FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
( X ) Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the year ended December 31, 1996.
( ) Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
____________.
Commission File Number:
SYMONS INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1707115
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
4720 Kingsway Drive, Indianapolis Indiana 46205
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (317) 259-6300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (X)
The aggregate market value of the 3,450,000 shares of the Issuer's Common
Stock held by non-affiliates, as of March 20, 1997 was $52,612,500.
The number of shares Common Stock of the Registrant, without par value,
outstanding as of March 31, 1997 was 10,450,000.
Documents Incorporated By Reference:
Portions of the Annual Report to the Shareholders and the Proxy Statement for
the 1997 Annual Meeting of Shareholders are incorporated into Parts II and
III.
Exhibit Index on Page 69. Page 1 of 245.
<PAGE>
SYMONS INTERNATIONAL GROUP INC.
ANNUAL REPORT ON FORM 10-K
December 31, 1996
PART I PAGE
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS . . . . . . . . . . . .44
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . .55
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . .56
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . .57
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . .57
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . .57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . .57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . .57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . .57
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . .58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . .58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K .58
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
<PAGE>
ITEM 1 - BUSINESS
General
Overview
Symons International Group, Inc. (the "Company") is a 67% subsidiary of Goran
Capital Inc. ("Goran"). Prior to the Company's Initial Public Offering
("Offering") on November 5, 1996, it was a wholly-owned subsidiary of Goran.
The Company underwrites and markets nonstandard private passenger automobile
insurance and crop insurance.
Formation of GGS Management Holdings, Inc. ("GGSH"); Acquisition of Superior
Insurance Company ("Superior")
On January 31, 1996, Goran, the Company, Fortis, Inc. and its wholly-owned
subsidiary, Interfinancial, Inc., a holding company for Superior ("Superior"),
entered into a Stock Purchase Agreement (the "Superior Purchase Agreement")
pursuant to which the Company agreed to purchase Superior from Interfinancial,
Inc. (the "Acquisition") for a purchase price of approximately $66.6 Million.
Simultaneously with the execution of the Superior Purchase Agreement, Goran,
the Company, GGSH and GS Capital Partners II, L.P. ("GS Funds"), a Delaware
limited partnership, entered into an agreement (the "GGS Agreement") to
capitalize GGSH and to cause GGSH 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 GGSH (i) all the
outstanding common stock of Pafco General Insurance Company ("Pafco"), with
a book value of $16.9 Million, (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 GGSH $21.2 Million in cash. The Formation
Transaction and the Acquisition were completed on April 30, 1996.
Pursuant to the GGS Agreement, prior to the Company's contribution of Pafco to
GGSH, Pafco transferred all of the outstanding capital stock of IGF Insurance
Company ("IGF") (the "Transfer") in order to improve the risk-based capital
rating of Pafco and to permit GGSH 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"). The IGFH Bank Debt and the IGF Note
were repaid with a portion of the proceeds from the Offering.
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
underwriters at 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 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. 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 31 states. Based on a
Company analysis of gross premiums written in 1995 as reported by A.M. Best,
the Company believes that the combination of Pafco and Superior makes the
Company's nonstandard automotive group the sixteenth 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 the National Crop Insurance Services, Inc. ("NCIS"), the
Company believes that IGF is the fifth largest underwriter of multi-peril
crop insurance ("MPCI") in the United States.
The following table sets forth the premiums written by Pafco, Superior and
IGF by line of business for the periods indicated:<PAGE>
Symons International Group,
Inc. For The Years Ended December 31,
(In Thousands)
1994 1995 1996
Nonstandard Automobile (1)
Gross Premiums Written $ 45,593 $ 49,005 $187,176
Net Premiums Written 28,114 37,302 186,579
Crop Hail (2)
Gross Premiums Written $ 10,130 $ 16,966 $ 27,957
Net Premiums Written 4,565 11,608 23,013
MPCI (3)
Gross Premiums Written $ 44,325 $ 53,408 $ 82,102
Net Premiums Written 0 0 0
Commercial
Gross Premiums Written $ 3,086 $ 5,255 $ 8,264
Net Premiums Written 2,460 4,537 0
Total Gross Premiums
Written (4) $103,134 $124,634 $305,499
Total Net Premiums
Written $ 35,139 $ 53,447 $209,592
(1) Does not reflect net premiums written for Superior for the years ended
December 31, 1994 and 1995 and for the four months ended April 30, 1996. For
the years ended December 31, 1994 and 1995, Superior and its subsidiaries had
gross premiums written of $112.9 Million and $94.8 Million, respectively, and
net premiums written of $112.5 Million and $94.1 Million, respectively. For
the four months ended April 30, 1996, Superior and its subsidiaries had gross
premiums written of $44.0 Million and net premiums written of $43.6 Million.
(2) Most crop hail insurance policies are sold in the second and third
quarters 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".
(4) For additional financial segment information concerning the Company's
nonstandard automobile and crop insurance operations, 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 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. 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 $106 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. According to statistical information derived from insurer annual
statements compiled by A.M. Best, the nonstandard automobile market
accounted for $17.4 billion in annual premium volume for 1995.
Strategy
The Company has multiple strategies with respect to its nonstandard
automobile insurance operations, including:
1. 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. The Company regularly evaluates
acquisition opportunities. There can be no assurance, however, that
any suitable business opportunities will arise.
2. 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.
3. 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.
4. 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.
5. 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 databases to verify repair and vehicle replacement costs and to
increase subrogation and salvage recoveries.
6. 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
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 228,000 combined policies
of Pafco and Superior in force on December 31, 1996, fewer than 9% had policy
limits in excess of these basic limits of coverage. Of the 63,000 policies of
Pafco in force on December 31, 1996, approximately 88% had policy periods of
six months or less. Of the approximately 165,000 policies of Superior in
force as of December 31, 1996, approximately 74% had policy periods of six
months and approximately 26% 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 Choice
policy covers insureds whose prior driving record, insurability and other
relevant characteristics indicate a lower risk profile than other risks in the
nonstandard marketplace. The Superior Standard policy is intended for risks
which do not qualify for Superior Choice 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
Choice 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. Superior offers a product
similar to the Pafco product in states in which it is not offering a multi-
tiered product.
Marketing
The Company's nonstandard automobile insurance business is concentrated in
the states of Florida, California, Indiana, Missouri, Texas and Virginia,
and the Company writes nonstandard automobile insurance in 13 additional
states. 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 tables 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.
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
Company Superior
1994 1995 1996 1994 1995 1996
State
Arkansas $ 1,619 $ 1,796 $ 2,004 $ 0 $ 0 $ 0
California 0 0 0 13,422 15,350 25,131
Colorado 5,629 9,257 10,262 0 0 0
Florida 0 0 0 55,282 54,535 97,659
Georgia 0 0 0 7,342 5,927 7,398
Illinois 0 80 1,380 3,894 2,403 1,614
Indiana 13,648 13,710 16,599 414 132 0
Iowa 3,769 3,832 5,818 0 0 0
Kentucky 9,573 7,840 11,065 0 0 0
Mississippi 0 0 0 4,411 2,721 2,250
Missouri 8,163 8,513 13,423 0 0 0
Nebraska 3,192 3,660 5,390 0 0 0
Ohio 0 0 0 4,325 3,164 3,643
Oklahoma 0 317 2,559 0 0 0
Tennessee 0 0 0 1,829 332 (2)
Texas 0 0 0 10,660 3,464 10,122
Virginia 0 0 0 7,500 5,035 14,733
Washington 0 0 0 3,827 1,693 106
Totals 45,593 49,005 68,500 112,906 94,756 162,654
<PAGE>
Symons International Group, Inc. and
Superior Insurance Company (Combined)
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
State
Arkansas $ 1,619 $ 1,796 $ 2,004
California 13,422 15,350 25,131
Colorado 5,629 9,257 10,262
Florida 55,282 54,535 97,659
Georgia 7,342 5,927 7,398
Illinois 3,894 2,483 2,994
Indiana 14,062 13,842 16,599
Iowa 3,769 3,832 5,818
Kentucky 9,573 7,840 11,065
Mississippi 4,411 2,721 2,250
Missouri 8,163 8,513 13,423
Nebraska 3,192 3,660 5,390
Ohio 4,325 3,164 3,643
Oklahoma 0 317 2,559
Tennessee 1,829 332 (2)
Texas 10,660 3,464 10,122
Virginia 7,500 5,035 14,733
Washington 3,827 1,693 106
Totals $158,499 $143,761 $231,154
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 26 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
delivering prompt service while ensuring consistent underwriting, the Company
offers rating software to its agents in some states which permits them to
evaluate 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".
Pafco 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.
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, Virginia,
California and Missouri. 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.
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% and unprofitable when the combined ratio is over 100%. The following
table sets forth loss and LAE ratios, underwriting expense ratios and combined
ratios for the periods indicated for the nonstandard automobile insurance
business 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.
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
Company Superior
1994 1995 1996 1994 1995 1996
Loss Ratio 62.3% 65.8% 61.8% 72.3% 64.2% 66.1%
LAE Ratio 9.8% 8.0% 8.6% 9.6% 9.9% 9.5%
Underwriting
Expense Ratio 34.3% 37.5% 33.3% 34.5% 33.5% 23.9%
Combined Ratio 106.4% 111.3% 103.7% 116.4% 107.6% 99.5%
Symons International Group, Inc.
and Superior Insurance Company (Combined) (1)
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
Loss Ratio 70.5% 64.6% 65.1%
LAE Ratio 9.6% 9.4% 8.6%
Underwriting Expense Ratio 34.5% 34.8% 27.7%
Combined Ratio 114.6% 108.8% 101.4%
(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 after April 30, 1996.<PAGE>
In an effort to maintain and improve
underwriting profits, the territorialmanagers 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 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 database, 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. Reserves for uncollectible reinsurance are provided as deemed
necessary.
In 1995, Pafco maintained a 25% quota share reinsurance treaty on its
nonstandard automobile insurance business, as well as an excess of loss treaty
covering 100% of losses on an individual occurrence basis in excess of
$200,000 up to a maximum of $1,050,000. As of January 1, 1996, Pafco has
terminated all third party quota share reinsurance with respect to its
nonstandard automobile insurance business. Pafco has entered into a quota
share reinsurance agreement with Superior whereby Pafco shall cede 100% of its
gross premiums written on or after May 1, 1996 that are in excess of three
times outstanding capital and surplus. See "Certain Relationships and Related
Transactions - Reinsurance Arrangements". In 1996, Pafco continues to
maintain an excess of loss treaty on its nonstandard automobile insurance
business covering 100% of losses on an individual occurrence basis in excess
of $200,000 up to a maximum of $1,050,000. Of such reinsurers, those having
A.M. Best ratings of A or better provided 83% of such coverage. The following
table provides information with respect to material third party reinsurers on
the foregoing Pafco nonstandard automobile reinsurance treaties:
Symons International Group, Inc.
For The Year Ended December 31, 1996
(In Thousands)
Reinsurers A.M. Best Rating Reinsurance Recoverables(1)
Chartwell Reinsurance
Company A(2) $ 290
Constitution Reinsurance
Corporation A+(3) $1,210
(1) Only recoverables greater than $200,000 are shown. Total nonstandard
automobile reinsurance recoverables as of December 31, 1996 were approximately
$2,565.
(2) An A.M. Best rating of "A" is the third highest of 15 ratings.
(3) An A.M. Best rating of "A+" is the second highest of 15 ratings.
In 1995, Superior maintained both automobile casualty and property catastrophe
excess reinsurance. Superior's casualty excess of loss treaties covered
losses in excess of $100,000 up to a maximum of $2 million. Superior's first
casualty excess layer contained limits of $200,000 excess of $100,000, its
second casualty excess layer contained limits of $700,000 excess of $300,000
and its third casualty excess layer had a limit of $1 million excess of $1
million. Superior's first layer of property catastrophe excess reinsurance
covered 95% of $500,000 excess of $500,000 with an annual limit of $1 million
and its second layer of property catastrophe excess reinsurance covered 95% of
$2 million excess of $1 million with an annual limit of $4 million. In 1996,
Superior maintained the same levels of coverage, except as follows: (i) as to
its third casualty excess layer, the limit was increased to $4 million, and
(ii) Superior added a third layer of property catastrophe excess reinsurance
covering 95% of $2 million excess of $3 million with an annual limit of $4
million. Superior has had no quota share reinsurance on its nonstandard
automobile business in either 1995 or 1996.
In 1995, Superior placed all of its reinsurance with Prudential Reinsurance
Company (now Everest Reinsurance Company). In 1996, Superior placed all of
its reinsurance with Everest Reinsurance Company, except for its third layer
casualty excess of loss treaty, which was placed as follows: Zurich
Reinsurance Centre, Inc., 50%; Skandia America Reinsurance Corporation, 15%;
Transatlantic Reinsurance Company, 15%; SOREMA North American Reinsurance
Company, 10%; and Winterthur Reinsurance Corporation of America, 10%. The
foregoing reinsurers have the following A.M. Best ratings: Everest Reinsurance
Company - "A"; Skandia America Reinsurance Corporation - "A-" (the fourth
highest of 15 ratings); SOREMA North American Reinsurance Company - "A-";
Transatlantic Reinsurance Company - "A+"; Winterthur Reinsurance Company of
America - "A"; and Zurich Reinsurance Centre, Inc. - "A". For the year ended
December 31, 1996, Superior had $737,000 of ceded premiums to unaffiliated
reinsurers.
On April 29, 1996, Pafco retroactively ceded all of its commercial business
relating to 1995 and previous years to Granite Reinsurance Company Ltd.
("Granite Re"), an affiliate, with an effective date of January 1, 1996. On
this date, Pafco also entered into a 100% quota share reinsurance Agreement
with Granite Re, whereby all of Pafco's commercial business from 1996 and
forward was ceded to Granite Re effective January 1, 1996. Pafco has a
reinsurance recoverable at December 31, 1996 from Granite Re for $9,230,000,
of which $770,000 is uncollateralized.
Neither Pafco nor Superior has any facultative reinsurance with respect to its
nonstandard automobile insurance business.
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. Although
the Company's pricing is inevitably influenced to some degree by that of its
competitors, management of the Company 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
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. 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
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 Federal Crop Insurance Reform Act of 1994
(the "1994 Reform Act") was enacted in order to increase participation in the
MPCI program and eliminate the need for ad hoc federal disaster relief
payments to farmers.
The 1994 Reform Act required farmers for the first time to purchase at least
CAT Coverage (i.e., the minimum available level of MPCI providing coverage for
50% of farmers' historic yield at 60% of the price per unit for such crop set
by the FCIC) in order to be eligible for other federally sponsored farm
benefits, including, but not limited to, low interest loans and crop price
supports. The 1994 Reform Act also authorized the marketing and selling of
CAT Coverage by the local United States Department of Agriculture ("USDA")
offices.
The Federal Agriculture Improvement and Reform Act of 1996 ("the 1996 Reform
Act"), signed into law by President Clinton in April, 1996, 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, and also eliminates the
linkage between CAT Coverage and qualification for certain federal farm
program benefits. This limitation should provide the Company with the
opportunity to realize increased revenues from the distribution and servicing
of its MPCI product. 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
through private agencies: Arizona, Colorado, Illinois, Indiana, Iowa, Kansas,
Minnesota, Montana, Nebraska, North Carolina, North Dakota, South Dakota,
Washington and Wyoming. The FCIC has transferred to the Company approximately
8,900 insureds for CAT Coverage who previously purchased such coverage from
USDA field offices. The Company believes that any future 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 since ad hoc
federal disaster relief programs have been 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 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.
Strategy
The Company has multiple strategies for its crop insurance operations,
including the following:
1. 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.
2. The Company also limits the risks associated with crop insurance through
selective underwriting of crops based on its historical loss experience data
base.
3. The Company continues to develop and maintain a proprietary knowledge-
based underwriting system which utilizes a database of Company-specific
underwriting rules.
4. 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.
5. Unlike many of its competitors, the Company employs a number of full time
claims adjusters in order to reduce the losses experienced by IGF.
6. 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 hail damage has
already occurred.
7. The Company continues to explore growth opportunities and product
diversification through new specialty coverages, including Crop Revenue
Coverage and named peril insurance.
8. The Company continues to explore new opportunities for advances in
administrative efficiencies and product underwriting presented by advances in
Precision Farming software, Global Positioning System (GPS) software and
Geographical Information System (GIS) technology, all of which continue to be
adopted by insureds in their farming practices.
