of
such period constituted the board of directors (including for this purpose any
new director whose election or nomination for election by the shareholders was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of such period) cease for any reason to
constitute at least a majority of the board of directors.
For purposes of this Article VIII, "serving an employee benefit plan at
the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent with respect to
an employee benefit plan, its participants, or beneficiaries. A person who acted
in good faith and in a manner he reasonably believed to be in the best interests
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interest of the
corporation" referred to in this Article VIII.
For purposes of this Article VIII, "official capacity," when used with
respect to a director, shall mean the office of director of the corporation; and
when used with respect to an individual other than a director, shall mean the
office in the corporation held by the officer or the employment or agency
relationship undertaken by the employee or agent on behalf of the corporation.
"Official capacity" does not include service for any other foreign or domestic
corporation or any partnership, joint venture, trust, employee benefit plan, or
other enterprise, whether for profit or not.
Section 9. Payments a Business Expense. Any payments made to any
indemnified party under this Article VIII or under any other right to
indemnification shall be deemed to be an ordinary and necessary business expense
of the corporation, and payment thereof shall not subject any person responsible
for the payment, or the board of directors, to any action for corporate waste or
to any similar action.
ARTICLE IX
Amendments
These bylaws may be altered, amended or repealed and new bylaws may be
made by a
14
<PAGE>
majority of the whole board of directors at any regular or special meeting of
the board of directors.
15
AGREEMENT made this 30th day of April, 1996.
BETWEEN:
SUPERIOR INSURANCE COMPANY
SUPERIOR AMERICAN INSURANCE COMPANU
SUPERIOR GUARANTY INSURANCE COMPANY
(collectively, hereinafter designated as the "Company")
- and -
GGS MANAGEMENT, INC.
(hereinafter designated as the "Manager")
IN CONSIDERATION of the mutual covenants and premises contained herein
the parties hereto agree.
1. The Company hereby grants to the Manager authority to act on behalf
of the Company in all States of United States of America in which the Company
carries on business to receive and accept proposals for insurance covering such
classes of risks as set out in Addendum "A" attached hereto and forming part of
this contract as may from time to time be amended.
2. The Manager has full authority and responsibility to collect and
receive on behalf of the Company payments for premiums for such insurance but
all such payments shall be made payable to the Company. The Company shall
establish and the Manager shall deposit all gross premiums into a bank account
controlled by the Company (the "Premium Account") immediately upon the Manager's
receipt of such funds. All funds deposited into the Premium Account shall
-1-
<PAGE>
be supported by the Policy Register (as hereinafter defined). On a monthly
basis, the Manager shall furnish to the Company or its data processing facility
a report of Gross Written Premium in a policy register format, setting forth
policies bound or endorsed by policy number, name of the insured, policy
effective and termination date, policy issuance date, premium received, and
commission due (the "Policy Register").
3. The Company hereby grants to the Manager authority to, on behalf of
the Company, receive and accept proposals for contracts, to appoint adjusters,
adjust and settle claims on behalf of the Company and to do all those things
required to be done by the Company in fulfilling its obligations to the public,
the Department of Insurance or other government bodies. All funds collected for
the account of the Company shall be held by the Manager in a fiduciary capacity
in a bank which is a member of the Federal Reserve system. This account shall be
used for all payment as directed by the Company. The Manager may retain no more
than sixty (60) days of estimated claims payments and allocated loss adjustment
expenses.
All claims must be reported to the Company in a timely manner and all
claims must be adjusted by properly licensed persons. Notice shall be sent by
the Manager to the Company as soon as it becomes known that any claim (i)
exceeds the limits set by the Company; (ii) involves a coverage dispute; (iii)
exceeds the Manager's claims settlement authority; (iv) is open for more than
six (6) months; or, (v) is closed by payment of an amount set by the Department
of Insurance or an amount set by the Company, whichever is less.
-2-
<PAGE>
All claims files shall be the joint property of the Company and the
Manager. However, upon an order of liquidation of the Company, the claims and
related application files shall become the sole property of the Company or its
estate. The Manager shall have reasonable access to and the right to copy said
files on a timely basis.
Any settlement authority granted to the Manager may be terminated for
cause upon the Company's written notice to the Manager or upon the termination
of this Agreement. The Company may suspend the settlement authority granted
herein during the pendency of any dispute regarding its cause for termination of
this Agreement.
4. The powers granted by the Company to the Manager hereunder are on an
exclusive basis and during the currency of this Agreement the Company shall not
act on its own in respect of any matter delegated to the Manager hereunder.
5. In consideration of the Manager performing its duties hereunder and
as compensation for such business as is placed with the Company, the Company
agrees that out of premiums so collected, delivered and deposited to the account
of the Company, the Company shall pay to the Manager fees at rates as set out in
Addendum "A" attached hereto or as may from time to time be amended in writing.
Manager hereby agrees that it shall pay Company's office rent and occupancy
operating expenses from the amounts it receives pursuant to this Agreement.
-3-
<PAGE>
6. The Company hereby appoints and constitutes the Manager as its
legally designated Manager throughout the United States of America and hereby
conveys and confers to the Manager the powers authorizing him to take all the
actions necessary so as to enable the Manager to perform its duties hereunder.