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 insure against the risk that his crop yield for any growing season will be
less than 50% to 75% (as selected by the farmer at the time of policy
application or renewal) 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% of
the price for such crop (as selected by the farmer at the time of policy
application or renewal) 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 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, in certain states, from
USDA field offices.
In addition to CAT Coverage, MPCI policies that provide a greater level of
protection than the CAT Coverage level are also offered ("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 a 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 Buy-up policies written has historically tended to increase
after a year in which a major natural disaster adversely affecting crops
occurs, and to decrease following a year in which favorable weather conditions
prevail.
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 profit sharing 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 are received by the Company from
farmers only after the end of a growing season and are then 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 an 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 is 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 standard unit of measure for the
commodity, historically the most frequently sold Buy-up Coverage. For income
statement purposes under GAAP, the Company's gross premiums written for MPCI
consist only of its MPCI Premiums and do not include MPCI Imputed Premiums.
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%. The MPCI Retention is protected by private
third party stop loss treaties.
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 have a favorable net loss ratio and 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.
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"). As previously
described, the Company purchases reinsurance from third parties other than the
FCIC to further reduce its MPCI loss exposure.
Loss Experience of Insureds
Under the MPCI program the Company pays losses to farmers through a federally
funded escrow account as they are incurred during the growing season. The
Company requests funding of the escrow account when a claim is settled, and
the escrow account is funded 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 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 increased the potential
profitability of risks allocated to the Commercial Pool by private insurers.
The following table presents MPCI Premiums, MPCI Imputed Premiums, and
underwriting gains or losses of IGF for the periods indicated:
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
MPCI Premiums $44,325 $53,408 $82,102
MPCI Imputed Premiums 2,171 19,552 29,744
Gross Underwriting Gain 4,344 10,870 15,801
Net Private Third-Party
Reinsurance Expense
And Other (1,087) (1,217) (3,524)
Net Underwriting Gain 3,257 9,653 12,277
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. 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.
Farmers are required to pay a 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.
In addition to premium revenues, the Company received the following fees and
commissions from its crop insurance segment for the periods indicated:
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
CAT Coverage Fees $ 74 $ 1,298 $ 1,181
Buy-up Expense Reimbursement
Payments 13,845 16,366 24,971
CAT LAE Reimbursement
Payments and MPCI Excess
LAE Reimbursement Payments 107 3,427 5,753
Total $14,026 $21,091 $31,905
Crop Revenue Coverage
The Company has recently introduced a new product in its crop insurance
business called Crop Revenue Coverage ("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 other than the
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 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 to 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 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 futures price or harvest
futures price (in each case, for post-harvest delivery) 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.
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 reviewing the current
rating structure supporting the CRC product. The Company is studying this
issue and other factors as part of its MPCI underwriting and risk allocation
plan, although the Company currently expects to offer CRC in the regions where
it can be sold for winter wheat in 1996 because of high interest in the
product among farmers. Based on crop performance to date in the regions where
it has written CRC for spring planted crops, the Company does not believe that
any potential underpricing of CRC policies it has written for such crops will
adversely affect its results of operations.
Crop Hail
In addition to MPCI, 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
product which combines the application and underwriting process for MPCI and
hail coverages. The HAILPLUS 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, tomatoes 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 Effect For 1996
In order to reduce the Company's potential loss exposure under the MPCI
program, the Company purchases stop loss reinsurance from other private
insurers in addition to reinsurance obtained from the FCIC. In addition,
since the FCIC and state regulatory authorities require IGF to limit its
aggregate writings of MPCI Premiums and MPCI Imputed Premiums to no
more than 900% of capital, and retain a net loss exposure of not in excess
of 50% of capital, IGF may also obtain reinsurance from private insurers in
order to permit it to increase its premium writings. 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, although the reinsurer is only liable to participate in losses of
the Company up to a 150% pure loss ratio. The Company also has stop loss
treaties for its crop hail business which reinsure approximately 45% of losses
in excess of an 80% pure loss ratio up to a 100% pure loss ratio and 95% of
losses in excess of a 100% pure loss ratio up to a 140% pure loss ratio. With
respect to its MPCI business, the Company has stop loss treaties which
reinsure 93.75% of the underwriting losses experienced by the Company to the
extent that aggregate losses of its insureds nationwide are in excess of 100%
of the Company's MPCI Retention up to 125% of MPCI Retention. The Company
also has an additional layer of MPCI stop loss reinsurance which covers 95% of
the underwriting losses experienced by the Company to the extent that
aggregate losses of its insureds nationwide are in excess of 125% of MPCI
Retention up to 150% of MPCI Retention.
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.
Reserves for uncollectible reinsurance are provided as deemed necessary. The
following table provides information with respect to all reinsurers on the
aforementioned IGF reinsurance agreements:
Symons International Group, Inc.
For The Year Ended December 31, 1996
(In Thousands)
Reinsurers A.M. Best Rating Ceded Premiums
Folksam International
Insurance Co. Ltd. A-(2) $ 587
Frankona
Ruckversicherungs AG A(3) $ 400
Granite Re NR(4) $1,609
Insurance Corporation
Of Hannover A- $1,159
Liberty Mutual Insurance
Co. (UK) Ltd A $ 364
Partner Reinsurance
Company Ltd. A $1,587
R & V Versicherung AG NR(5) $ 852
Scandinavian Reinsurance
Company Ltd. A+(6) $1,393
(1) For the year ended December 31, 1996, total ceded premiums were $86,393.
(2) An A.M. Best rating of "A-" is the fourth highest of 15 ratings.
(3) An A.M. Best rating of "A" is the third highest of 15 ratings.
(4) Granite Re, an affiliate of the Company, is an insurer domiciled in
Barbados which has never applied for or requested such a rating.
(5) R + V Versicherung AG is an insurer domiciled outside of the United
States and, as such, does not have a rating from A.M. Best.
(6) An A.M. Best rating of "A+" is the second highest of 15 ratings.
Marketing; Distribution Network
IGF markets its products to the owners and operators of farms in 31 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
20 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 1996. 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 to have noncontiguous acreage, thereby
making it less likely that the entire farm will be affected by a particular
occurrence. Many farmers with large farms tend to buy or rent acreage which
is increasingly distant from the central farm location. Accordingly, the
likelihood of a major storm (wind, rain or hail) or a freeze affecting all of
a particular farmer's acreage decreases.
The following table presents MPCI Premiums written by IGF by state for the
years ended December 31, 1994, 1995 and 1996.
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
State
Texas $ 6,751 $11,075 $12,361
Iowa 8,506 9,296 15,205
Illinois 7,302 7,305 11,228
Kansas 2,003 3,476 5,249
Minnesota 1,965 2,026 2,244
Nebraska 1,536 1,992 3,206
Indiana 1,486 1,875 3,870
Colorado 1,526 1,771 3,334
Missouri 1,785 1,718 2,427
North Dakota 1,153 1,638 2,796
All Other 10,312 11,236 20,182
Total $44,325 $53,408 $82,102
<PAGE>
The following table presents gross premiums written by IGF by state for crop
hail coverages for the years ended December 31, 1994, 1995 and 1996.
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
State
Iowa $ 3,954 $ 4,667 $ 6,590
Minnesota 318 2,162 2,300
Colorado 964 1,775 1,651
Nebraska 1,022 1,477 1,567
Montana 239 1,355 5,632
North Dakota 1,087 1,283 2,294
Kansas 765 846 661
South Dakota 124 756 1,457
Wisconsin 315 458 370
Mississippi 277 400 482
All Other 1,065 1,787 4,953
Total $10,130 $16,966 $27,957
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).
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). 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, IGF employs full-time
professional claims adjusters who are agronomy trained as well as part-time
adjusters. Management believes that the professionalism of the IGF full-time
claims staff coupled with their exclusive commitment to IGF helps to ensure
that claims are handled in a manner so as to reduce overpayment of 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 representative's and/or 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 CAT 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 CAT
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 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 1996 crop year, the number of insurance companies having
agreements with the FCIC to sell and service MPCI policies has declined from
50 to 16. The Company believes that IGF is the fifth largest MPCI 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 Insurance
Service, Inc. (affiliated with Cigna Insurance Company), Rural Community
Insurance Services, Inc. (which is owned by Norwest Corporation), American
Growers Insurance Company (Redland), Crop Growers Insurance, Inc., Great
American Insurance Company, Blakely Crop Hail (an affiliate of Farmers
Alliance Mutual Insurance Company) and North Central Crop Insurance, Inc.
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.
Reserves 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. Nonstandard automobile
reserves for reported claims 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. Reported 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 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.
The following loss reserve development tables illustrate the change over time
of reserves established for claims and claims expense at the end of various
calendar years for the nonstandard automobile segment of the Company (not
including Superior), and for Superior separately. The first three line items
show the reserves as originally reported at the end of the stated year. The
table also includes the cumulative amounts paid as of the end of successive
years with respect to that reserve liability. The "liabilities reestimated"
section indicates reestimates of the original recorded reserve as of the end
of each successive year based on additional information pertaining to such
liabilities. The last portion of the table compares the latest reestimated
reserve to the reserve amount as originally established and indicates whether
or not the original recorded amount was adequate or inadequate to cover the
estimated costs of unsettled claims.
The reserve for claims and claims expense is an accumulation of the estimated
amounts necessary to settle all outstanding claims as of the date for which
the reserve is stated. The reserve and payment data shown below have been
reduced for estimated subrogation and salvage recoveries. The reserve
estimates are based upon the factors in each case and experience with similar
cases. No attempt is made to isolate explicitly the impact of inflation from
the multitude of factors influencing the reserve estimates though inflation is
implicitly included in the estimates. The Company and Superior regularly
update their reserve forecasts by type of claim as new facts become known and
events occur which affect unsettled claims. The Company and Superior do not
discount their reserves for unpaid claims and claims expense.
<PAGE>
The following loss reserve development tables are cumulative and, therefore,
ending balances should not be added since the amount at the end of each
calendar year includes activity for both the current and prior years.
Conditions and trends that have affected the development of liability in the
past may not necessarily reoccur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies from the table.
<TABLE>
Symons International Group, Inc.
Nonstandard Automobile Insurance Only
(Not Including Superior)
For The Years Ended December 31,
(In Thousands)
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Reserves For
Unpaid Losses And
LAE $26,819 $30,844 $27,145
Deduct: Reinsurance
Recoverable 10,927 9,921 8,124
Reserve For Unpaid
Losses And LAE,
Net Of Reinsurance $4,748 $10,775 $14,346 $17,083 $17,449 $18,706 $16,544 $16,522 $20,923 $19,021
Paid Cumulative
As Of:
One Year Later 2,517 6,159 7,606 7,475 8,781 10,312 9,204 9,059 8,082
Two Years Later 4,318 7,510 10,388 10,930 12,723 14,934 12,966 8,806
Three Years Later 4,433 7,875 12,107 12,497 14,461 16,845 13,142
Four Years Later 4,146 8,225 12,863 13,271 15,071 16,641
Five Years Later 4,154 8,513 13,147 13,503 14,903
Six Years Later 4,297 8,546 13,237 13,500
Seven Years Later 4,297 8,561 13,238
Eight Years Later 4,295 8,561
Nine Years Later 4,295
Liabilities
Reestimated As Of:
One Year Later 3,434 11,208 15,060 15,103 16,797 18,872 16,747 17,000 21,748
Two Years Later 4,588 11,413 14,178 14,745 16,943 19,599 17,023 17,443
Three Years Later 4,702 10,923 14,236 14,993 16,914 19,662 17,009
Four Years Later 4,311 10,791 14,479 14,809 16,750 19,651
Five Years Later 4,234 10,877 14,436 14,659 16,746
Six Years Later 4,320 10,825 14,468 14,659
Seven Years Later 4,278 10,922 14,468
Eight Years Later 4,309 10,921
Nine Years Later 4,309
Net Cumulative
(Deficiency) Or
Redundancy 439 (146) (22) 2,424 695 (945) (465) (921) (825)
Expressed As A
Percentage Of
Unpaid Losses And
LAE 9.2% (1.4%) (0.0%) 14.2% 4.0% (5.1%) (2.8%) (5.6%) (3.9%)
</TABLE>
<PAGE>
Net reserves for the nonstandard automobile business of the Company increased
substantially in 1988, 1989, 1990 and 1995. Such changes were due entirely to
changes in the premium volume of the nonstandard automobile business for those
years. In general, the Company's nonstandard automobile segment has not
developed significant redundancies or deficiencies as compared to original
reserves. A deficiency of $956,000, or 5.1%, of original reserves developed
with respect to loss reserves at December 31, 1992 due to an unexpected
increase in loss severity and average claim cost.
<TABLE>
Superior Insurance Company
For The Years Ended December 31,
(In Thousands)
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Reserves For
Unpaid Losses And
LAE $52,610 $54,577 $47,112 $52,413
Deduct: Reinsurance
Recoverable 68 1,099 987 0
Reserve For Unpaid
Losses And LAE,
Net Of Reinsurance $26,245 $37,851 $56,424 $60,118 $60,224 $56,803 $52,542 $53,487 $46,125 $52,413
Paid Cumulative
As Of:
One Year Later 18,202 23,265 31,544 33,275 31,484 30,689 32,313 28,227 25,454
Two Years Later 25,526 34,122 43,547 44,128 40,513 41,231 38,908 35,141
Three Years Later 29,670 39,524 48,037 47,442 44,183 43,198 41,107
Four Years Later 32,545 41,257 49,064 49,256 44,708 44,010
Five Years Later 33,242 41,492 49,522 49,365 45,196
Six Years Later 33,395 41,716 49,327 49,476
Seven Years Later 33,535 41,576 49,425
Eight Years Later 33,469 41,621
Nine Years Later 33,408
Liabilities
Reestimated As Of:
One Year Later 31,911 48,376 54,858 58,148 53,515 50,086 53,856 48,564 37,933
Two Years Later 37,118 49,327 53,715 56,626 50,520 50,474 50,006 42,989
Three Years Later 37,932 49,051 53,022 55,147 51,854 46,624 46,710
Four Years Later 38,424 49,436 52,644 57,720 49,739 44,823
Five Years Later 38,580 49,297 54,030 56,824 48,592
Six Years Later 38,584 50,701 53,697 55,770
Seven Years Later 39,965 50,515 53,683
Eight Years Later 39,861 50,521
Nine Years Later 39,998
Net Cumulative
(Deficiency) Or
Redundancy (13,553) (12,670) 2,741 4,348 11,980 5,832 10,489 8,193 8,192
Expressed As A
Percentage Of
Unpaid Losses And
LAE (51.6%) (33.5%) 4.9% 7.2% 19.9% 10.3% 4.8% 9.2% 17.8%
</TABLE>
<PAGE>
Net reserves for Superior increased substantially through 1990 before
decreasing in 1992. Such changes were due to changes in premium volume and
reduction of reserve redundancies. The decrease in 1995 reflects the
Company's curtailment of marketing efforts and writings in Illinois,
Mississippi, Tennessee, Texas and Washington resulting from more restrictive
underwriting criteria, inadequately priced business in these states and other
unfavorable marketing conditions. Significant deficiencies developed in
reserves established as of December 31 of each of 1986 through 1988 which were
substantially offset by reserve additions in 1989 due to changes in reserve
methodology. With respect to reserves established as of December 31, 1991 and
1992, Superior developed significant redundancies due to conservative levels
of case basis and IBNR reserves. Beginning in 1993, Superior began to adjust
its reserving methodology to reduce its redundancies and to take steps to
close older claim files which still carried redundant reserves.
The Company and Superior employ an independent actuary to annually evaluate
and certify the adequacy of their loss and LAE reserves.
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 are managed by third party
professional administrators, including Goldman Sachs & Co., in accordance with
pre-established investment policy guidelines established by the Company. The
investment portfolios of the Company at December 31, 1996 consisted of the
following:
<PAGE>
Symons International Group, Inc.
For The Year Ended December 31, 1996
(In Thousands)
Amortized Estimated
Type of Investment Cost Market Value
Fixed Maturities:
U.S. Treasury Securities and
Obligations of U.S. Government
Corporation and Agencies $ 55,034 $ 55,144
Foreign Governments 1,515 1,485
Obligations of States and
Political Subdivisions 2,945 2,952
Corporate Securities 67,545 68,100
Total Fixed Maturities $127,039 $127,681
Equity Securities:
Preferred stocks 0 0
Common Stocks 25,734 27,920
Short Term Investments 9,565 (1) 9,565
Real Estate 466 466
Mortgage Loans 2,430 2,430
Other Loans 75 75
Total Investments $165,309 $168,137
(1) Due to the nature of crop insurance, the Company must maintain short-term
investments to fund amounts due under the MPCI program.