7. Except as other provided herein, particularly, but without
limitation, the Manager is hereby empowered to, and hereby agrees to perform,
on behalf of the Company:
(a) Accept proposals for, underwrite, issue policies for, and
provide all other policyholder services incident to the
category of insurance business as set forth in Addendum A;
(b) Receive, demand, seize, institute proceedings for recovery and
recover any and all premiums, debts or other sums which are
presently or which shall become in the future due and payable
to the Company provided that, in respect to all premiums,
payments shall be made directly to the Company and in respect
to all other debts or sums recovered shall be paid forthwith
to the account of the Company;
(c) Open and maintain, in the name of the Company, one or several
accounts in any bank or trust company and draw on such
accounts for and on behalf of the Company and, to that end,
endorse checks and bills of exchange so as to effect deposits
in said accounts in the name and on behalf of the Company; but
it is expressly stipulated that the Manager does not have the
authorization to overdraw or to negotiate and/or obtain a
loan, on pledged security or otherwise, or pay any sum on its
own account without a special authorization from the Company;
(d) Receive and/or cash and deposit forthwith to the account of
the Company any dividend, interest or other sums of money
related to or connected with securities forming a part of the
activity of the Company in the United States of America
whether provided by law or as a result of contracts or trusts
or otherwise, within the limits authorized by law;
(e) Solicit authorizations of any Department of Insurance or other
governmental bodies and solicit the renewal and modification
of such authorizations and, to this end, constitute deposits
of securities or other properties, as may be required, and
draw up and execute, on behalf of the Company, all required
documents to that end and also:
-4-
<PAGE>
(i) Solicit, if need be, the arbitration of a civil
servant of the Department of Insurance or other
civil servant;
(ii) Draw up and execute, on behalf of the Company, any
declaration as to its solvency or any other document
required by law;
(iii) Generally, to that end, do whatever is
necessary and draw up and execute any other document
which may be required from the Company.
(f) Establish and verify the annual accounts and other financial
documents required by the laws and regulations of any
jurisdiction in the territory of which the American branch of the
Company is authorized to do business, in addition to any other
documents and reports required to be furnished pursuant to such
laws and regulations; and in the event that it will be necessary
that such reports or documents be drawn up by two persons,
appoint an agent in such territory as representative of the
Company with the necessary powers to establish such reports or
documents;
(g) Communicate with the Department of Insurance in the State of
Florida or of any state, territory, or district therein or
thereof or with any other persons any such state, territory or
district, as provided by law and, on behalf of the Company,
accept and acknowledge the receipt of service of a notice or
proceeding of any kind, either provisional or definitive in any
judicial proceeding against the Company, in any Court of Justice
of the United States of America or of any state, territory or
district therein of thereof, and appoint and admit, on behalf of
the Company that a decision taken by the Department of Insurance
or other qualified person be considered as valid and obligatory
and binding upon the Company pursuant to the laws and customs of
the United States of America or of the states, territories or
districts therein or thereof.
(h) The Manager shall not:
(i) Bind reinsurance or retrocessions on behalf of the
Company;
(ii) Commit the Company to participate in insurance or
reinsurance syndicates;
(iii) Appoint any producer without assuring that the
producer is lawfully licensed to transact the type
of insurance for which he is appointed;
(iv) Collect a payment from a reinsurer or commit the
Company to a claim settlement with a reinsurer
without the prior written approval of the
Company;
(v) Permit any subproducer to serve on its board of
directors;
-5-
<PAGE>
(vi) Appoint a submanaging general agent.
8. The parties agree that all books and records relating to the
Company's business including those maintained for its and on its behalf by the
Manager shall remain the property of the Company and shall be kept at the
Company's head office. Furthermore, all business effected on the Company's
account by the Manager shall be the property of the Company and the Manager
shall have no rights thereto except in accordance with this Agreement.
9. The Company agrees to hold the Manager harmless and to indemnify the
Manager in respect to all claims including the cost of defense arising out of
loss to policy holders caused directly by the Company's error in the processing
or handling of policies and further agrees to hold the Manager harmless and
indemnify the Manager for actions of the Company which result in loss or damage
to the Manager.
10. The Manager is an agent of the Company and the Company agrees to
indemnify the Manager for all actions taken by the manager on behalf of the
Company in accordance with its duties hereunder.
11. The term and termination of this Agreement shall be as follows:
(a) This Agreement shall be for a period of five (5) years
commencing on the date first written above and shall be
automatically renewed for further periods of three (3)
years each unless a notice in writing to the contrary
shall have been sent by either party to the other by prepaid
mail at least sixty (60) days prior to December 31 of the
end of the term or any renewals.
(b) Notwithstanding the foregoing, either party may terminate this
Agreement upon sixty (60) days notice in writing delivered by
prepaid mail to the other party.
-6-
<PAGE>
(c) This Agreement shall terminate with cause:
(i) Immediately at the election of and upon written notice
from the Company, if any public authority cancels or
declines to renew any of the licenses of the Manager, or
automatically and immediately if any public authority
cancels or declines to renew the Company's licenses in any
jurisdiction in which it is licensed to do business.
(ii) Automatically and immediately upon the insolvency or
bankruptcy of the Manager or an assignment by the Manager
for the benefit of creditors.
(iii) Automatically and immediately upon the insolvency of
the Company.
(iv) Immediately at the election of and upon written notice
from the Company of the commission of any of the following
acts by the Manager: fraud or gross negligence or willful
misconduct (which includes, but is not limited to, willful
violation of instructions, or willful violation of any
covenant of this Agreement or any statutory provision or
Department regulation).