The following table sets forth, as of December 31, 1995 and 1996 the
composition of the fixed maturity securities portfolio of the Company by time
to maturity.
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
1995 1996
Market Percent Total Market Percent Total
Time to Maturity Value Market Value Value Market Value
1 Year or Less $ 4,610 35.6% $ 6,423 5.0%
More Than 1 Year
Through 5 Years 5,051 39.1% 71,086 55.7%
More Than 5 Years
Through 10 Years 3,270 25.3% 43,404 34.0%
More Than 10 Years 0 0% 6,768 5.3%
Total $12,931 100.0% $127,681 100.0%
<PAGE>
The following table sets forth, as of December 31, 1995 and 1996 the ratings
assigned to the fixed maturity securities of the Company.
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
1995 1996
Market Percent Total Market Percent Total
Rating (1) Value Market Value Value Market Value
Aaa or AAA $ 7,753 60.0% $ 50,444 39.5%
Aa or AA 680 5.2% 2,976 2.3%
A 257 2.0% 50,365 39.4%
Baa or BBB 100 0.8% 11,671 9.1%
Ba or BB 0 0% 2,840 2.3%
Other Below Investment
Grade 0 0% 2,091 1.6%
Not Rated (2) 4,141 32.0% 7,294 5.8%
Total $12,931 100.0% $127,681 100.0%
(1) Ratings are assigned by Moody's Investors Service, Inc., and when not
available are based on ratings assigned by Standard & Poor's Corporation.
(2) These securities were not rated by the rating agencies. However, these
securities are designated as Category 1 securities by the NAIC, which is the
equivalent rating of A or better.
The investment results of the Company for the periods indicated are set forth
below:
Symons International Group, Inc.
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
Net Investment Income (1) $ 1,241 $ 1,173 $ 6,733
Average Investment
Portfolio (2) $20,628 $22,653 $153,565
Pre-tax Return On Average
Investment Portfolio 6.0% 5.2% 5.9%
Net Realized Gains (Losses) $ (159) $ (344) $ (1,015)
(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.
Ratings
A.M. Best has currently assigned a B+ 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 was reduced from A- to B+ as
a result of the leverage of GGS Holdings resulting from indebtedness assumed
in connection with the Acquisition. 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, although
there can be no assurance that a revised rating will be obtained or as to the
level of any such rating.
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. "B+" and "B-" ratings are A.M. Best's sixth and eighth
highest rating classifications, respectively, out of 15 ratings. A "B+"
rating is awarded to insurers which, in A.M. Best's opinion, "have
demonstrated very good overall performance when compared to the standards
established by the A.M. Best Company" and "have a good 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 or changes therein will not in the future
adversely affect the Company's competitive position.
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.
Pafco, IGF and Superior are subject to triennial examinations by state
insurance regulators. Such examinations were last conducted for Pafco as of
June 30, 1992 (covering the period to that date from September 30, 1990), for
IGF as of March 31, 1992 (covering the period to that date from December 31,
1987), and Superior Insurance Company as of December 31, 1993 (covering the
period to that date from January 1, 1991). The two subsidiaries of Superior,
Superior American Insurance Company and Superior Guaranty Insurance
Company, had examinations conducted as of October 31, 1996 (covering the
period to that date from the subsidiaries' inception on December 9, 1994).
Pafco will have a triennial examination in 1997. Superior and IGF have not
been notified of the dates of their next examination.
Insurance Holding Company Regulation
The Company also is subject to laws governing insurance holding companies
in Florida and Indiana, where they 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 IGF, Pafco and
Superior (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.
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 unless the Indiana
Commissioner, upon application, has determined otherwise. In addition, any
purchaser of approximately 10% or more of the outstanding shares of Common
Stock of the Company will be presumed to have acquired control of Pafco and
Superior unless the Commissioner of the Indiana Department of Insurance
("Indiana Commissioner") and the Commissioner of the Florida Department of
Insurance ("Florida Commissioner"), upon application, have determined
otherwise.
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 of Insurance receives notice of their
declaration. "Extraordinary" dividends and distributions may not be paid
without 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 of Insurance must receive notice of
all dividends, whether "extraordinary" or not, within five business days after
they are declared. Notwithstanding the foregoing limit, a domestic insurer
may not declare or pay a dividend of funds other than earned surplus without
the prior approval of the Indiana Department of Insurance. "Earned surplus"
is defined as the amount of unassigned funds set forth in the insurer's most
recent annual statement, less surplus attributable to unrealized capital gains
or reevaluation of assets. As of December 31 1996, IGF and Pafco had earned
surplus of $29,412,000 and $18,112,000, respectively. Further, 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 the sum of its liabilities and the aggregate amount of the par
value of all shares of its capital stock; provided, that in no instance shall
such dividend reduce the total of (i) gross paid-in and contributed surplus,
plus (ii) special surplus funds, plus (iii) unassigned funds, minus (iv)
treasury stock at cost, below an amount equal to 50% of the aggregate amount
of the par value of all shares of the insurer's capital stock.
Under Florida law, a domestic insurer may not pay any dividend or distribute
cash or other property to its stockholders except out of that part of its
available and accumulated surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida
domestic insurer may not make dividend payments or distributions to
stockholders without prior approval of the Florida Department of Insurance if
the dividend or distribution does not exceed the larger of (i) the lesser of
(a) 10% of surplus, or (b) 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 (a) 10% of surplus, or (b) 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 of Insurance 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 (including unrealized gains or losses) 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 of Insurance or (ii) 30
days after the Florida Department of Insurance 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 of Insurance
has prohibited Superior from paying any dividends (whether extraordinary or
not) for four years without the prior written approval of the Florida
Department of Insurance.
Under these laws, the maximum aggregate amounts of dividends to the Company
in 1997 by IGF and Pafco without prior regulatory approval is $12,122,000 and
$561,000, respectively, none of which has been paid. 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 of Insurance
will approve any request for extraordinary dividends from Pafco or IGF or that
the Florida Department of Insurance 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, Inc. ("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 of Insurance has required Pafco to
resubmit its management agreement for review by the Indiana Department of
Insurance 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 of Insurance 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 of Insurance's consideration of the performance and operating
percentages of Superior and other pertinent data. There can be no assurance
that either the Indiana Department of Insurance or the Florida Department of
Insurance 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 program came as a result of the passage by Congress of the 1994
Reform Act and the 1996 Reform Act.
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 but not limited to low interest loans 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 Premium increased to $53.4 million in 1995
from $44.3 million in 1994. However, the 1996 Reform Act, signed into law by
President Clinton in April, 1996, 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 its MPCI product. The Company has not experienced any material negative
impact in 1996 from the delinkage mandated by the 1996 Reform Act. In
addition, the FCIC has transferred to the Company approximately 8,900 insureds
for CAT Coverage who previously purchased such coverage from USDA field
offices. The Company believes that any future 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 since ad hoc federal
disaster relief programs have been 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 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.
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 1996 Pafco had a net premiums to surplus ratio of 3.03 to 1 which was
in excess of the high end range of 3.0 to 1. The excess was not material and
Pafco has the ability to cede business to Superior to maintain compliance with
this ratio. Pafco's change in net writings was 61% compared to 33% at the
high end of the range. This result was expected given growth in gross
premiums and elimination of quota share reinsurance. Pafco also had positive
surplus growth of 64% outside the high end of the range at 50%. Pafco planned
for higher premium volume given the more profitable results than in prior
years. During 1996, Pafco's investment yield as calculated under the IRIS
tests was 3.8% which was below the low end of the range at 4.5%. However,
this IRIS test is a simple average of beginning and end of year investments.
Pafco's value fell below the range due to the following: (i) inclusion of
investment in IGF prior to the Transfer during the first four months of the
year when no investment income was received; (ii) growth in the portfolio in
the latter part of the year not taken into account by the IRIS test; (iii)
change during the course of the year to reduce ratio of equities to total
investments in favor of fixed income securities; (iv) contribution to surplus
of $3.7 million at the end of 1996 included in the IRIS test; and (v)
inclusion of the home office building in the investment base. If a weighted
average was calculated using monthly balances and excluding the IGF investment
and real estate was excluded from the calculation, Pafco's return would have
been 5.7%. Based on current investment levels and mix it is expected that
this test will be met in 1997. During 1996, Pafco's ratio of reserve
deficiency to surplus was 62% which exceeds the upper range of 25%. This IRIS
test calculates the average of claims liability to premiums for the preceding
two years and compares the resultant percentage to the current year's
percentage with a corresponding analysis to surplus. During 1994 and 1995,
Pafco's claims liability to premiums ratio was approximately 55% and decreased
to approximately 35% in 1996, resulting in the unusual IRIS result. This
situation was a result of commercial claims liabilities in 1994 and 1996 that
have now been ceded to an affiliate. Thus, claims liability at December 31,
1996 is entirely for nonstandard automobile. The reserves for the commercial
liability business were at a much higher ratio of premiums and are paid at a
much slower rate than nonstandard automobile claims. Thus, although premiums
grew in 1996, the increase in nonstandard automobile claims liability was
offset by ceded commercial claims. As this IRIS test uses a two year average
of claims liabilities to premiums, it is likely that Pafco may exceed the
normal ratio in 1997. It should be noted that Pafco did not have unusual IRIS
values for the one and two year reserve development to surplus tests.
During 1996 IGF had unusual values for three IRIS tests. IGF's surplus
increased by 237% which exceeded the high end of the range of 50%. However,
this is a very positive development due to growth in profits and the capital
infusion from the proceeds of the Offering. IGF continued to have unusual
values in the liabilities to liquid assets and agents balances to surplus
tests. IGF generally has an unusual value in these tests due to the
reinsurance program mandated by the FCIC for the distribution of the MPCI
program and the fact that agents' balances at December 31 are usually not
settled until late February.
During 1996 Superior had a ratio of net premiums written to surplus of 3.07 to
1 compared to the IRIS test upper limit of 3.0 to 1. During 1996, Superior's
net premium writings increased by 116% which exceeded the upper limit of the
IRIS range of 33%. Superior had a reserve deficiency to surplus ratio of 29%
which was in excess of the upper IRIS limit of 25%. All these matters were a
function of the strong growth of Superior. Such results may continue in the
future if growth continues. See Management's Discussion and Analysis for
further discussion on impact of premium writings to surplus ratio.
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 December 31,
1996, the RBC ratios of the Insurers were in excess of the Company Action
Level, the first trigger level 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 recognizes 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.
Stockholder Agreement with GS Funds
The Stockholder Agreement among the Company, GS Funds, Goran and GGS
Holdings provides that the Board of Directors of GGS Holdings consists of five
members, of whom three shall be designated by the Company and two shall be
designated by GS Funds. However, in the event that (x) at any time the Company
and its affiliates shall own less than 25% of the issued and outstanding common
stock of GGS Holdings by reason of the issuance of shares of common stock to
GS Funds in satisfaction of the indemnification obligations of the Company or
Goran pursuant to the GGS Agreement (the "Indemnity Date") or (y) at any time
(i) the Company, Goran or GGS Holdings is in violation of any term of the
Stockholder Agreement, or (ii) GGS Holdings or GGS Management shall remain
in violation of any covenant with respect to indebtedness incurred by GGSH to
partially fund the Acquisition (the "GGS Senior Credit Facility") (whether or
not such violation is waived) after the expiration of any applicable cure
period or there shall occur an event of default under the GGS Senior Credit
Facility (whether or not waived), the size of the Board shall be reduced to
four members (a "Board Reduction"). At December 31, 1996, GS Funds waived
their right to this Board Reduction for the covenants violations of the GGSH
Senior Credit Facility. The covenants contained in the GGS Senior Credit
Facility are customary commercial loan covenants relating to the maintenance
of financial ratios and restrictions on dividends, significant corporate
transactions and other matters. In such event, so long as the Indemnity Date
has not occurred, the Company shall be entitled to designate only two
directors and GS Funds shall be entitled to designate two directors. After
the occurrence of the Indemnity Date, the Company shall be entitled to
designate one director and GS Funds shall be entitled to designate three
directors.
Prior to a Board Reduction, action may be taken by the Board only with the
approval of a majority of the members of the Board. After a Board Reduction,
prior to the Indemnity Date, action may only be taken with the approval of at
least one GS Funds designee and one Company designee. After the Indemnity
Date following a Board Reduction, action may only be taken by the Board with
the approval of a majority of the entire Board. Prior to a Board Reduction,
GGS Holdings may not take the following actions, among others, without first
obtaining approval by the Board and at least one GS Funds designee: (i)
consolidate or merge with any person, (ii) purchase the capital stock or
substantially all of the assets of any person, (iii) enter into any joint
venture or partnership or establish any non-wholly owned subsidiaries in which
the consideration paid by or invested by GGS Holdings is in excess of $1
million, (iv) voluntarily liquidate or dissolve, (v) offer any type of
insurance other than nonstandard automobile insurance (other than certain
policies issued on behalf of IGF or SIGF), (vi) sell, lease or transfer assets
for an aggregate consideration in excess of $1 million, (vii) subject to
certain exceptions, enter into any contract with a director or officer of
Goran (or any relative or affiliate of such person) or with any affiliate of
Goran, (viii) create or suffer to exist any indebtedness for borrowed money in
an aggregate amount in excess of $1 million excluding certain existing
indebtedness, (ix) mortgage or encumber its assets in an amount in excess of
$1 million, (x) make or commit to make any capital expenditure in an amount in
excess of $1 million, (xi) redeem or repurchase its outstanding capital stock,
(xii) issue or sell any shares of capital stock of GGS Holdings or its
subsidiaries, (xiii) enter into, adopt or amend any employment agreement or
benefit plan, (xiv) amend its Certificate of Incorporation or Bylaws, (xv)
amend or waive any provision of the Stockholder Agreement or the GGS
Agreement, (xvi) change its independent certified accountants or actuaries,
(xvii) register any securities under the Securities Act, (xviii) enter into
one or more agreements to reinsure a substantial portion of the liability of
GGS Holdings or any of its subsidiaries, or (xix) adopt or change the reserve
policy or the investment policy of GGS Holdings or any of its subsidiaries.
The Company's representatives on the Board of Directors of GGS Holdings are G.
Gordon Symons, Chairman of the Board of the Company, Alan G. Symons, Chief
Executive Officer of the Company and Douglas H. Symons, President and Chief
Operating Officer of the Company. Pursuant to their power under the
Stockholder Agreement to designate the Chairman of the Board of GGS Holdings,
GS Funds have named G. Gordon Symons as Chairman of the Board of GGS Holdings.
The Stockholder Agreement 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. GS Funds has
the right at any time to designate a chief operating officer for GGS Holdings
but has currently not elected to exercise this right. Upon request, GS Funds
has 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 GS
Funds the right to appoint any designees to the Board of Directors of any of
the subsidiaries of GGS Holdings.
Certain Rights Of The GS Funds To Cause A Sale of GGS Holdings
Events Which Trigger the Rights of the GS Funds to Cause A Sale of GGS
Holdings.
The Stockholder Agreement establishes certain rights of 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, on a fully diluted basis, at least 20% of
all such stock issued and outstanding, and generating at least $25 million in
net proceeds to the sellers of such securities, by April 30, 2001, (ii) the
third separate occasion, during the term of the Stockholder Agreement, on
which an equity financing or acquisition transaction proposed by GS Funds is
rejected by the GGS Holdings Board of Directors, (iii) the loss of voting
control of Goran or the Company (defined, with respect to Goran, as being
direct or indirect ownership of more than 40% of the outstanding voting stock
of Goran if any other holder or group holds in excess of 10% of the
outstanding voting stock of Goran, and otherwise 25% thereof; and defined,
with respect to the Company, as requiring both (a) direct ownership by Goran
in excess of 50% of the Company's voting stock and (b) retention by Alan G.
Symons and his family members of voting control of Goran) by Alan G. Symons
or his family members or affiliates, or (iv) 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, 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 GS Funds' intention to initiate the sale
of GGS Holdings, the Company may provide written notice to GS Funds that it
wishes to acquire or combine with GGS Holdings. The Company's notice to GS
Funds must include the proposed purchase price and other material terms and
conditions with such specificity as is necessary to permit GS Funds to
evaluate the Company's offer. If, within 90 days of delivery of the notice by
the Company, GS Funds accepts the Company's offer, the Company will be
obligated to acquire or combine with GGS Holdings. In the event GS Funds
rejects 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 GS Funds.