(v) At the election of the Company upon the Manager's
violation of any provision of this Agreement, provided,
however, that in the case of such violation, the Company
shall give the Manager notice of the violation, and the
Manager will be allowed ten (10) days to cure such violation
after the date of the notice, or if the same is of such a
nature that it cannot reasonably be cured within such time,
if the Manager has not within such time commenced to cure
the same and does not diligently continue to and actually
cure the same. For purposes of this Paragraph , routine
differences in the accounting methods of the Manager and the
Company which are minor in amount and do not involve
premiums collected and willfully withheld by the Manager
shall not constitute failure to account for and pay over
premiums, provided all items not in dispute are paid in
accordance with the collection and remittance procedures set
forth in this Agreement.
(d) In the event of proper termination of this Agreement:
(i) All obligations of the Manager and the Company under
this Agreement shall survive until discharged and shall be
discharged promptly.
(ii) No party shall have a claim upon the other for loss of
prospective profit or damage to the business arising
therefrom.
-7-
<PAGE>
(iii) The Manager shall upon demand return to the Company
any Policies, forms or other supplies imprinted with the
Company's name regardless of who incurred the cost for same,
or any Policies, forms or other supplies furnished to the
Manager by the Company.
(e) The Company may, in its sole discretion, suspend the
underwriting authority of the Manager during the pendency of
any dispute regarding the cause for termination.
12. Any notice required or permitted hereunder shall be deemed to be
validly sent if sent to the following addresses:
(a) In the case of the Company:
3030 North Rocky Point Drive
Tampa, Florida 33607
Attention: President
(b) In the case of the Manager:
4720 Kingsway Drive
Indianapolis, Indiana 46205
Any such notice addressed as aforesaid and sent by prepaid mail shall
be conclusively deemed to have been received on the fifth business day after
such mailing. Either of the parties may advise the other in writing of any
change of address by the giving of notices.
13. It is expressly understood and covenanted that the Manager shall
not in any way assign, cede or transfer this Agreement without the written
consent of the Company.
14. This Agreement shall be governed by the laws of the State of Florida.
-8-
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Agreement by
officers duly authorized in that behalf.
SUPERIOR INSURANCE COMPANY
By: /s/ Alan G. Symons
SUPERIOR AMERICAN INSURANCE COMPANY
By: /s/ Alan G. Symons
SUPERIOR GUARANTY INSURANCE COMPANY
By: /s/ Alan G. Symons
GGS MANAGEMENT, INC.
By: /s/ Alan G. Symons
Dated at _____________________,
this 30th day of April,
1996.
-9-
<PAGE>
ADDENDUM A
SCHEDULE OF CLASSES AND FEES
The Manager shall receive fees for the business placed with the Company in
accordance with the following:
CLASS FEES
(% of Gross Written Premiums)
Automobile Agents commission plus 17% not to exceed 32%
in total.
When the Manager has elected to place reinsurance on behalf of the
Company, the reinsurance shall have a ceding commission payable to the Company
of at least the commission payable to the Manager plus taxes plus the agents'
commissions or the commission payable to the Manager shall be reduced
proportionately to the amount of the commission for reinsurance.
Exhibit 10.6
AGREEMENT made this 1st day of May, 1987.
B E T W E E N:
PAFCO GENERAL INSURANCE COMPANY
(hereinafter designated as the "Company")
- and -
SYMONS INTERNATIONAL GROUP, INC.
(hereinafter designated as the "Manager")
IN CONSIDERATION of the mutual covenants and premises
contained herein the parties hereto agree.
1. The Company hereby grants to the Manager authority to act on behalf of the
Company in all States of United States of America in which the Company carries
on business to receive and accept proposals for insurance covering such classes
of risks as set out in Addendum "A" attached hereto and forming part of this
contract as may from time to time be amended.
2. The Manager has full authority and responsibility to collect and receive on
behalf of the Company payments for premiums for such insurance but all such
payments shall be made payable to the Company.
3. The Company hereby grants to the Manager authority to, on behalf of the
Company, receive and accept proposals for contracts, to appoint adjusters,
adjust and settle claims on
<PAGE>
-2-
behalf of the Company and to do all those things required to be done by the
Company in fulfilling its obligations to the public, the Department of Insurance
or other government bodies.
4. The powers granted by the Company to the Manager hereunder are on an
exclusive basis and during the currency of this Agreement the Company shall not
act on its own in respect of any matter delegated to the Manager hereunder.
5. In consideration of the Manager performing its duties hereunder and as
compensation for such business as is placed with the Company, the Company agrees
that out of premiums so collected, delivered and deposited to the account of the
Company, the Company shall pay to the Manager fees at rates as set out in
Addendum "A" attached hereto or as may from time to time be amended in writing.
6. The Company hereby appoints and constitutes the Manager as its legally
designated Manager throughout the United States of America and hereby conveys
and confers to the Manager the powers authorizing him to take all the actions
necessary so as to enable the Manager to perform its duties hereunder.