Accordingly, under certain circumstances, 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.
Employees
At December 31, 1996 the Company and its subsidiaries employed approximately
600 persons. The Company believes that relations with its employees are
excellent.
FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS
The statements contained in this Annual Report which are not historical facts,
including but not limited to, statements concerning (i) the impact of federal
and state laws and regulations, including but not limited to, the 1994 Reform
Act and 1996 Reform Act, on the Company's business and results of operations,
(ii) the competitive advantage afforded to IGF by approaches adopted by
management in the areas of information, technology, claims handling and
underwriting, (iii) the sufficiency of the Company's cash flow to meet the
operating expenses, debt service obligations and capital needs of the Company
and its subsidiaries, and (iv) the impact of declining MPCI Buy-up Expense
Reimbursements on the Company's results of operations, are forward-looking
statements within the meanings of Section 27A of the Securities Act of 1933,
as amended and Section 21E of the Securities Exchange Act of 1934, as amended.
From time to time the Company may also issue other statements either orally or
in writing, which are forward looking within the meaning of these statutory
provisions. Forward looking statements are typically identified by the words
"believe", "expect", "anticipate", "intend", "estimate", "plan" and similar
expressions. These statements involve a number of risks and uncertainties,
certain of which are beyond the Company's control. Actual results could
differ materially from the forward looking statements in this Form 10-K or
from other forward looking statements made by the Company. In addition to the
risks and uncertainties of ordinary business operations, some of the facts
that could cause actual results to differ materially from the anticipated
results or other expectations expressed in the Company's forward-looking
statements are the risks and uncertainties (i) discussed herein, (ii)
contained in the Company's other filings with the Securities and Exchange
Commission and public statements from time to time, and (iii) set forth below:
Uncertain 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 under-
writing 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 adjustments 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 fluctuation 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.
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, drought, floods, freezes 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 are
recognized throughout the year with a reconciliation for the current crop year
in the fourth quarter.
The Company expects that for the foreseeable future a majority of its crop
insurance 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 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. The FCIC has
appointed several committees comprised of members of the insurance industry to
make recommendations concerning this matter.
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, signed into law by President Clinton in April, 1996,
provides that, 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 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.
Total MPCI Premium for each farmer depends upon the kinds 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 Election") to be
used in computing MPCI Premiums. Any reduction of the Price Election by the
FCIC will reduce the MPCI Premium charged per policy, and accordingly will
adversely impact MPCI Premium volume.
The Company's crop insurance business is also 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, technologic advances in agricultural practices,
international agricultural markets and general economic conditions both in the
United States and abroad. For example, the number of MPCI Buy-up Coverage
policies written has historically tended to increase after a year in which a
major natural disaster adversely affecting crops occurs, and to decrease
following a year in which favorable weather conditions prevail.
<PAGE>
Highly Competitive Businesses
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.
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 1996 crop year, the
number of insurance companies that have entered into agreements with the FCIC
to sell and service MPCI policies has declined from 50 to 16. 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.
Importance of Ratings
A.M. Best has currently assigned Superior a B+ (Very Good) rating and Pafco a
B- (Adequate) rating. Subsequent to the Acquisition, the rating of Superior
was reduced from A- to B+ as a result of the leverage of GGS Holdings
resulting from indebtedness in connection with the Acquisition. A "B+" and a
"B-" rating are A.M. Best's sixth and eighth highest rating classifications,
respectively, out of 15 ratings. A "B+" rating is awarded to insurers which,
in A.M. Best's opinion, "have demonstrated very good overall performance when
compared to the standards established by the A.M. Best Company" and "have a
good ability to meet their obligations to policyholders over 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, although there can be no assurance that a
revised rating will be obtained or as to the level of any such rating. 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.
The A.M. Best ratings for the Company's rated Insurers are lower than for many
of the Company's competitors. There can be no assurance that such ratings or
future changes therein will not affect the Company's competitive position.
Geographic Concentration
The Company's nonstandard automobile insurance business is concentrated in the
states of Florida, California, Indiana, Missouri and Virginia; consequently
the Company will be significantly affected by changes in the regulatory and
business climate in those states. The Company's crop insurance business is
concentrated in the states of Iowa, Texas, Illinois, Kansas and Minnesota and
the Company will be significantly affected by weather conditions, natural
perils and other factors affecting the crop insurance business in those
states.
Future Growth and Continued Operations Dependent on 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, meet the other related standards established by insurance
regulatory authorities and insurance rating bureaus and satisfy financial
ratio covenants in loan agreements.
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 Company's insurance
subsidiaries will have access to sufficient capital to support future growth
and also satisfy the capital requirements of rating agencies, regulators and
creditors. 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 of 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.
Uncertainty Associated with Estimating Reserves for Unpaid Losses and LAE
The reserves 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 reserves are based on
estimates of trends in claims severing judicial theories of liability and
other factors.
Although the nature of the Company's insurance business is primarily short-tail,
the establishment of adequate reserves is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
materially exceed the Company's reserves for losses and LAE and 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
estimates of the Company's reserves for losses and LAE. The historic
development of reserves 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.
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 generally 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.
Risks Associated with Investments
The Company's results of operations depend in part on the performance of its
invested assets. 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.
Comprehensive State Regulation
The Company's insurance subsidiaries 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. 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.
Holding Company Structure; Dividend And Other Restrictions; Management Fees
Holding Company Structure. 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 its
insurance subsidiaries, 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.
Dividend and Other Restrictions. 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 of Insurance ("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.
Notwithstanding the foregoing limit, 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. "Earned Surplus" is defined as the
amount of unassigned funds set forth in the insurer's most recent annual
statement, less surplus attributable to unrealized capital gain or re-evaluation
of assets. Further, 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 the sum of its liabilities
and the aggregate amount of the par value of all shares of capital stock;
provided, that in no instance shall such dividend reduce the total of (i)
gross paid-in and contributed surplus, plus (ii) special surplus funds, plus
(iii) unassigned funds, minus (iv) treasury stock at cost, below an amount
equal to 50% of the aggregate amount of the par value of all shares of the
insurer's capital stock.
Under Florida law, a domestic insurer may not pay any dividend or distribute
cash or other property to its stockholders except out of that part of its
available and accumulated surplus funds which is derived from realized net
operating profits on its business 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 (a) 10% of surplus or (b) net investment 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 (a) 10% of surplus or (b) 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 net operating profits on its
business and net realized capital gains, or (ii) the insurer's entire net
operating profits (including unrealized gains or losses) 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) thirty 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
"Consent Order"), 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.
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. 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.
Payment of dividends by IGF requires prior approval by the lender under the
credit agreement which IGF is a party. There can be no assurance that IGF
will be able to obtain this consent. The Company is in the process of seeking
regulatory approval for a new arrangement whereby underwriting, marketing and
administrative functions of IGF will be assumed by, and employees will be
transferred to, IGF Holdings. As a result of this restructuring, management
fees would be paid by IGF to IGF Holdings, thereby providing an additional
source of liquidity for the Company to the extent these payments exceed the
operating and other expenses of IGF Holdings. There can be no assurance that
this regulatory approval will be obtained.
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.
Management Fees. The management agreement originally entered into between the
Company and Pafco was assigned as of April 30, 1996 by the Company to GGS
Management, a wholly-owned subsidiary of GGS Holdings. 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 transaction relating to the formation of
GGS Holdings, 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 re-evaluate
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, as a result of certain restrictive covenants with respect to
dividends and other payments contained in 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. In addition, since
the GS Funds own 48% of the outstanding capital stock of GGS Holdings, the
Company would only be entitled to receive 52% of any dividend or distribution
paid by GGS Holdings to its stockholders.
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, on a fully diluted basis, at least 20% of
all such stock issued and outstanding, and generating at least $25 million in
net proceeds to the sellers of such securities, by April 30, 2001, (ii) the
third separate occasion, during the term of the Stockholder Agreement on which
an equity financing or acquisition transaction proposed by the GS Funds is
rejected by the GGS Holdings Board of Directors, (iii) the loss of voting
control of Goran or the Company (defined, with respect to Goran as being
direct or indirect ownership of more than 40% of the outstanding voting stock
of Goran if any other holder or group holds in excess of 10% of the
outstanding voting stock of Goran and otherwise 25% thereof, and defined, with
respect to the Company, as requiring both (a) direct ownership by Goran in
excess of 50% of the Company's voting stock and (b) retention by Alan G.
Symons and his family members of voting control of Goran by Alan G. Symons or
his family members or affiliates, or (iv) the cessation of Alan G. Symons'
employment as CEO of GGS Holdings for any reason. As a result of the
considerations arising under the Investment Company Act of 1940 (the "1940
Act") with respect to GGS Holdings, any public offering by GGS Holdings would
probably be required to consist solely of a secondary offering of shares held
by stockholders.
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 ninety 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.
ITEM 2 - PROPERTIES
The headquarters for the Company, GGS Holdings and Pafco are located at 4720
Kingsway Drive, Indianapolis, Indiana. 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
Pointe 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 fee 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.
IGF has entered into a purchase agreement to acquire an office building in Des
Moines, Iowa, to be used as its crop insurance division home office. The
purchase price was $2.6 million, of which $2.4 million was escrowed on
February 1, 1997. The terms include a floating closing date whereby the
transaction will close on the earlier of February 1, 1998 or thirty days after
the closing of the sale of the Company's currently occupied home office
building, also located in Des Moines. The purchase of the new building is not
contingent on the sale of the current building.
ITEM 3 - 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
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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during 1996 to a vote of security holders of the
Registrant, through the solicitation of proxies or otherwise.
SEPARATE ITEM, EXECUTIVE OFFICERS OF THE REGISTRANT
Presented below is certain information regarding the executive officers of the
Company who are not also directors. Their respective ages and their
respective positions with the Company are listed as as follows:
Name Age Position
David L. Bates 37 Vice President, General Counsel
and Secretary of the Company
Gary P. Hutchcraft 35 Vice President, Chief Financial
Officer and Treasurer of the
Company
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. Hutchcraft, C.P.A., has served as Vice President, Chief Financial Officer
and Treasurer 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.
<PAGE>
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information regarding the trading market for the Company's Common Shares, the
range of selling prices for each quarterly period since the Offering on
November 4, 1996, with respect to the Common Shares and the approximate number
of holders of Common Shares as of December 31, 1996 and other matters is
included under the caption "Market and Dividend Information" on page 50 of the
1996 Annual Report, included as Exhibit 13, which information is incorporated
herein by reference.
The Company currently intends to retain earnings for use in the operation and
expansion of its business and therefore does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will depend,
among other things, upon earnings, capital requirements, any financing
agreement covenants and the financial condition of the Company. In addition,
regulatory restrictions and provisions of the GGS Senior Credit Facility limit
distributions to shareholders.
ITEM 6 - SELECTED FINANCIAL DATA
The data included on pages 4 and 5 of the 1996 Annual Report, included as
Exhibit 13, under "Selected Financial Data" is incorporated herein by
reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF 0PERATIONS
The discussion entitled "Management Discussion and Analysis of Financial
Condition and Results of Operations" included in the 1996 Annual Report on
pages 6 through 19 included as Exhibit is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements in the 1996 Annual Report, included as
Exhibit 13, and listed in Item 14 of this Report are incorporated herein by
reference from the 1996 Annual Report.
ITEM 9- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding Directors of the Company is
incorporated herein by reference to the Company's definitive proxy statement
for its 1996 annual meeting of common stockholders filed with the Commission
pursuant to Regulation 14A (the "1996 Proxy Statement").
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the Company's 1996 Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated herein by reference to
the Company's 1996 Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
the Company's 1996 Proxy Statement.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The documents listed below are filed as a part of this Report except as
otherwise indicated:
1. Financial Statements. The following described consolidated financial
statements found on the pages of the 1996 Annual Report indicated below are
incorporated into Item 8 of this Report by reference.
Description of Financial Statement Item Location in 1996 Annual
Report
Report of Independent Accountants Page 49
Consolidated Balance Sheets, December 31,
1996 and 1995 Page 20
Consolidated Statements of Earnings, Years
Ended December 31, 1996, 1995 and 1994 Page 21
Consolidated Statements of Changes In
Shareholders' Equity, Years Ended
December 31, 1996, 1995 and 1994 Page 22
Consolidated Statements of Cash Flows,
Years Ended December 31, 1996, 1995 and
1994 Page 23
Notes to Consolidated Financial Statements,
Years Ended December 31, 1996, 1995 and
1994 Page 24
2. Financial Statement Schedules. The following financial statement
schedules are included beginning on Page 58.
Report of Independent Accountants
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
3. Exhibits. The Exhibits set forth on the Index to Exhibits are
incorporated herein by reference.
4. Reports on Form 8-K. Registrant filed no reports on Form 8-K during the
quarter ended December 31, 1996.<PAGE>
Board of Directors and Stockholders of
Symons International Group, Inc. and Subsidiaries
Our report on the consolidated financial statements of Symons International
Group, Inc. and Subsidiaries has been incorporated by reference in this Form
10-K from page 49 of the 1996 Annual Report to Shareholders of Symons
International Group, Inc. and Subisidiaries. In connection with our audits of
such financial statements, we have also audited the related financial
statement schedules listed in the index on page 69 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 21, 1997.
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL
INFORMATION OF REGISTRANT
As Of December 31, 1995 and 1996
(In Thousands)
1995 1996
ASSETS
Assets:
Investments In And Advances To $18,589 $77,514
Related Parties
Cash and Cash Equivalents 0 6,160
Deferred Income Taxes 52 0
Property and Equipment 337 8
Other 57 168
Intangible Assets 0 83
Total Assets $19,035 $83,933
LIABILITIES AND STOCKHOLDERS EQUITY
Liabilities:
Payables To Affiliates $ 8,671 $ 350
Federal Income Tax Payable 0 81
Line of Credit and Notes Payable 0 0
Other 829 992
Total Liabilities $ 9,500 $ 1,423
Minority Interest 0 21,610
Stockholders' Equity:
Common Stock, No Par, 1,000,000
Shares Authorized, 10,450,000
Issued And Outstanding $ 1,000 $38,969
Additional Paid-In Capital 3,130 5,905
Unrealized Loss On Investments (45) 820
(Net Of Deferred Taxes Of ($23,000)
in 1995 and $1,225,000 in 1996)
Retained Earnings 5,450 15,206
Total Stockholders' Equity $ 9,535 $60,900
Total Liabilities and Stockholders' Equity $19,035 $83,933
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
For The Years Ended December 31, 1994, 1995
and 1996
(In Thousands)
1994 1995 1996
Net Investment Income $ 37 $1,522 $ 98
Net Realized Investment Losses (8) (52) 0
Other Income 8,533 7,626 5,353
Total Revenue 8,562 9,096 5,451
Expenses:
Policy Acquisition And General
And Administrative Expenses 7,528 7,891 4,269
Interest Expense 874 621 613
Total Expenses 8,402 8,512 4,882
Income Before Taxes and Minority
Interest 160 584 569
Provision For Income Taxes:
Current Year 176 293 228
Prior Year (70) 0 0
Provision for Income Taxes 106 293 228
Net Income Before Equity In Net
Income Of Subsidiaries 54 291 341
Equity In Net Income Of Subsidiaries 2,063 4,530 12,915
Net Income For The Period $2,117 $4,821 $13,256
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
For The Years Ended December 31, 1994, 1995
and 1996
(In Thousands)
1994 1995 1996
Net Income $ 2,117 $ 4,821 $13,256
Cash Flows From Operating Activities:
Adjustments To Reconcile Net Cash
Provided By (Used In) Operations:
Equity In Net Income of
Subsidiaries (2,063) (4,530) (12,915)
Depreciation Of Property And
Equipment 91 37 52
Net Realized Capital Loss 8 (52) 0
Amortization Of Intangible Assets 169 88 3
Net Changes In Operating Assets And
Liabilities:
Federal Income Taxes Recoverable
(Payable) 206 (176) 81
Other Assets (70) 216 (145)
Other Liabilities (1,060) 518 163
Net Cash Provided From (Used In) (602) 922 495
Operations
Cash Flow Used In Investing
Activities:
Purchase Of Property And Equipment (58) (179) 0
Net Cash Used In Investing
Activities (58) (179) 0
Cash Flows Provided By (Used In)
Financing Activities:
Proceeds from Common Stock Offering 0 0 37,969
Repayment Of Loans (1,750) (1,250) 0
Contributed Capital 0 0 (20,475)
Loans From Related Parties 2,410 507 (8,329)
Payment of Dividend to Parent 0 0 (3,500)
Net Cash Provided By (Used In)
Financing Activities 660 (743) 5,665
Increase (Decrease) In Cash And
Cash Equivalents 0 0 6,160
Cash And Cash Equivalents -
Beginning Of Year 0 0 0
Cash And Cash Equivalents -
End Of Year 0 0 6,160
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
For The Years Ended December 31, 1994, 1995
and 1996
Basis of Presentation
The condensed financial information should be read in conjunction with the
consolidated financial statements of Symons International Group, Inc. The
condensed financial information includes the accounts and activities of the
Parent Company which acts as the holding company for the insurance
subsidiaries.