7. Particularly, but without limitation, the Manager is hereby empowered to, on
behalf of the Company:
(a) receive, demand, seize, institute proceedings for
recovery and recover any and all premiums, debts or
other sums which are presently or which shall become
in the future due and payable to the Company provided
<PAGE>
-3-
that, in respect to all premiums, payments shall
be made directly to the Company and in respect to
all other debts or sums recovered shall be paid
forthwith to the account of the Company;
(b) open and maintain, in the name of the Company,
one or several accounts in any bank or trust
company and draw on such accounts for and on
behalf of the Company and, to that end, endorse
cheques and bills of exchange so as to effect
deposits in said accounts in the name and on
behalf of the Company; but it is expressly
stipulated that the Manager does not have the
authorization to overdraw or to negotiate
and/or obtain a loan, on pledged security or
otherwise, or pay any sum on its own account
without a special authorization from the
Company;
(c) receive and/or cash and deposit forthwith to
the account of the Company any dividend,
interest or other sums of money related to or
connected with securities forming a part of the
activity of the Company in the United States of
America whether provided by law or as a result
of contracts or trusts or otherwise, within the
limits authorized by law;
(d) solicit authorizations of any Department of
Insurance or other governmental bodies and
solicit the renewal and modification of such
authorizations and, to this end, constitute
<PAGE>
-4-
deposits of securities or other properties, as may be
required, and draw up and execute, on behalf of the
Company, all required documents to that end and also:
(i) solicit, if need be, the arbitration of
a civil servant of the Department of
Insurance or other civil servant;
(ii) draw up and execute, on behalf of the
Company, any declaration as to its
solvency or any other document required
by law;
(iii) generally, to that end, do whatever is
necessary and draw up and execute any
other document which may be required from
the Company.
(e) establish and verify the annual accounts and
other financial documents required by the laws
and regulations of any jurisdiction in the
territory of which the American branch of the
Company is authorized to do business, in
addition to any other documents and reports
required to be furnished pursuant to such laws
and regulations; and in the event that it will
be necessary that such reports or documents be
drawn up by two persons, appoint an agent in
such territory as representative of the Company
with the necessary powers to establish such
reports or documents;
<PAGE>
-5-
(f) Communicate with the Department of Insurance in
the State of Indiana or of any state,
territory, or district therein or thereof or
with any other persons any such state,
territory or district, as provided by law and,
on behalf of the Company, accept and
acknowledge the receipt of service of a notice
or proceeding of any kind, either provisional
or definitive in any judicial proceeding
against the Company, in any Court of Justice of
the United States of America or of any state,
territory or district therein of thereof, and
appoint and admit, on behalf of the Company
that a decision taken by the Department of
Insurance or other qualified person be
considered as valid and obligatory and binding
upon the Company pursuant to the laws and
customs of the United States of America or of
the states, territories or districts therein or
thereof.
8. The parties agree that all books and records relating to the Company's
business including those maintained for its and on its behalf by the Manager
shall remain the property of the Company and shall be kept at the Company's head
office. Furthermore, all business effected on the Company's account by the
Manager shall be the property of the Company and the Manager shall have no
rights thereto except in accordance with this Agreement.
9. The Company agrees to hold the Manager harmless and to indemnify the Manager
in respect to all claims including the cost of defense arising out of loss to
policy holders
<PAGE>
-6-
caused directly by the Company's error in the processing or handling of policies
and further agrees to hold the Manager harmless and indemnify the Manager for
actions of the Company which result in loss or damage to the Manager.
10. The Manager is an agent of the Company and the Company agrees to indemnify
the Manager for all actions taken by the manager on behalf of the Company in
accordance with its duties hereunder.
11. This Agreement shall be for a period of five years commencing on the date
first written above and shall be automatically renewed for further periods of
three years each unless a notice in writing to the contrary shall have been sent
by either party to the other by prepaid mail at least sixty days prior to
December 31 of the end of the term or any renewals. Notwithstanding the
foregoing, either party may terminate this agreement upon sixty days notice in
writing delivered by prepaid mail to the other party.
12. Any notice required or permitted hereunder shall be deemed to be validly
sent if sent to the following addresses:
(a) In the case of the Company:
4720 Kingsway Drive
Indianapolis, Indiana 46205
(b) In the case of the Manager:
4720 Kingsway Drive
Indianapolis, Indiana 46205
<PAGE>
-7-
Any such notice addressed as aforesaid and sent by prepaid mail shall be
conclusively deemed to have been received on the fifth business day after such
mailing. Either of the parties may advise the other in writing of any change of
address by the giving of notices.
13. It is expressly understood and covented that the Manager shall not in any
way assign, cede or transfer this Agreement without the written consent of the
Company.
14. This Agreement shall be governed by the laws of the State of Indiana.
IN WITNESS WHEREOF the parties hereto have executed this Agreement by
officers duly authorized in that behalf.
PAFCO GENERAL INSURANCE COMPANY
PER: /s/Alan G. Symons
-----------------------------
SYMONS INTERNATIONAL GROUP, INC.
PER: /s/ Alan G. Symons
-----------------------------
Dated at Toronto,
this 14th day of October,
1987.
<PAGE>
ADDENDUM A
SCHEDULE OF CLASSES AND FEES
The Manager shall receive fees for the business placed with
the Company in accordance with the following:
CLASS FEES
(% of Gross Written Premiums)
Automobile Agents commission plus 23.5% not
to exceed 38.5% in total.
Property Agents commission plus 23.5% not
to exceed 38.5% in total.
Liability Agents commission plus 23.5% not
to exceed 38.5% in total.
Accident & Sickness Agents commission plus 23.5% not to
exceed 38.5% in total.
When the Manager has elected to place reinsurance on behalf of
the Company, the reinsurance shall have a ceding commission payable to the
Company of at least the commission payable to the Manager plus taxes plus the
agents' commissions or the commission payable to the Manager shall be reduced
proportionate to the amount of the commission for reinsurance.