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE IV - REINSURANCE
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
Direct Amount $102,178 $123,381 $298,596
Assumed From Other
Companies $ 956 $ 1,253 $ 6,903
Ceded To Other
Companies $ 67,995 $ 71,187 $(95,907)
Net Amount $ 35,139 $ 53,447 $209,592
Percentage Of Amount
Assumed To Net 2.7% 2.3% 3.3%
<PAGE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31,
(In Thousands)
1994-Allowance 1995-Allowance 1996-Allowance
for Doubtful for Doubtful for Doubtful
Accounts Accounts Accounts
Additions:
Balance At Beginning
Of Period $1,179 $1,209 $ 927
Reserves Acquired In
The Superior Acquisition 500
Charged To Costs
And Expenses (1) (86) 2,523 5,034
Charged to Other
Accounts 0 0 0
Deductions From
Reserves (116)(2) 2,805 (2) 4,981
Balance At End
Of Period $1,209 $ 927 $1,480
(1) In 1993, the Company began to direct bill policyholders rather than
agents for premiums. During late 1994 and into 1995, the Company experienced
an increase in premiums written. During 1995, the Company further evaluated
the collectibility of this business and incurred a bad debt expense of
approximately $2.5 million. The Company continually monitors the adequacy of
its allowance for doubtful accounts and believes the balance of such allowance
at December 31, 1994, 1995 and 1996 was adequate.
(2) Uncollectible accounts written off, net of recoveries.
<PAGE>
<TABLE>
SYMONS INTERNATIONAL GROUP, INC. - CONSOLIDATED
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY - CASUALTY INSURANCE OPERATIONS
For The Years Ended December 31,
(In Thousands)
<CAPTION>
Deferred Reserves Discount, Unearned Earned Net Claims and Amortization Paid Premiums
Policy for Unpaid if any, Premiums Prem- Invest- Adjustment of deferred claims Written
Acqui- Claims and deducted iums ment expenses policy and claim
sition claim ad- in Column Income incurred- cquisition adjust-
Costs justment C related to: costs ment-
expense expenses
Column Column Column Column Column Column Cur- Prior Column Column Column
B C D E F G rent Years I J K
Year
Column
H
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994 1,479 29,269 $0 14,416 32,126 1,241 26,268 202 4,852 26,995 103,134
1995 2,379 59,421 $0 17,497 49,641 1,173 35,184 787 7,150 31,075 124,634
1996 12,800 101,719 $0 87,285 191,759 6,733 137,679 (570) 27,657 130,895 305,499
</TABLE>
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.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereto duly authorized.
SYMONS INTERNATIONAL GROUP, INC.
/s/ Alan G. Symons
March 15, 1997 By:
Alan G. Symons, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on March 29, 1996, on
behalf of the registrant in the capacities indicated:
(1) Principal Executive Officer:
/s/ Alan G. Symons
Alan G. Symons
Chief Executive Officer
(2) Principal Financial/Accounting Officer:
/s/ Gary P. Hutchcraft
Gary P. Hutchcraft
Vice President and Chief Financial Officer
(3) The Board of Directors:
/s/ G. Gordon Symons /s/ David R. Doyle
G. Gordon Symons David R. Doyle
Chairman of the Board Director
/s/ John K. McKeating /s/ James G. Torrance
John K. McKeating James G. Torrance
Director Director
/s/ Robert C. Whiting /s/ Douglas H. Symons
Robert C. Whiting Douglas H. Symons
Director Director
/s/ Jerome B. Gordon /s/ Alan G. Symons
Jerome B. Gordon Alan G. Symons
Director Director
<PAGE>
EXHIBIT INDEX
Reference to Sequential
Regulation S-K Page
Exhibit No. Document Number
1 Final Draft of the Underwriting Agreement, dated November 4,
1996, among Registrant, Goran Capital, Inc., Advest, Inc. and
Mesirow Financial, Inc...........................................76
3.1 The Registrant's Restated Articles of Incorporation are
incorporated by reference to Exhibit 3.1 of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
3.2 Registrant's Restated Code of Bylaws, as amended.................129
4.1 Article V - "Number, Terms and Voting Rights of Shares" of
the Registrant's Restated Articles of Incorporation is
incorporated by reference to the Registrant's Restated
Articles of Incorporation incorporated by reference 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 are incorporated by
reference to the Registrant's Restated Code of Bylaws, as
amended, filed hereunder as Exhibit 3.2.
10.1 The Stock Purchase Agreement among Goran Capital Inc.,
Registrant, Fortis, Inc. and Interfinancial, Inc. dated
January 31, 1996 is incorporated by reference to Exhibit 10.1
of the Registrant's Registration Statement on Form S-1, Reg.
No. 333-9129.
10.2(1) The Stock Purchase Agreement among GGS Management Holdings,
Inc., GS Capital Partners II, L.P., Goran Capital Inc. and
Registrant dated January 31, 1996 is incorporated by
reference to Exhibit 10.2(1) of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.2(2) The First Amendment to the Stock Purchase Agreement by and
among GGS Management Holdings, Inc., GS Capital Partners II,
L.P., Goran Capital Inc. and Registrant dated March 28, 1996
is incorporated by reference to Exhibit 10.2(2) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.2(3) The Second Amendment to the Stock Purchase Agreement by and
among GGS Management Holdings, Inc., GS Capital Partners II,
L.P., Goran Capital Inc. and Registrant dated April 30, 1996
is incorporated by reference to Exhibit 10.2(3) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.2(4) The Third Amendment to the Stock Purchase Agreement by and
among GGS Management Holdings, Inc., GS Capital Partners II,
L.P., Goran Capital Inc., Registrant and Pafco General
Insurance Company dated September 24, 1996 is incorporated by
reference to Exhibit 10.2(4) of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.3(1) The Stockholders Agreement among GGS Management Holdings,
Inc., GS Capital Partners II, L.P., Registrant and Goran
Capital Inc. dated April 30, 1996 is incorporated by
reference to Exhibit 10.3(1) of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.3(2) The Amended and Restated Stockholder Agreement among GGS
Management Holdings, Inc., GS Capital Partners II, L.P.,
Registrant and Goran Capital Inc. dated September 24, 1996 is
incorporated by reference to Exhibit 10.3(2) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.4 The Registration Rights Agreement among GGS Management
Holdings, Inc., GS Capital Partners II, L.P., Goran Capital
Inc. and Registrant dated April 30, 1996 is incorporated by
reference to Exhibit 10.4 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.5 The Management Agreement among Superior Insurance Company,
Superior American Insurance Company, Superior Guaranty
Insurance Company and GGS Management, Inc. dated April 30,
1996 is incorporated by reference to Exhibit 10.5 of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.6 The Management Agreement between Pafco General Insurance
Company and Registrant dated May 1, 1987, as assigned to GGS
Management, Inc. effective April 30, 1996, is incorporated by
reference to Exhibit 10.6 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
<PAGE>
10.7 The Administration Agreement between IGF Insurance Company
and Registrant dated February 26, 1990, as amended, is
incorporated by reference to Exhibit 10.7 of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.8 The Agreement between IGF Insurance Company and Registrant
dated November 1, 1990 is incorporated by reference to
Exhibit 10.8 of the Registrant's Registration Statement on
Form S-1, Reg. No. 333-9129.
10.9(1) The Credit Agreement between GGS Management, Inc., various
Lenders and The Chase Manhattan Bank (National Association),
as Administrative Agent, dated April 30, 1996 is incorporated
by reference to Exhibit 10.11(1) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.9(2) The Pledge Agreement between GGS Management Holdings, Inc.
and Chase Manhattan Bank, N.A. dated April 30, 1996 is
incorporated by reference to Exhibit 10.11(2) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.9(3) The Pledge Agreement between GGS Management, Inc. and Chase
Manhattan Bank, N.A. dated April 30, 1996 is incorporated by
reference to Exhibit 10.11(3) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.9(4) The First Amendment to the Credit Agreement between GGS
Management, Inc., various Lenders and Chase Manhattan Bank,
N.A., as Administrative Agent, dated September 26,
1996..............................................................156
10.9(5) The Second Amendment to the Credit Agreement between GGS
Management, Inc., various Lenders and Chase Manhattan Bank,
N.A., as Administrative Agent, dated December 31,
1996..............................................................159
10.9(6) The Third Amendment to the Credit Agreement between GGS
Management, Inc., various Lenders and Chase Manhattan Bank,
N.A., as Administrative Agent, dated March 26,
1997........161
10.10 The Registration Rights Agreement between Goran Capital Inc.
and Registrant dated May 29, 1996 is incorporated by
reference to Exhibit 10.13 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.11(1) The License, Improvement and Support Agreement between
Tritech Financial Systems, Inc. and Registrant dated August
30, 1995 is incorporated by reference to Exhibit 10.14(1) of
the Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.11(2) The License of Computer Software between Tritech Financial
Systems, Inc. and Registrant dated August 30, 1995 is
incorporated by reference to Exhibit 10.14(2) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.12(1) The Agreement among Cliffstan Investments, Inc., Pafco
General Insurance Company and Gage North Holdings, Inc. dated
September 1, 1989 is incorporated by reference to Exhibit
10.15(1) of the Registrant's Registration Statement on Form
S-1, Reg. No. 333-9129.
10.12(2) The Purchase of Promissory Note and Assignment of Security
Agreement between Pafco General Insurance Company and Granite
Reinsurance Company, Ltd., dated September 30, 1992 is
incorporated by reference to Exhibit 10.15(2) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.12(3) The Guarantee of Alan G. Symons dated April 22, 1994 is
incorporated by reference to Exhibit 10.15(3) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.12(4) The Share Pledge Agreement between Symons International
Group, Ltd. and Pafco General Insurance Company dated April
22, 1994 is incorporated by reference to Exhibit 10.15(4) of
the Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.13(1) The Employment Agreement between GGS Management Holdings,
Inc. and Alan G. Symons dated January 31, 1996 is
incorporated by reference to Exhibit 10.16(1) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.13(2) The Employment Agreement between GGS Management Holdings,
Inc. and Douglas H. Symons dated January 31, 1996 is
incorporated by reference to Exhibit 10.16(2) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.14(1) The Employment Agreement between IGF Insurance Company and
Dennis G. Daggett effective February 1, 1996 is incorporated
by reference to Exhibit 10.17(1) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
<PAGE>
10.14(2) The Employment Agreement between IGF Insurance Company and
Thomas F. Gowdy effective February 1, 1996 is incorporated by
reference to Exhibit 10.17(2) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.15 The Employment Agreement between Superior Insurance Company
and Roger C. Sullivan, Jr. dated May 9, 1996 is incorporated
by reference to Exhibit 10.18 of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.16 The Employment Agreement between Goran Capital Inc. and Gary
P. Hutchcraft effective June 30, 1996 is incorporated by
reference to Exhibit 10.19 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.17 The Goran Capital Inc. Stock Option Plan is incorporated by
reference to Exhibit 10.20 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.18 The GGS Management Holdings, Inc. 1996 Stock Option Plan is
incorporated by reference to Exhibit 10.21 of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.19 The Registrant's 1996 Stock Option Plan is incorporated by
reference to Exhibit 10.22 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.20 The Registrant's Retirement Savings Plan is incorporated by
reference to Exhibit 10.24 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
10.21 The Insurance Service Agreement between Mutual Service
Casualty Company and IGF Insurance Company dated May 20, 1996
is incorporated by reference to Exhibit 10.25 of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.22(1) The Automobile Third Party Liability and Physical Damage
Quota Share Reinsurance. Contract between Pafco General
Insurance Company and Superior Insurance Company is
incorporated by reference to Exhibit 10.27(1) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.22(2) The Crop Hail Quota Share Reinsurance Contract and Crop
Insurance Service Agreement between Pafco General Insurance
Company and IGF Insurance Company is incorporated by
reference to Exhibit 10.27(2) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.22(3) The Automobile Third Party Liability and Physical Damage
Quota Share Reinsurance Contract between IGF Insurance
Company and Pafco General Insurance Company is incorporated
by reference to Exhibit 10.27(3) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.22(4) The Multiple Line Quota Share Reinsurance Contract between
IGF Insurance Company and Pafco General Insurance Company is
incorporated by reference to Exhibit 10.27(4) of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
10.22(5) The Standard Revenue Agreement between Federal Crop Insurance
Corporation and IGF Insurance Company is incorporated by
reference to Exhibit 10.27(5) of the Registrant's
Registration Statement on Form S-1, Reg. No. 333-9129.
10.23 The Commitment Letter, effective October 24, 1996, between
Fifth Third Bank of Central Indiana and Registrant is
incorporated by reference to Exhibit 10.28 of the
Registrant's Registration Statement on Form S-1, Reg. No.
333-9129.
13 Annual Report to Security Holders.................................170
21 The Subsidiaries of the Registrant are incorporated by
reference to Exhibit 21 of the Registrant's Registration
Statement on Form S-1, Reg. No. 333-9129.
27 Financial Data Schedule...........................................223
99 Proxy Statement with respect to 1997 Annual Meeting
of Shareholders of Registrant....................................224
<PAGE>
3,000,000 Shares
(plus 450,000 Shares to cover overallotments, if any)
SYMONS INTERNATIONAL GROUP, INC.
Common Stock
UNDERWRITING AGREEMENT
November 4, 1996
ADVEST, INC.
MESIROW FINANCIAL, INC.
As Representatives (the "Representatives")
of the Several Underwriters
Named in Schedule I Hereto
c/o Advest, Inc.
90 State House Square
Hartford, CT 06103
Dear Sirs:
Symons International Group, Inc., an Indiana corporation (the
"Company") and a wholly owned subsidiary of Goran Capital Inc., a Canadian
federally chartered corporation ("Parent"), proposes, subject to the terms and
conditions stated herein, to sell to the Underwriters (the "Underwriters") named
in Schedule I hereto an aggregate of Three Million (3,000,000) shares (the
"Company Shares") of the Company's Common Stock, no par value ("Common Stock").
In addition, in order to cover overallotments in the sale of the
Company Shares, the Underwriters may, at the Underwriters' election and subject
to the terms and conditions stated herein, purchase ratably in proportion to the
amounts set forth opposite their respective names in Schedule I hereto, up to
Four Hundred Fifty Thousand (450,000) additional shares of Common Stock from the
Company (such additional shares of Common Stock, the "Optional Shares"). The
Company Shares and the Optional Shares are referred to collectively herein as
the "Shares."
As part of the offering contemplated by this Agreement, Advest, Inc.
has agreed to reserve out of the Shares set forth opposite its name on Schedule
I to this Agreement, up to 150,000 Shares, for sale to certain officers,
directors and employees of the Company and its affiliates, certain family
members of the foregoing and other persons having business relationships with
1
<PAGE>
the Company or its affiliates (collectively, "Participants"), as set forth in
the Prospectus under the heading "Underwriting" (the "Directed Share Program").
The Shares to be sold by Advest, Inc. pursuant to the Directed Share Program
(the "Directed Shares") will be sold by Advest, Inc. pursuant to this Agreement
at the public offering price. Any Directed Shares not orally confirmed for
purchase by any Participants by the end of the first business day after the date
on which this Agreement is executed will be offered to the public by Advest,
Inc. as set forth in the Prospectus.
The Company hereby confirms its engagement of each of Advest, Inc. and
Mesirow Financial, Inc. as, and each of Advest, Inc. and Mesirow Financial, Inc.
hereby confirms its agreement with the Company to render services as, a
"qualified independent underwriter" within the meaning of Rule 2720 of the
Conduct Rules of the National Association of Securities Dealers, Inc. with
respect to the offering and sale of the Shares. Each of Advest, Inc. and Mesirow
Financial, Inc., solely in its capacity as qualified independent underwriter and
not otherwise, is referred to herein as a "QIU" (and together with the other
QIU, as the "QIUs").
Each of the Company and Parent, intending to be legally bound, hereby
confirms its agreement with the Underwriters as follows:
1. Representations and Warranties of the Company and Parent.
(a) Each of the Company and Parent, and IGF Holdings, Inc., an Indiana
corporation and a wholly owned subsidiary of the Company ("IGFH") (to the extent
that the following representations and warranties relate directly to IGFH or its
subsidiaries), jointly and severally represent and warrant to, and agree with,
each of the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-09129)
with respect to the Shares, including a prospectus subject to completion, has
been filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and one
or more amendments to such registration statement may have been so filed. After
the execution of this Agreement, the Company will file with the Commission
either (A) if such registration statement, as it may have been amended, has
become effective under the Act and information has been omitted therefrom in
accordance with Rule 430A under the Act, a prospectus in the form most recently
included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement) with such
changes or insertions as
2
<PAGE>
are required by Rule 430A or permitted by Rule 424(b) under the Act and as have
been provided to and approved by the Representatives, or (B) if such
registration statement, as it may have been amended, has not become effective
under the Act, an amendment to such registration statement, including a form of
prospectus, a copy of which amendment has been provided to and approved by the
Representatives prior to the execution of this Agreement. As used in this
Agreement, the term "Registration Statement" means such registration statement,
as amended at the time when it was or is declared effective, including (i) all
financial statements, schedules and exhibits thereto, (ii) all documents (or
portions thereof) incorporated by reference therein, and (iii) any information
omitted therefrom pursuant to Rule 430A under the Act and included in the
Prospectus (as hereinafter defined); the term "Preliminary Prospectus" means
each prospectus subject to completion included in such registration statement or
any amendment or post-effective amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement at the
time it was or is declared effective), including all documents (or portions
thereof) incorporated by reference therein; and the term "Prospectus" means the
prospectus first filed with the Commission pursuant to Rule 424(b) under the Act
or, if no prospectus is required to be so filed, such term means the prospectus
included in the Registration Statement, in either case, including all documents
(or portions thereof) incorporated by reference therein. As used herein, any
reference to any statement or information as being "made," "included,"
"contained," "disclosed" or "set forth" in any Preliminary Prospectus, a
Prospectus or any amendment or supplement thereto, or the Registration Statement
or any amendment thereto (or other similar references) shall refer both to
information and statements actually appearing in such document as well as
information and statements incorporated by reference therein.
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued and no proceeding for that purpose has been
instituted or threatened by the Commission or the securities authority of any
state or other jurisdiction. If the Registration Statement has become effective
under the Act, no stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued and no proceeding for that purpose
has been instituted or threatened or, to the best knowledge of the Company,
contemplated by the Commission or the securities authority of any state or other
jurisdiction.
(iii) When any Preliminary Prospectus was filed with the
Commission it (A) contained all statements required to be stated therein in
accordance with, and complied in all material respects with the requirements of,
the Act and the
3
<PAGE>
rules and regulations of the Commission thereunder and (B) did not include any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration Statement or any
amendment thereto was or is declared effective, and at each Time of Delivery (as
hereinafter defined), it (A) contained and will contain all statements required
to be stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (B) did not and will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the Prospectus or
any amendment or supplement thereto is filed with the Commission pursuant to
Rule 424(b) (or, if the Prospectus or such amendment or supplement is not
required to be so filed, when the Registration Statement or the amendment
thereto containing such amendment or supplement to the Prospectus was or is
declared effective) and at each Time of Delivery, the Prospectus, as amended or
supplemented at any such time, (A) contained and will contain all statements
required to be stated therein in accordance with, and complied or will comply in
all material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (B) did not and will not include
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (iii) do not apply to statements or omissions made
in any Preliminary Prospectus, the Registration Statement or any amendment
thereto or the Prospectus or any amendment or supplement thereto in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through you specifically for use therein. It is understood that the
statements set forth in each Preliminary Prospectus, the Registration Statement
or any amendment thereto or the Prospectus or any amendment or supplement
thereto (W) in the last paragraph of the cover page, (X) on the inside cover
page with respect to stabilization and passive market making, (Y) under the
section entitled "Underwriting" regarding the Underwriters and the underwriting
arrangements, and (Z) under the section entitled "Legal Matters" regarding the
identity of the counsel for the Underwriters, constitute the only written
information furnished to the Company by or on behalf of any Underwriter through
you specifically for use in any Preliminary Prospectus, the Registration
Statement or any amendment thereto or the Prospectus and any amendment or
supplement thereto, as the case may be.
(iv) The descriptions in the Registration Statement and the
Prospectus of laws, statutes, regulations,
4
<PAGE>
legal and governmental proceedings, contracts and other documents are accurate
in all material respects; and there are no laws, statutes, regulations, or legal
or governmental proceedings required to be described in the Registration
Statement or the Prospectus that are not described as required and no contracts
or documents of a character that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described and filed as required.
(v) Each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and has full power and authority
(corporate and other) to own or lease its properties and conduct its business as
described in the Prospectus. Each of the Company and Parent has full power and
authority (corporate and other) to enter into this Agreement and to perform its
obligations hereunder. Each of the Company and its subsidiaries is duly
qualified to transact business as a foreign corporation and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties,
or conducts any business, so as to require such qualification, except where the
failure to so qualify would not have a material adverse effect on the financial
position, results of operations or business of the Company and its subsidiaries
taken as a whole (a "Material Adverse Event").
(vi) The Company's authorized, issued and outstanding capital
stock is as disclosed in the Prospectus. All of the issued shares of capital
stock of the Company have been duly authorized and validly issued, are fully
paid and nonassessable and conform to the descriptions of the Common Stock
contained in the Prospectus. None of the issued shares of capital stock of the
Company or any of its subsidiaries has been issued or is owned or held in
violation of any statutory (or to the knowledge of the Company, any other)
preemptive rights of shareholders, and no person or entity (including any holder
of outstanding shares of capital stock of the Company or its subsidiaries) has
any statutory (or to the knowledge of the Company, any other) preemptive or
other rights to subscribe for any of the Shares. None of the capital stock of
the Company has been issued in violation of applicable federal or state
securities laws.
(vii) All of the issued shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable and are owned beneficially by the Company or a subsidiary
of the Company, free and clear of all liens, security interests, pledges,
charges, encumbrances, defects, shareholders' agreements, voting agreements,
proxies, voting trusts, equities
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or claims of any nature whatsoever except for (A) the pledge by GGS Management,
Inc., a Delaware corporation ("GGS Management") of all of the outstanding shares
of capital stock of Pafco General Insurance Company, an Indiana insurance
company, and Superior Insurance Company, a Florida insurance company, as
collateral to secure the GGS Senior Credit Facility (as such term is defined in
the Prospectus), (B) the pledge by GGS Management Holdings, Inc., a Delaware
corporation, of all of the outstanding shares of capital stock of GGS Management
as collateral to secure the GGS Senior Credit Facility, (C) the pledge by IGFH
of 29,614 shares of Common Stock of IGF Insurance Company ("IGF") and 2,494,000
shares of IGF Preferred Stock as collateral to secure both the IGFH Bank Debt
and the IGF Note (as such terms are defined in the Prospectus) and (D) the
pledge by the Company of shares of IGFH and GGS Management Holdings, Inc. as
security for the obligations of Parent under the Amended and Restated Trust
Indenture dated as of December 29, 1992, as amended by the First Supplemental
Indenture dated as of April 30, 1996 which will be released prior to the closing
of the sale and purchase of the Shares (the pledges described in clauses (A),
(B), (C) and (D) being hereinafter referred to as the "Pledges") and (E) the
Stockholder Agreement (as such term is defined in the Prospectus). Other than
the subsidiaries listed on Exhibit 21 to the Registration Statement and the
equity securities held in the investment portfolios of such subsidiaries (the
composition of which is not materially different than the disclosures in the
Prospectus as of specific dates), the Company does not own, directly or
indirectly, any capital stock or other equity securities of any other
corporation or any ownership interest in any partnership, joint venture or other
association.
(viii) Except as disclosed in the Prospectus, there are no
outstanding (A) securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such subsidiary, (B) warrants, rights or options to subscribe for
or purchase from the Company or any such subsidiary any such capital stock or
any such convertible or exchangeable securities or obligations or (C)
obligations of the Company or any such subsidiary to issue any shares of capital
stock, any such convertible or exchangeable securities or obligations, or any
such warrants, rights or options.
(ix) Since the date of the most recent audited financial
statements included in the Prospectus, neither the Company nor any of its
subsidiaries has sustained any material loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order or
decree, otherwise than as disclosed in or contemplated by the Prospectus and
other than pursuant to claims
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made by insureds in the ordinary course of business under policies issued by the
Company's subsidiaries.
(x) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, (A) neither the Company nor
any of its subsidiaries has incurred any liabilities or obligations, direct or
contingent, or entered into any transactions, not in the ordinary course of
business, that are material to the Company and its subsidiaries, (B) the Company
has not purchased any of its outstanding capital stock or declared, paid or
otherwise made any dividend or distribution of any kind on its capital stock,
(C) there has not been any change in the capital stock, long-term debt or
short-term debt of the Company or any of its subsidiaries, and (D) there has not
been any material adverse change, or any development involving a prospective
material adverse change, in or affecting the financial position, results of
operations or business of the Company and its subsidiaries, in each case other
than as disclosed in or contemplated by the Prospectus.
(xi) Except for the Goran Registration Rights Agreement (as such
term is defined in the Prospectus), there are no contracts, agreements or
understandings between the Company and any person granting such person the right
to require the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such person or
to require the Company to include such securities in the securities registered
pursuant to the Registration Statement (or any such right has been effectively
waived) or any securities being registered pursuant to any other registration
statement filed by the Company under the Act.
(xii) Neither the Company nor any of its subsidiaries is, or with
the giving of notice or passage of time or both would be, in violation of its
Articles of Incorporation or Bylaws or in default in any material respect under
any indenture, mortgage, deed of trust, loan agreement, lease or other agreement
or instrument to which the Company or any of its subsidiaries is a party or to
which any of their respective properties or assets are subject.
(xiii) The Company and its subsidiaries have good and marketable
title in fee simple to all real property, if any, and good title to all personal
property owned by them, in each case free and clear of all liens, security
interests, pledges, charges, encumbrances, mortgages and defects, except such as
are disclosed in the Prospectus or such as do not constitute a Material Adverse
Event and do not interfere with the use made or proposed to be made of such
property by the Company and its subsidiaries; and any real property and
buildings held
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under lease by the Company or any of its subsidiaries are held under valid,
subsisting and enforceable leases, with such exceptions as are disclosed in the
Prospectus or are not material and do not interfere with the use made or
proposed to be made of such property and buildings by the Company or such
subsidiary.
(xiv) Neither the Company nor Parent requires any consent,
approval, authorization, order or declaration of or from, or registration,
qualification or filing with, any court or governmental agency or body in
connection with the sale of the Shares or the consummation of the transactions
contemplated by this Agreement in order for the Company to be permitted to
increase the capital and surplus of the Company's insurance company subsidiaries
as contemplated in the "Use of Proceeds" section of the Prospectus, the
registration of the Shares under the Act (which, if the Registration Statement
is not effective as of the time of execution hereof, shall be obtained as
provided in this Agreement) and the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and such as may be required under state securities or blue
sky laws in connection with the offer, sale and distribution of the Shares by
the Underwriters.
(xv) Other than as disclosed in the Prospectus, there is no
litigation, arbitration, claim, proceeding (formal or informal) or investigation
(including without limitation, any insurance regulatory proceeding) pending or,
to the best of the Company's or Parent's knowledge, as the case may be,
threatened in which the Company or any of its subsidiaries or Parent is a party
or of which any of their respective properties or assets are the subject which,
if determined adversely to the Company or any such subsidiary or Parent, would
individually or in the aggregate constitute a Material Adverse Event. Neither
the Company nor any of its subsidiaries nor Parent is in violation of, or in
default with respect to, any law, statute, rule, regulation, order, judgment or
decree, except as described in the Prospectus or such as do not and will not
individually or in the aggregate constitute a Material Adverse Event, and
neither the Company nor any of its subsidiaries nor Parent is required to take
any action in order to avoid any such violation or default.
(xvi) To the best of the Company's knowledge, Coopers & Lybrand
L.L.P., who have certified certain financial statements of the Company and its
consolidated subsidiaries included in the Registration Statement and the
Prospectus, are independent public accountants as required by the Act, the
Exchange Act and the respective rules and regulations of the Commission
thereunder.
(xvii) The consolidated financial statements and schedules
(including the related notes) of the Company and
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its consolidated subsidiaries included in the Registration Statement, the
Prospectus and/or any Preliminary Prospectus were prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved and fairly present the financial position and results of
operations of the Company and its subsidiaries, on a consolidated basis, at the
dates and for the periods presented. The selected financial data set forth under
the captions "Summary Company Consolidated Financial Data," "Summary Superior
Consolidated Financial Data," "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" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Superior" in the Prospectus fairly present, on the basis stated in
the Prospectus, the information included therein, and have been compiled on a
basis consistent with that of the audited financial statements included in the
Registration Statement. The supporting notes and schedules included in the
Registration Statement, the Prospectus and/or any Preliminary Prospectus fairly
state in all material respects the information required to be stated therein in
relation to the financial statements taken as a whole. The unaudited interim
consolidated financial statements included in the Registration Statement comply
as to form in all material respects with the applicable accounting requirements
of Rule 10-01 of Regulation S-X under the Act.
(xviii) This Agreement has been duly authorized, executed and
delivered by each of the Company and Parent, and, assuming due execution by the
Representatives of the Underwriters, constitutes the valid and binding agreement
of each of the Company and Parent, enforceable against the Company and Parent in
accordance with its terms, subject, as to enforcement, to applicable bankruptcy,
insolvency, reorganization and moratorium laws and other laws relating to or
affecting the enforcement of creditors' rights generally and to general
equitable principles and except as the enforceability of rights to indemnity and
contribution under this Agreement may be limited under applicable securities
laws or the public policy underlying such laws.
(xix) The sale of the Shares and the performance of this
Agreement and the consummation of the transactions herein contemplated will not
(with or without the giving of notice or the passage of time or both) (A)
conflict with any term or provision of the articles of incorporation or bylaws,
or other organizational documents, of the Company or Parent, (B) result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement
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or instrument to which the Company or Parent is a party or to which any of their
respective properties or assets are subject, (C) conflict with or violate any
provision of the governing instruments of the Company or Parent or any law,
statute, rule or regulation or any order, judgment or decree of any court or
governmental agency or body having jurisdiction over the Company or Parent or
any of the properties or assets of the Company or Parent or (D) result in a
breach, termination or lapse of the corporate power and authority of the Company
or Parent to own or lease and operate its assets and properties and conduct its
business as described in the Prospectus.
(xx) When the Shares have been duly delivered against payment
therefor as contemplated by this Agreement, the Shares will be validly issued,
fully paid and non-assessable, and the holders thereof will not be subject to
personal liability solely by reason of being such holders. The certificates
representing the Shares are in proper legal form under, and conform in all
respects to the requirements of, the Indiana Business Corporation Law, as
amended. Neither the filing of the Registration Statement nor the offering or
sale of Shares as contemplated by this Agreement gives any security holder of
the Company any rights for or relating to the registration of any shares of
Common Stock or any other capital stock of the Company, except such as have been
satisfied or waived.
(xxi) The Company has not distributed and will not distribute any
offering material in connection with the offering and sale of the Shares other
than the Registration Statement, a Preliminary Prospectus, the Prospectus and
other material, if any, permitted by the Act.
(xxii) Neither the Company nor any of its officers, directors or
affiliates nor Parent has (A) taken, directly or indirectly, any action designed
to cause or result in, or that has constituted or might reasonably be expected
to constitute, the stabilization or manipulation of the price of any security of
the Company or Parent to facilitate the sale or resale of the Shares or (B)
since the filing of the Registration Statement (1) sold, bid for, purchased or
paid anyone any compensation for soliciting purchases of, the Shares or (2) paid
or agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company or Parent.