Exhibit 10.7
ADMINISTRATION AGREEMENT
THIS AGREEMENT, made as of the 26th day of February, 1990, is by and between IGF
INSURANCE COMPANY ("IGF") and SYMONS INTERNATIONAL GROUP, INC.
("SIG").
WITNESSETH:
WHEREAS, IGF desires to engage SIG to administer the non-standard private
passenger automobile insurance and motorcycle insurance which IGF will commence
writing in the states of Missouri and Arkansas upon execution of this Agreement
(such automobile and motorcycle insurance in the states of Missouri and Arkansas
being hereinafter referred to as IGF's "insurance business") and which such
insurance business is the subject of a 99% Quota Share Reinsurance Agreement
between IGF and Pafco General Insurance Company "Pafco"); and
WHEREAS, SIG desires to administer such insurance business for and on behalf of
IGF;
NOW, THEREFORE, in consideration of the mutual covenants and promises contained
herein, and the mutual benefits to be derived from the performance thereof, the
parties agree as follows:
<PAGE>
1. Appointment. IGF hereby appoints and designates SIG as its manager to
administer the insurance business of IGF on the terms and conditions herein
provided, and SIG hereby accepts such appointment as manager to administer all
affairs pertaining to such insurance business and operations. During the term of
the Agreement, IGF shall not market non-standard private passenger automobile
insurance or motorcycle insurance through any agents or brokers except those
appointed by SIG; provided, however, IGF reserves the right to make any other
products which it has the authority to write available to its agency force.
2. Duties of Manager. SIG, for and on behalf of IGF, shall have the full
authority and responsibility:
to effect, modify and terminate contracts of insurance pertaining to
IGF's insurance business contemplated by this agreement and containing
such terms, premium rates and conditions as SIG may deem suitable and
appropriate;
to collect and receive on behalf of IGF all payments for premiums for
insurance contracts written pursuant to this Agreement;
to accept and authorize others to accept service of process and appear on
behalf of IGF in any lawsuits, actions or proceedings, and to bring,
prosecute, defend or otherwise settle lawsuits, actions or
proceedings;
to effect, modify and terminate agency and brokerage contracts;
and to do all things necessary or appropriate to administer in all
respects the insurance business of IGF contemplated by this agreement
and to fulfill the obligations of IGF to the public, policyholders,
claimants and the applicable Departments of Insurance.
3. Performance of Duties. SIG shall perform its duties hereunder in a prudent
manner and in the best interests of IGF, and in accordance with all applicable
insurance laws and regulations.
4. Reservation of Rights and Audits. IGF reserves the right to review and
consult with SIG on underwriting and underwriting guidelines, rates, claims and
claim payments, reserves and all other matters pertaining to IGF's insurance
business under this Agreement. IGF and its designated representatives shall have
free access to all its books and records maintained by SIG, and also to SIG's
own books and records as they pertain to the insurance contracts written
hereunder. IGF will endeavor to give SIG reasonable advance notice of its
intention to audit such books and records, but reserves the right to conduct a
spot audit at any time it deems desirable or necessary.
<PAGE>
5. Administration Fee. In consideration of SIG performing the administrative
services herein provided for the insurance business written by IGF, IGF shall
Pay to SIG an administration fee equal to:
(i) all underwriting expenses incurred in connection with writing such
insurance business (including agency and brokerage expenses and
commissions, inspection reports, agent's license fees and reinsurance
ceded premiums for excess coverages) calculated in accordance with
statutory accounting principals; plus
(ii) an amount equal to IGF's unallocated loss adjustment expenses
calculated in accordance with statutory accounting principles.
SIG and IGF agree that a provisional administration fee shall be paid to SIG on
a current basis, in an amount equal to 36.50% of the gross net written premiums
of IGF, but the provisional administration fee shall be adjusted downward or
upward within thirty (30) days after each calendar quarter to reflect the actual
amounts of the fee as provided in the preceding sentence; provided, however,
such administration fee shall not exceed 36.50% without IGF's prior written
consent. SIG, out of its Administration Fee, shall pay directly the underwriting
expenses and unallocated loss adjustment expenses.
<PAGE>
In addition to the Administration Fee detailed above, investment income on all
funds deposited to the account of IGF shall inure to the benefit of SIG. The
investment income accumulated herein may be withdrawn by SIG at any time.
6. Expenses Payable by IGF. IGF authorizes SIG to pay out of the funds due IGF
all expenses and costs in connection with IGF's insurance business; excluding,
however, the underwriting expenses and unallocated loss adjustment expenses
which are to be paid by SIG out of its administration fee as provided in
paragraph 5 of the Agreement. Expenses to be paid out of the funds of IGF shall
include claims losses, damages, judgments, settlements and allocated claim loss
adjustment expenses, collection expenses and license fees.
7. Reports and Remittances. SIG shall submit monthly reports to IGF, both on a
gross basis and net of reinsurance by Pafco, reasonably detailing as of the
close of the month the gross net written premium, unearned premium, paid losses
and loss expenses, cash reserves, IBNR reserves, LAE reserve, and such other
information as IGF may require for its financial reports, records and tax
returns. Such reports shall be submitted to IGF and its reinsurer, Pafco, within
fifteen (15) days of the close of the preceding calendar month, and shall be
<PAGE>
accompanied with the funds due IGF and Pafco, respectively, net of losses and
loss expenses paid and the administration fee to be retained by SIG. In
addition, SIG shall provide IGF with the following on a timely basis:
(i) a copy of the Company's monthly bank statement;
(ii) a copy of Pafco's monthly financial statements; and
(iii)a copy of Pafco's' Quarterly Statement as filed with the Indiana
Department of Insurance.
8. Books and Records. All books and records (and information therein) relating
to IGF's business, including those maintained on its behalf by SIG, shall be and
remain the property of IGF. All books and records maintained for and on behalf
in of IGF by SIG shall be kept at SIG's principal offices at 4720 Kingsway Drive
in Indianapolis, Indiana and shall not be removed therefrom without IGF's prior
written consent. Such books and records shall be surrendered to IGF upon
termination of this Agreement. All business developed under this Agreement shall
be the property of IGF during the term hereof and for so long after termination
of this Agreement as SIG shall have outstanding liabilities to IGF. Upon
satisfaction of such liabilities, such business, including the policyholders and
expiration lists, shall be and become the property of SIG.
9. Indemnification. SIG agrees to indemnify, defend and hold harmless IGF, its
officers, directors and employees, from and against every claim, demand,
<PAGE>
liability, suit, judgment and expense, including attorney's fees and defense
costs, arising out of or connected in any way with any actions taken (or not
taken) by SIG under this Agreement and which are in the nature of:
(i) a proposed fine or penalty of any kind by a Department of Insurance or
other governmental authority, or
(ii) a claim for any extra contractual or punitive damages, whether a first
party or third party claim, and under any insurance contract written
pursuant to this Agreement. The Company's liability for
extra-contractual or punitive damages is as set forth in and limited
by Article X of the Quota Share Reinsurance Agreement between IGF and
Pafco and is hereby intended to include SIG as though SIG and Pafco
were one, but such inclusion of SIG shall not in any way enhance,
increase or duplicate IGF's liability in excess of a pro-rata share of
1% in total.
10. Term. The term of this Agreement shall commence on the date first above
written and shall continue for an indefinite period. Either party may terminate
this Agreement at any time, with or without cause, upon sixty (60) days prior
written notice to the other party. Notwithstanding anything seemingly to the
contrary contained in this paragraph or any other paragraph of the Agreement,
IGF may cancel this Agreement "for cause" immediately upon written notification
to SIG of IGF's intent without any prior or advance notice whatsoever.
"Cause" shall include:
(i) the failure of Pafco to maintain clean, irrevocable, unconditional and
uninterrupted Letters of Credit and/or Trust Accounts with IGF in
accordance with the Quota Share Reinsurance Agreement between IGF and
Pafco, or if Pafco otherwise materially breaches such Reinsurance
Agreement, and
(ii) the failure of SIG to administer the insurance contracts written under
this Agreement in accordance with the insurance laws and regulations
of the applicable states or if SIG otherwise materially breaches this
Agreement.
Immediately upon termination of this Agreement, SIG shall cease writing and/or
renewing insurance contracts in IGF and shall so notify all its agents and
brokers. Upon termination, and without further compensation or remuneration, SIG
shall either administer the run off of the insurance contracts written under
this Agreement or shall cooperate to the fullest extent with IGF in doing so, at
IGF's election.
<PAGE>
11. Successors. All terms and provisions of this Agreement will be binding upon,
will inure to the benefit of, and will be enforceable by the successors and
permitted assigns of IGF and SIG. This Agreement shall not be assignable or
transferable by any party without the prior written consent of the other party.
12. Entire Agreement, Amendments. This Agreement contains the entire
understanding of the parties hereto with respect to the subject matter contained
herein. This Agreement may be amended only by a written instrument duly executed
by all of the parties hereto or their respective successors or permitted
assigns.
13. Notices. All notices, requests, demands and other communications hereunder
("Communications") shall be in writing and all such Communications shall be
deemed to have been duly made if delivered personally, or deposited with any
recognized over-night courier service, or deposited with the United States Post
Office for delivery by registered or certified mail return receipt requested,
properly addressed and postage prepaid:
<PAGE>
If to Company: IGF Insurance Company
2882 106th Street
Des Moines, Iowa
Attention:William McDonald
If to SIG: Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attention: Douglas H. Symons
14. Governing Law. This Agreement is submitted by SIG to IGF at its home office
and principal place of business in the State of Iowa and shall be deemed to have
been made there. The Agreement shall be governed and controlled by the laws of
the State of Iowa as to interpretation, enforcement, validity, construction,
effect, choice of law and in all other respects.
15. Severability. If any term or provision of this Agreement or any application
thereof, shall be invalid or unenforceable, the remainder of this Agreement and
any application thereof shall not be effected thereby. To the extent that a
provision is deemed unenforceable by virtue of its scope, but may be enforceable
by limitation thereof, such provision shall be enforceable to the fullest extent
permitted under the laws and public policies of the State of Iowa.
<PAGE>
16. Counterparts. This Agreement may be executed simultaneously in counterparts,
each of which will be deemed an original, but all of which together will
constitute but one and the same instrument.
17. Headings. The headings included in this Agreement are for convenience or
reference only and shall not constitute a part of this Agreement for any other
purpose.
In Witness Whereof, the parties have executed this Agreement as of the date
first above written.
IGF INSURANCE COMPANY
By: /s/ William L. McDonald
President
SYMONS INTERNATIONAL GROUP, INC.
By: /s/ Douglas Symons President
<PAGE>
ADDENDUM NO: 1
TO
ADMINISTRATION AGREEMENT
dated February 26, 1991
Between
IGF INSURANCE COMPANY Of Des
Moines, Iowa, U.S.A.