(xxiii) Neither the Company, any of its subsidiaries, nor any
director, officer, employee or other person associated with or acting on behalf
of the Company or any such subsidiary has, directly or indirectly, violated any
provision of the Foreign Corrupt Practices Act of 1977, as amended.
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(xxiv) The operations of the Company and its subsidiaries with
respect to any real property currently leased or owned or by any means
controlled by the Company or any subsidiary (the "Real Property") are in
compliance in all material respects with all federal, state, and local laws,
ordinances, rules, and regulations relating to occupational health and safety
and the environment (collectively, "Laws"), and the Company and its subsidiaries
have not violated any Laws in a way which would give rise to a Material Adverse
Event. Except as disclosed in the Prospectus, there is no pending or, to the
best of the Company's knowledge, threatened claim, litigation or any
administrative agency proceeding, nor has the Company or any subsidiary received
any written or oral notice from any governmental entity or third party, that:
(A) alleges a material violation of any Laws by the Company or any subsidiary or
(B) alleges the Company or any subsidiary is a liable party under the
Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C.
ss. 9601 et seq. or any state superfund law.
(xxv) The Company and each of its subsidiaries owns or has the
right to use trademarks, trademark applications, trade names, service marks,
franchises, trade secrets, proprietary or other confidential information and
intangible properties and assets (collectively, "Intangibles"); and, to the best
knowledge of the Company, neither the Company nor any subsidiary has infringed
or is infringing, and neither the Company nor any subsidiary has received notice
of infringement with respect to, asserted Intangibles of others.
(xxvi) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which they
are engaged; and neither the Company nor any such subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a comparable cost, except as
disclosed in the Prospectus. The foregoing representation is not intended to and
does not relate to any reinsurance contracts, agreements or treaties to which
the Company or any of its subsidiaries is a party.
(xxvii) Each of the Company and its subsidiaries makes and keeps
accurate books and records reflecting its assets and maintains internal
accounting controls which provide reasonable assurance that (A) transactions are
executed in accordance with management's authorization, (B) transactions are
recorded as necessary to permit preparation of the Company's consolidated
financial statements in accordance with generally
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accepted accounting principles and to maintain accountability for the assets of
the Company, (C) access to the assets of the Company and each of its
subsidiaries is permitted only in accordance with management's authorization and
(D) the recorded accountability for assets of the Company and each of its
subsidiaries is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxviii)The Company and its subsidiaries have filed all foreign,
federal, state and local tax returns that are required to be filed by them and
have paid all taxes shown as due on such returns as well as all other taxes,
assessments and governmental charges that are due and payable; and no material
deficiency with respect to any such return has been assessed or proposed.
(xxix) Except for such plans that are expressly disclosed in the
Prospectus, the Company and its subsidiaries do not maintain, contribute to or
have any material liability with respect to any employee benefit plan, profit
sharing plan, employee pension benefit plan, employee welfare benefit plan,
equity-based plan or deferred compensation plan or arrangements (collectively,
"Plans") that are subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended, and the rules and regulations thereunder
("ERISA"). All Plans are in compliance in all material respects with all
applicable laws, including but not limited to ERISA and the Internal Revenue
Code of 1986, as amended (the "Code"), and have been operated and administered
in all material respects in accordance with their terms. No Plan is a defined
benefit plan or multiemployer plan. The Company does not provide retiree life
and/or retiree health benefits or coverage for any employee or any beneficiary
of any employee after such employee's termination of employment, except as
required by Section 4980B of the Code or under a Plan which is intended to be
"qualified" under Section 401(a) of the Code. No Plan has been involved in any
prohibited transaction under Section 406 of ERISA or Section 4975 of the Code.
Full payment has been made of all amounts which the Company or any of its
subsidiaries were required under the terms of the Plans to have paid as
contributions to such Plans on or prior to the date hereof (excluding any
amounts not yet due). No material liability, claim, action or litigation, has
been incurred, made, commenced or, to the knowledge of the Company, threatened,
by or against the Company or any of its subsidiaries with respect to any Plan
(other than for benefits payable in the ordinary course). No material liability
has been, or could reasonably be expected to be, incurred under Title IV of
ERISA or Section 412 of the Code by any entity required to be aggregated with
the Company or any of its subsidiaries pursuant to Section 4001(b) of ERISA
and/or Section 414(b) or (c) of the Code (and the
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regulations promulgated thereunder) with respect to any "employee pension
benefit plan" which is not a Plan. As used in this subsection, the terms
"defined benefit plan," "employee benefit plan," "employee pension benefit
plan," "employee welfare benefit plan" and "multiemployer plan" shall have the
respective meanings assigned to such terms in Section 3 of ERISA.
(xxx) No material labor dispute exists with the Company's or any
of its subsidiary's employees, and no such labor dispute is threatened. The
Company has no knowledge of any existing or threatened labor disturbance by the
employees of any of its principal agents, suppliers, contractors or customers
that would give rise to a Material Adverse Event.
(xxxi) Each contract or other instrument (however characterized
or described) to which the Company or any subsidiary is a party or by which any
of its properties or business is bound or affected and which is material to the
conduct of the Company's business as described in the Prospectus has been duly
and validly executed by the Company or such subsidiary, and, to the knowledge of
the Company, by the other parties thereto. Each such contract or other
instrument is in full force and effect and is enforceable against the parties
thereto in accordance with its terms, and the Company and each of its
subsidiaries are not, and to the knowledge of the Company, no other party is, in
default thereunder, nor has any event occurred that, with the lapse of time or
the giving of notice, or both, would constitute a default under any such
contract or other instrument. All necessary consents under such contracts or
other instruments to disclosure in the Prospectus with respect thereto have been
obtained.
(xxxii) The Company and its subsidiaries have received all
permits, licenses, franchises, authorizations, registrations, qualifications and
approvals (collectively, "Permits") of governmental or regulatory authorities
(including, without limitation, state and/or other insurance regulatory
authorities) as may be required of them to own their properties and conduct
their businesses in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus; and the Company and its
subsidiaries have fulfilled and performed all of their material obligations with
respect to such Permits, and no event has occurred which allows or, after notice
or lapse of time or both, would allow revocation or termination thereof or
result in any other material impairment of the rights of the holder of any such
Permit, subject in each case to such qualification as may be set forth in the
Prospectus; and, except as described in the Prospectus, such Permits contain no
restrictions that materially affect the ability of the Company and its
subsidiaries to conduct their businesses.
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(xxxiii)The Company and each of its subsidiaries have filed, or
has had filed on its behalf, on a timely basis, all materials, reports,
documents and information, including but not limited to annual reports and
reports of examination with each applicable insurance regulatory authority,
board or agency, which are required to be filed by it, except where the failure
to have timely filed such materials, reports, documents and information would
not constitute a Material Adverse Event.
(xxxiv) Neither Parent nor the Company nor any of the Company's
subsidiaries is an "investment company" or a company "controlled" by an
investment company as such terms are defined in Sections 3(a) and 2(a)(9),
respectively, of the Investment Company Act of 1940, as amended (the "Investment
Company Act"), and, if the Company conducts its business as set forth in the
Registration Statement and the Prospectus, will not become an "investment
company" and will not be required to register under the Investment Company Act.
(xxxv) To the best knowledge of the Company, none of the
officers, directors (except as previously disclosed to you by the Company in
writing) or shareholders holding 5% or more of any class of the Company's
capital stock are affiliated with any member of the National Association of
Securities Dealers, Inc. (the "NASD").
(xxxvi) The common stock of Parent is registered under the
Exchange Act and Parent is in substantial compliance with the requirements of
the United States federal securities laws (including, without limitation, the
requirements of the Exchange Act), the Nasdaq National Market and the Toronto
Stock Exchange. No document that has been filed by Parent with the Commission
pursuant to the Exchange Act including, without limitation, any Form 10-K, 10-Q
or 8-K, annual report to stockholders or proxy statement, (a) contained at the
time of such filing or, except to the extent corrected or modified by a
subsequent filing under the Exchange Act, contains an untrue statement of
material fact or (b) omitted at the time of filing or, except to the extent
corrected or modified by a subsequent filing under the Exchange Act, omits to
state a material fact necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading.
(xxxvii)The Company and each of its subsidiaries is in compliance
with all provisions of Section 1 of the Laws of Florida, Chapter 92-198, An Act
Relating to Disclosure of Doing Business with Cuba.
(xxxviii The Company has not offered, or caused the Underwriters
to offer, Shares to any person pursuant to the Directed Share Program with the
specific intent to unlawfully
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influence (i) a customer or supplier of the Company to alter the customer's or
supplier's level or type of business with the Company, or (ii) a trade
journalist or publication to write or publish favorable information about the
Company or its products or services.
Any certificate signed by any officer of the Company or any subsidiary
in such capacity and delivered to the Representatives or to counsel for the
Underwriters pursuant to this Agreement shall be deemed a representation and
warranty by the Company or such subsidiary to the several Underwriters as to the
matters covered thereby.
2. Purchase and Sale of Shares.
(a) Subject to the terms and conditions herein set forth, the
Company agrees to sell to each of the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of Eleven Dollars and Fifty Cents ($11.50) per share (reflecting a seven
percent underwriting discount and a one percent non-accountable expense
allowance payable to the Representatives on behalf of the Underwriters pursuant
to Section 6) (the "Per Share Price"), the number of Company Shares (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
the aggregate number of Shares to be sold by the Company as set forth in the
first paragraph of this Agreement by a fraction, the numerator of which is the
aggregate number of Company Shares to be purchased by such Underwriter as set
forth opposite the name of such Underwriter in Schedule I hereto, and the
denominator of which is the aggregate number of Company Shares to be purchased
by the several Underwriters hereunder.
(b) The Company hereby grants to the Underwriters the right to
purchase at their election in whole or in part from time to time up to Four
Hundred Fifty Thousand (450,000) Optional Shares, at the Per Share Price, for
the sole purpose of covering overallotments in the sale of the Company Shares.
Any such election to purchase Optional Shares may be exercised by written notice
from the Representatives to the Company, given from time to time within a period
of 30 calendar days after the date of this Agreement and setting forth the
aggregate number of Optional Shares to be purchased and the date on which such
Optional Shares are to be delivered, as determined by you but in no event
earlier than the First Time of Delivery (as hereinafter defined) or, unless you
otherwise agree in writing, earlier than two or later than ten business days
after the date of such notice. In the event you elect to purchase all or a
portion of the Optional Shares, the Company agrees to furnish or cause to be
furnished to you the certificates, letters and opinions, and to satisfy all
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conditions, set forth in Section 7 hereof at each Subsequent Time of Delivery
(as hereinafter defined).
(c) In making this Agreement, each Underwriter is contracting
severally, and not jointly, and except as provided in Sections 2(b) and 9
hereof, the agreement of each Underwriter is to purchase only that number of
shares specified with respect to that Underwriter in Schedule I hereto. No
Underwriter shall be under any obligation to purchase any Optional Shares prior
to an exercise of the option with respect to such Shares granted pursuant to
Section 2(b) hereof.
3. Offering by the Underwriters. Upon the authorization by you of the
release of the Shares, the several Underwriters propose to offer the Shares for
sale upon the terms and conditions disclosed in the Prospectus.
4. Delivery of Shares; Closing.
(a) Certificates in definitive form for the Shares to be purchased
by each Underwriter hereunder, and in such denominations and registered in such
names as you may request upon at least 48 hours' prior notice to the Company,
shall be delivered by or on behalf of the Company, to you for the account of
such Underwriter, against payment by such Underwriter on its behalf of the
purchase price therefor by (at the Representatives' election) wire transfer of
immediately available funds to such accounts as the Company (as the case may be)
shall designate in writing, or by official bank check or checks (payable in next
day funds), payable to the order of the Company in next-day available funds. The
closing of the sale and purchase of the Shares shall be held at the offices of
LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125 West 55th Street, New York, New York
10019, except that physical delivery of such certificates shall be made at the
office of The Depository Trust Company, 55 North Water Street, New York, New
York 10041. The time and date of such delivery and payment shall be, with
respect to the Company Shares, at 10:00 a.m., New York, New York time, on the
third (3rd) full business day after this Agreement is executed or at such other
time and date as you and the Company may agree upon in writing, and, with
respect to the Optional Shares, at 10:00 a.m., New York, New York time, on the
date specified by you in the written notice given by you of the Underwriters'
election to purchase all or part of such Optional Shares, or at such other time
and date as you and the Company may agree upon in writing. Such time and date
for delivery of the Company Shares is herein called the "First Time of
Delivery," such time and date for delivery of any Optional Shares, if not the
First Time of Delivery, is herein called a "Subsequent Time of Delivery," and
each such time and date for delivery is herein called a "Time of Delivery." The
Company will make such certificates available for checking and
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packaging at least 24 hours prior to each Time of Delivery at the office of The
Depository Trust Company, 55 North Water Street, New York, New York 10041 or at
such other location specified by you in writing at least 48 hours prior to such
Time of Delivery.
5. Covenants of the Company.
(a) The Company and the Parent covenant and agree with each of the
Underwriters that:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective prior to the execution and delivery of
this Agreement, to become effective. If the Registration Statement has been
declared effective prior to the execution and delivery of this Agreement, the
Company will file the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented to by you,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second
business day following the execution and delivery of this Agreement or (B) the
fifth business day after the date on which the Registration Statement is
declared effective. The Company will advise you promptly of any such filing
pursuant to Rule 424(b). The Company will file promptly all reports and any
definitive proxy or information statements required to be filed by the Company
with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of the Prospectus and for so long as the
delivery of a prospectus is required in connection with the offering, sale and
distribution of the Shares.
(ii) The Company will not file with the Commission the
prospectus or the amendment referred to in the second sentence of Section
1(a)(i) hereof, any amendment or supplement to the Prospectus or any amendment
to the Registration Statement unless you have received a reasonable period of
time to review any such proposed amendment or supplement and consented to the
filing thereof and will use its best efforts to cause any such amendment to the
Registration Statement to be declared effective as promptly as possible. Upon
the request of the Representatives or counsel for the Underwriters, the Company
will promptly prepare and file with the Commission, in accordance with the rules
and regulations of the Commission, any amendments to the Registration Statement
or amendments or supplements to the Prospectus that may be necessary or
advisable in connection with the distribution of the Shares by the several
Underwriters and will use its best efforts to cause any such amendment to the
Registration Statement to be declared effective as promptly as possible. If
required, the Company will file any amendment or supplement to the Prospectus
with the Commission in the manner and within the time period required by Rule
424(b) under the Act. The Company will advise the Representatives, promptly
after
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receiving notice thereof, of the time when the Registration Statement or any
amendment thereto has been filed or declared effective or the Prospectus or any
amendment or supplement thereto has been filed and will provide evidence to the
Representatives of each such filing or effectiveness.
(iii) The Company will advise you promptly after receiving
notice or obtaining knowledge of (A) when any post-effective amendment to the
Registration Statement is filed with the Commission, (B) the receipt of any
comments from the Commission concerning the Registration Statement, (C) when any
post-effective amendment to the Registration Statement becomes effective, or
when any supplement to the Prospectus or any amended Prospectus has been filed,
(D) the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any part thereof or any order
preventing or suspending the use of any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, (E) the suspension of the qualification
of the Shares for offer or sale in any jurisdiction or of the initiation or
threatening of any proceeding for any such purpose, (F) any request made by the
Commission or any securities authority of any other jurisdiction for amending
the Registration Statement, for amending or supplementing the Prospectus or for
additional information. The Company will use its best efforts to prevent the
issuance of any such stop order or suspension and, if any such stop order or
suspension is issued, to obtain the withdrawal thereof as promptly as possible.
(iv) If the delivery of a prospectus relating to the Shares is
required under the Act at any time prior to the expiration of nine months after
the date of the Prospectus and if at such time any events have occurred as a
result of which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if for any reason it is necessary
during such same period to amend or supplement the Prospectus, the Company will
promptly notify you and upon your request (but at the Company's expense) prepare
and file with the Commission an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance and will furnish
without charge to each Underwriter and to any dealer in securities as many
copies of such amended or supplemented Prospectus as you may from time to time
reasonably request. If the delivery of a prospectus relating to the Shares is
required under the Act at any time nine months or more after the date of the
Prospectus, upon your request but at the expense of such Underwriter, the
Company will prepare and deliver to such Underwriter as many
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copies as you may request of an amended or supplemented Prospectus complying
with Section 10(a)(3) of the Act.