(hereinafter called IGF)
and
SYMONS INTERNATIONAL GROUP, INC.
Of Indianapolis, Indiana, U.S.A.
(hereinafter called SIG)
WHEREAS, Pafco General Insurance Company has amended its ceding commission to
IGF Insurance Company effective January 1, 1992; and
WHEREAS, IGF Insurance Company wishes to amend its commission to Symons
International Group, Inc. in accordance with the above;
NOW, THEREFORE, in consideration of the above, "IGF" and "SIG" mutually agree
that Section 5, "Administration Fee" shall be replaced by the following wording:
5. Administration Fee. In consideration of SIG performing the
administrative services herein provided for the insurance business written by
IGF, IGF shall pay to SIG an administration fee that will include the following:
(i) all underwriting expenses incurred in connection with writing
such insurance business (including agency and brokerage
expenses and commissions, inspection reports, agent's license
fees and reinsurance ceded premiums for excess coverages)
calculated in accordance with statutory accounting principals;
plus
(ii) an amount equal to IGF's unallocated loss adjustment expenses
calculated in accordance with statutory accounting principals.
SIG and IGF agree that the administration fee shall be paid to SIG on a current
<PAGE>
basis, in an amount equal to 30.50% of the gross net written premiums of IGF.
SIG, out of its Administration Fee, shall pay directly the underwriting expenses
and allocated loss adjustment expenses, which shall include all expenses as
detailed above in Section 5.(i) and 5.(ii).
In addition to the Administration Fee detailed above, investment income on all
funds deposited to the account of IGF shall inure to the benefit of SIG. The
investment income accumulated herein may be withdrawn by SIG at any time.
All other terms and conditions remain unaltered.
This Addendum has been drawn up in duplicate and signed by each of the
parties.
In Indianapolis, Indiana, this 21st day of January, 1992.
/s/ Douglas Symons
SYMONS INTERNATIONAL GROUP, INC.
and in Des Moines, Iowa, this 23rd day of January, 1992.
/s/ William L. McDonald
IGF INSURANCE COMPANY
<PAGE>
ADDENDUM NO: 2
ADMINISTRATION AGREEMENT
dated February 26, 1991
Between
IGF INSURANCE COMPANY Of Des
Moines, Iowa, U.S.A.
and
SYMONS INTERNATIONAL GROUP, INC.
Of Indianapolis, Indiana, U.S.A.
It is hereby understood and agreed that the following amendments shall
be made to Section 5 "Administration Fee".
Effective January 1, 1991:
Subsection (i); all underwriting expenses incurred in connection with
writing such insurance business including agency and brokerage expenses
and commissions, inspection reports and agent's license fees)
calculated in accordance with statutory accounting principals; plus
Effective January 1, 1992:
investment income on all funds deposited under this agreement to the
account of IGF shall be payable on a pro-rata basis quarterly within
thirty (30) days of the end of each calendar quarter as follows:
(a) 1% to IGF Insurance Company
(b) 99% to Pafco General Insurance Company
All other terms and conditions remain unaltered.
This Addendum has been drawn up in duplicate and signed by each of the
parties.
In Indianapolis, Indiana, this 9th day of March, 1992.
/s/ Douglas Symons
SYMONS INTERNATIONAL GROUP, INC.
and in Des Moines, Iowa, this 9th day of March, 1992.
/s/ Carol J. Sorvik
IGF INSURANCE COMPANY
AGREEMENT made this 1st day of November, 1990.
B E T W E E N:
IGF INSURANCE COMPANY
of Des Moines, Iowa, U.S.A
(hereinafter designated as "IGF")
- and -
SYMONS INTERNATIONAL GROUP, INC.,
of Indianapolis, Indiana, U.S.A.
(hereinafter designated as "SIG")
WHEREAS IGF is desirous of retaining the services of certain senior
executives of SIG for the supply of executive management, as well as assistance
in, but not limited to, the following areas:
1) Accounting
2) Investments
3) Marketing
4) Data Processing
5) Reinsurance
AND WHEREAS SIG is prepared to provide such executive management and
assistance as required by IGF.
NOW THEREFORE IN CONSIDERATION of the mutual covenants and premises
contained herein the parties hereto agree as follows, to be effective as of the
date first written above: 1. SIG agrees to provide, through certain of its
senior executives, such executive management as may from time to time be
required by IGF.
<PAGE>
2. SIG agrees to provide assistance to IGF through use of SIG's staff in
the following specific areas; however, assistance is not limited to
only these areas:
1) Accounting
2) Investments
3) Marketing
4) Data Processing
5) Reinsurance
3. IGF agrees, as consideration for the services as hereinbefore referred
to, to pay to SIG in respect to the calendar year 1990 the sum of
$100,000-00 (U.S.) and for the calendar year 1991 the minimum sum of
$600,000.00 (U.S.), adjusted annually at December 31st to be equal to
3% of the first $25,000,000 gross written premium and 1 1/2% of the
gross written premium in excess of $25,000,000, excluding private
passenger automobile premium written by IGF, such monies to be paid in
such installments and at such time as the parties hereto may from time
to time mutually agree upon.
4. This agreement covers the calendar years 1990 and 1991 and may be
extended by the parties hereto to cover subsequent calendar years by
written endorsement signed by both parties hereto.
-2-
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this agreement by
officers duly authorized in that behalf.
IGF INSURANCE COMPANY
Per: William L. McDonald
Per: Carol J. Sorvik
Symons International Group, Inc.
Per: Douglas Symons
Per: Terry E. Diers
-3-
<PAGE>
ADDENDUM NO: 1
TO
SERVICES AGREEMENT
dated November 1, 1990
Between
IGF INSURANCE COMPANY Of Des
Moines, Iowa, U.S.A.
(hereinafter designated as "IGF")
and
SYMONS INTERNATIONAL GROUP, INC.
Of Indianapolis, Indiana, U.S.A.
(hereinafter designated as "SIG")
IT IS MUTUALLY understood and agreed that this agreement shall be
extended to cover the year 1992 and that Section 3. shall be amended to read as
follows, from this date forward:
IGF agrees, as consideration for the services as hereinbefore referred
to, to pay to SIG in respect to the calendar year 1992 the sum of $600,000.00
(U.S.) maximum paid in monthly installments of $50,000.00 (U.S.) per month on or
before the 15th day of each month.
All other terms and conditions remain unaltered.
This Addendum has been drawn up in duplicate and signed by each of the
parties.
In Indianapolis, Indiana, this 10th day of April, 1992.
SYMONS INTERNATIONAL GROUP, INC.
Douglas Symons
and in Des Moines, Iowa, this 10th day of April, 1992.
IGF INSURANCE COMPANY
Terry E. Diers
-4-
<PAGE>
ADDENDUM NO. 2
TO
SERVICE AGREEMENT DATED NOVEMBER 1, 1990
Between
IGF INSURANCE COMPANY Of Des
Moines, Iowa, U.S.A.
(hereinafter designated as "IGF")
and
SYMONS INTERNATIONAL GROUP, INC.
Of Indianapolis, Indiana, U.S.A.
(hereinafter designated as "SIG")
IT IS MUTUALLY understood and agreed that this agreement shall be
extended to cover the year 1993 and that Section 3, as amended in Addendum No. 1
dated April 10, 1992 is correct as stated. The maximum fees payable for 1993 is
limited to $600,000 payable in monthly installments of $50,000 (U.S.) on or
before the 15th day of each month.
All other terms and conditions remain unaltered.
This Addendum has been drawn up in duplicate and signed by each of the
parties.
This Addendum has been drawn up in duplicate and signed by each of the
parties.
In Indianapolis, Indiana, this 17th day of February, 1993.
SYMONS INTERNATIONAL GROUP, INC.
and in Des Moines, Iowa, this 22nd day of February, 1993.
IGF INSURANCE COMPANY
-5-
ORGANIZATIONAL STUCTURE OF SIG AND ITS PRINCIPAL SUBSIDIARIES
[CHART]
[At the top of the chart there is a rectangular box with "Symons
International Group, Inc." and footnote number one noted inside. Coming from
this box are two lines; the left line has the figure of 100% while the right
line has the figure of 52%. The left line runs into a smaller rectangular box
with "IGF Holdings, Inc." inside. One line, with a 100% figure, runs from this
box to another rectangular box with "IGF Insurance" inside. The right line runs
into a smaller rectangular box with "GGS Management Holdings, Inc.," inside.
There is a line towards the right with a 48% figure running up from this box and
a line with a 100% figure running down from this box. The line running up runs
into another rectangular box with "Funds Affiliated with Goldman, Sachs & Co."
and footnote number two noted inside. The line running down from the GGS
Management Holdings box runs into a rectangular box with "GGS Management, Inc."
inside. There is one line running from this box with two branches each with a
100% figure. The left branch runs into a rectangular box with "Pafco General
Insurance Company" inside and the right branch runs into a rectangular box with
"Superior Insurance Company" inside. From this box runs one line with two
branches, each with a 100% figure. The left branch runs into a rectangular box
with "Superior American Insurance Company" inside and the right branch runs into
a rectangular box with "Superior Guaranty Insurance Company" inside.]
- ----------
(1) Symons International Group, Inc. is a wholly-owned subsidiary of Goran
Capital Inc., a Canadian federally chartered corporation. Goran's common
stock is traded on the Toronto Stock Exchange under the symbol "GNC" and on
the Nasdaq National Market under the symbol of "GNCNF."
(2) The ownership percentages of the funds affiliated with Goldman, Sachs & Co.
in GGS Management Holdings, Inc. are as follows: 30.1% by GS Capital
Partners II, L.P., a Delaware limited partnership, 12.0% by GS Capital
Partners II Offshore, L.P., a Cayman Islands limited partnership and 5.9%
collectively by the following investors: Stone Street Funds L.P., Bridge
Street Funds L.P., and Goldman Sachs & Co. Verwaltungs GmbH. These funds
are collectively referred to in this Prospectus as the "GS Funds."
Exhibit 23.1
[Coopers & Lybrand]
Consent of Independent Accounts
We consent to the inclusion in this registration statement on Form S-1 (File
No. 2-00000) of our report dated March 18, 1996, except for the second paragraph
in Note 6 and Note 18, as to which the date is July 29, 1996, and our report
dated June 14, 1996, on our audits of the consolidated financial statements and
consolidated financial statement schedules of Symons International Group, Inc.
and Superior Insurance Company, Inc., respectively. We also consent to the
reference to our firm under the captions "Selected Financial Data" and Experts."
/s/ Coopers & Lybrand
Indianapolis, Indiana
July 29, 1996