(v) The Company promptly from time to time will take such action
as you may reasonably request to qualify the Shares for offering and sale under
the securities or blue sky laws of such jurisdictions as you may request and
will continue such qualifications in effect for as long as may be necessary to
complete the distribution of the Shares, provided that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to file
a general consent to service of process in any jurisdiction.
(vi) The Company will promptly provide you, without charge, (A)
three manually executed copies of the Registration Statement as originally filed
with the Commission and of each amendment thereto, including all exhibits and
all documents or information incorporated by reference therein, (B) for each
other Underwriter a conformed copy of the Registration Statement as originally
filed and of each amendment thereto, without exhibits but including all
documents or information incorporated by reference therein and (C) so long as a
prospectus relating to the Shares is required to be delivered under the Act, as
many copies of each Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto as you may reasonably request.
(vii) As soon as practicable, but in any event not later than
the last day of the thirteenth month after the effective date of the
Registration Statement, the Company will make generally available to its
security holders an earnings statement of the Company and its subsidiaries, if
any, covering a period of at least 12 months beginning after the effective date
of the Registration Statement (which need not be audited) complying with Section
11(a) of the Act and the rules and regulations thereunder.
(viii) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the Prospectus,
the Company and Parent will not, without your prior written consent, offer,
issue, sell, contract to sell, grant any option for the sale of, or otherwise
dispose of, directly or indirectly, any shares of Common Stock or securities
convertible into or exercisable or exchangeable for shares of Common Stock,
except as provided in Section 2.
(ix) During the period of three years after the effective date
of the Registration Statement, the Company will furnish to you and, upon
request, to each of the other Underwriters, without charge, (A) copies of all
reports or other communications (financial or other) furnished to shareholders
and
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(B) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission, the National Association
of Securities Dealers, Inc. or any national securities exchange.
(x) Prior to the termination of the underwriting syndicate
contemplated by this Agreement, neither the Company nor any of its officers,
directors or affiliates nor Parent will (A) take, directly or indirectly, any
action designed to cause or to result in, or that might reasonably be expected
to constitute, the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of any of the Shares or (B) sell,
bid for, purchase or pay anyone any compensation for soliciting purchases of,
the Shares other than as contemplated under the Directed Share Program.
(xi) If at any time during the period beginning on the date the
Registration Statement becomes effective and ending on the later of (A) the date
30 days after such effective date and (B) the date that is the earlier of (1)
the date on which the Company first files with the Commission a Quarterly Report
on Form 10-Q after such effective date and (2) the date on which the Company
first issues a quarterly financial report to shareholders after such effective
date, (x) any publication or event relating to or affecting the Company shall
occur as a result of which in your reasonable opinion the market price of the
Common Stock has been or is likely to be materially affected (regardless of
whether such publication or event necessitates an amendment of or supplement to
the Prospectus), or (y) any rumor relating to or affecting the Company shall
occur as a result of which in your reasonable opinion the market price of the
Common Stock has been or is likely to be materially affected (regardless of
whether such rumor necessitates an amendment of or supplement to the
Prospectus), the Company will consult with you concerning the necessity of a
press release or other public statement, and, if the Company determines that a
press release or other public statement is necessary, the Company will forthwith
prepare and consult with you concerning the substance of, and disseminate a
press release or other public statement, reasonably satisfactory to you,
responding to or commenting on such publication, event or rumor.
(xii) The Company will comply with the Act, the Exchange Act and
the rules and regulations thereunder so as to permit the continuance of sales of
and dealings in the Shares for as long as may be necessary to complete the
distribution of the Shares as contemplated hereby.
(xiii) In case of any event, at any time within the period
during which a prospectus is required to be delivered
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under the Act, as a result of which any Preliminary Prospectus or the
Prospectus, as then amended or supplemented, would contain an untrue statement
of a material fact, or omit to state any material fact necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading, or, if it is necessary at any time to amend any
Preliminary Prospectus or the Prospectus to comply with the Act or any
applicable securities or blue sky laws, the Company promptly will prepare and
file with the Commission, and any applicable state securities commission, an
amendment, supplement or document that will correct such statement or omission
or effect such compliance and will furnish to the several Underwriters such
number of copies of such amendment(s), supplement(s) or document(s) as the
Representatives may reasonably request. For purposes of this subsection, the
Company will provide such information to the Representatives, the Underwriters'
counsel and counsel to the Company as shall be necessary to enable such persons
to consult with the Company with respect to the need to amend or supplement the
Registration Statement, any Preliminary Prospectus or the Prospectus or file any
document, and shall furnish to the Representatives and the Underwriters' counsel
such further information as each may from time to time reasonably request.
(xiv) The Company will use its best efforts to maintain the
qualification or listing of the shares of Common Stock (including, without
limitation, the Shares) on the Nasdaq National Market.
(xv) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent required
by the NASD or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. Advest, Inc. will notify the
Company as to which Participants will need to be so restricted. At the request
of Advest, Inc., the Company will direct the transfer agent to place stop
transfer restrictions upon such securities for such period of time.
(xvi) The Company will pay all fees and disbursements incurred
by the Underwriters in connection with the offer of any Directed Shares outside
of the United States under the Directed Share Program and stamp duties, similar
taxes or duties or other taxes, if any, incurred by the Underwriters in
connection with the Directed Share Program.
(b) The Company and Parent covenant with Advest, Inc. that the
Company will comply with all applicable securities and other applicable laws,
rules and regulations in each foreign
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jurisdiction in which the Directed Shares are offered in connection with the
Directed Share Program.
6. Expenses. The Company will pay all costs and expenses incident to
the performance of the obligations of the Company under this Agreement, whether
or not the transactions contemplated hereby are consummated or this Agreement is
terminated pursuant to Section 10 hereof, including, without limitation, all
costs and expenses incident to (i) the printing of and mailing expenses
associated with the Registration Statement, the Preliminary Prospectus and the
Prospectus and any amendments or supplements thereto, this Agreement, the
Agreement among Underwriters, the underwriters' questionnaire submitted to each
of the Underwriters by the Representatives in connection herewith, the power of
attorney executed by each of the Underwriters in favor of Advest, Inc. in
connection herewith, the Dealer Agreement and related documents (collectively,
the "Underwriting Documents") and the preliminary Blue Sky memorandum relating
to the offering prepared by LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to
the Underwriters (collectively with any supplement thereto, the "Preliminary
Blue Sky Memorandum"); (ii) the fees, disbursements and expenses of the
Company's counsel and accountants in connection with the registration of the
Shares under the Act and all other expenses in connection with the preparation
and, if applicable, filing of the Registration Statement (including all
amendments thereto), any Preliminary Prospectus, the Prospectus and any
amendments and supplements thereto, the Underwriting Documents and the
Preliminary Blue Sky Memorandum; (iii) the delivery of copies of the foregoing
documents to the Underwriters; (iv) the filing fees of the Commission and the
NASD relating to the Shares; (v) the preparation, issuance and delivery to the
Underwriters of any certificates evidencing the Shares, including transfer
agent's and registrar's fees; (vi) the qualification of the Shares for offering
and sale under state securities and blue sky laws, including filing fees and
fees and disbursements of counsel for the Underwriters (and local counsel
therefor) relating thereto; (vii) any listing of the Shares on the Nasdaq
National Market; (viii) any expenses for travel, lodging and meals incurred by
the Company and any of its officers, directors and employees in connection with
any meetings with prospective investors in the Shares; (ix) the costs of
advertising the offering, including, without limitation, with respect to the
placement of "tombstone" advertisements in publications selected by the
Representatives; and (x) all other costs and expenses reasonably incident to the
performance of the Company's obligations hereunder that are not otherwise
specifically provided for in this Section 6. In addition, the Company has agreed
to pay to Advest, Inc., on behalf of the Underwriters, at each Time of Delivery,
a non-accountable expense allowance in the amount of 1% of the gross
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proceeds from the sale of the Shares to be applied to the reimbursement of
underwriting syndicate expenses.
7. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters hereunder to purchase and pay for the Shares to be delivered at
each Time of Delivery shall be subject, in their discretion, to the accuracy of
the representations and warranties of each of the Company and Parent contained
herein as of the date hereof and as of such Time of Delivery, to the accuracy of
the statements of Company officers made pursuant to the provisions hereof, to
the performance by each of the Company and Parent of its covenants and
agreements hereunder, and to the following additional conditions precedent:
(a) If the registration statement as amended to date has not become
effective prior to the execution of this Agreement, such registration statement
shall have been declared effective not later than 11:00 a.m., Hartford,
Connecticut time, on the date of this Agreement or such later date and/or time
as shall have been consented to by you in writing. The Prospectus and any
amendment or supplement thereto shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing and in accordance with Section 5(a) of this Agreement; no stop order
suspending the effectiveness of the Registration Statement or any part thereof
shall have been issued and no proceedings for that purpose shall have been
instituted, threatened or, to the knowledge of the Company, Parent or the
Representatives, contemplated by the Commission; and all requests for additional
information on the part of the Commission shall have been complied with to your
reasonable satisfaction.
(b) All corporate proceedings and other matters incident to the
authorization, form and validity of this Agreement, the Shares and the form of
the Registration Statement and the Prospectus, and all other legal matters
relating to this Agreement and the transactions contemplated hereby, shall be
satisfactory in all material respects to counsel to the Underwriters.
(c) The Representatives shall have received copies of executed
lock-up agreements from each of Parent, the Company and the Company's officers
and directors who own shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock or who may be issued shares of
Common Stock under an option plan or other arrangement to the effect that such
individuals and entities will not offer, sell, contract to sell, or otherwise
dispose of, any such shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock for a period of 180 days after the
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date of the Prospectus without the written consent of Advest, Inc.
(d) The Representatives shall have received at or prior to the
First Time of Delivery from the Underwriters' counsel the Preliminary Blue Sky
Memorandum, such memorandum to be in form and substance satisfactory to the
Representatives.
(e) LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel for the
Underwriters, shall have furnished to you such opinion or opinions, dated such
Time of Delivery, with respect to the incorporation of the Company, the validity
of the Shares being delivered at such Time of Delivery, the Registration
Statement, the Prospectus, and other related matters as you may reasonably
request, and the Company shall have furnished to such counsel such documents as
they request for the purpose of enabling them to pass upon such matters.
(f) The NASD shall have indicated that it has no objection to the
underwriting arrangements pertaining to the sale of any of the Shares.
(g) You shall have received an opinion, dated such Time of
Delivery, of Barnes & Thornburg, counsel for the Company, in form and substance
satisfactory to you and your counsel, to the effect that:
(i) The Company has been duly incorporated, is validly existing
as a corporation under the laws of the State of Indiana and has the corporate
power and authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus and to enter into
this Agreement and perform its obligations hereunder.
(ii) Each of the subsidiaries listed on Exhibit 21 to the
Registration Statement (the "Subsidiaries") of the Company is validly existing
as a corporation in good standing (where applicable) under the laws of its
jurisdiction of incorporation and has the corporate power and authority to own
or lease its properties and conduct its business as described in the
Registration Statement and the Prospectus.
(iii) The Company's authorized, issued and outstanding capital
stock is as disclosed in the Prospectus. All of the issued shares of Common
Stock of the Company have been duly authorized and validly issued, are fully
paid and nonassessable and conform to the description of the Common Stock
contained in the Prospectus. None of the outstanding shares of Common Stock have
been issued in violation of the preemptive or other similar rights of any
shareholder or warrantholder of the Company arising by operation of law, under
the Articles of
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Incorporation or Bylaws of the Company or, to our knowledge, under any agreement
to which the Company or any of its Subsidiaries is a party. The issuance of the
shares of Common Stock is not subject to preemptive or other similar rights
under the Articles of Incorporation or Bylaws of the Company or, to our
knowledge, under any agreement to which the Company or any of its Subsidiaries
is a party.
(iv) All of the issued shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable, and, to such counsel's knowledge, are owned beneficially
by the Company or its subsidiaries, free and clear of all liens, security
interests, pledges, charges, encumbrances, shareholders' agreements, voting
agreements, proxies, voting trusts, defects, equities or claims of any nature
whatsoever (collectively, "Encumbrances"), including, without limitation,
Encumbrances arising or resulting from any indenture, mortgage, deed of trust,
loan agreement, lease or other agreement of or entered into by Parent, except
for the Pledges and the Stockholder Agreement (as such term is defined in the
Prospectus).
(v) When the Shares have been duly delivered against payment
therefor as contemplated by this Agreement, the Shares will be duly authorized,
validly issued and fully paid and nonassessable, the holders thereof will not be
subject to personal liability solely by reason of being such holders and the
Shares will conform to the description of the Common Stock contained in the
Prospectus; the certificates evidencing the Shares will comply with all
applicable requirements of Indiana law; and the Shares will have been listed on
the Nasdaq National Market.
(vi) To such counsel's knowledge, neither the Company nor any of
its subsidiaries is, or with the giving of notice or passage of time or both,
would be, in violation of its Articles of Incorporation or Bylaws, in each case
as amended to date.
(vii) The sale of the Shares being sold at such Time of Delivery
and the performance of this Agreement and the consummation of the transactions
herein contemplated will not violate any provision of the Articles of
Incorporation or Bylaws of the Company or any of its Subsidiaries, in each case
as amended to date, or to such counsel's knowledge, any existing law, statute,
rule or regulation, or conflict with, or (with or without the giving of notice
or the passage of time or both) result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument known to
such counsel to which the Company or any such Subsidiary
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is a party or to which any of their respective properties or assets is subject
(except for any conflicts with, breaches of or violations of any such
indentures, mortgages, deeds of trust, loan agreements, leases or other
agreements or instruments which would not, individually or in the aggregate,
have a material adverse effect on the financial position, results of operations
or business of the Company and its subsidiaries taken as a whole), or, conflict
with or violate any order, judgment or decree known to such counsel, of any
court or governmental agency or body having jurisdiction over the Company or any
of its Subsidiaries or any of their respective properties or assets, except with
respect to any statute, rule or regulation of any regulatory authority imposing
any obligation on the part of the Underwriters by way of their purchase of the
Shares, as to which no opinion need be rendered.
(viii) To such counsel's knowledge, no consent, approval,
authorization, order or declaration of or from, or registration, qualification
or filing with, any court or governmental agency or body is required for the
sale of the Shares or the consummation of the transactions contemplated by this
Agreement, except such as have been or will have been obtained and are or will
be in effect, and except the registration of the Shares under the Act, the
Exchange Act and such as may be required under state securities or blue sky laws
in connection with the offer, sale and distribution of the Shares by the
Underwriters, as to which such counsel expresses no opinion.
(ix) To such counsel's knowledge and other than as disclosed in
or contemplated by the Prospectus, there is no litigation, arbitration, claim,
proceeding (formal or informal) or investigation pending or threatened, in which
the Company or any of its Subsidiaries is a party or of which any of their
respective properties or assets is the subject which, if determined adversely to
the Company or any such Subsidiary, would individually or in the aggregate have
a material adverse effect on the financial position, results of operations or
business of the Company and its subsidiaries taken as a whole.
(x) The statements in the Prospectus under "Business --
Regulation," "Business -- Legal Proceedings," "Description of Capital Stock" and
"Shares Eligible for Future Sale" have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of statutes, licenses,
rules or regulations, or legal conclusions, are correct in all material
respects.
(xi) This Agreement has been duly authorized, executed and
delivered by the Company.
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(xii) Neither the Company nor any of its subsidiaries nor Parent
is an "investment company" or a company "controlled" by an investment company as
such terms are defined in Sections 3(a) and 2(a)(9), respectively, of the
Investment Company Act of 1940, as amended.
(xiii) The Registration Statement and the Prospectus and each
amendment or supplement thereto (other than the financial statements, the notes
and schedules thereto and other financial data included therein, to which such
counsel need express no opinion), as of their respective effective or issue
dates, complied as to form in all material respects with the requirements of the
Act and the respective rules and regulations thereunder. The descriptions in the
Registration Statement and the Prospectus of contracts and other documents are
accurate in all material respects and fairly present the information required to
be shown; and such counsel do not know of any contracts or documents of a
character required to be described in the Registration Statement or Prospectus
or to be filed as exhibits to the Registration Statement which are not described
and filed as required.
(xiv) Such counsel has been advised by the Division of
Corporation Finance of the Commission that the Registration Statement has become
effective under the Act; any required filing of the Prospectus pursuant to Rule
424(b) has been made in the manner and within the time period required by Rule
424(b); and, to such counsel's knowledge, (A) no stop order suspending the
effectiveness of the Registration Statement or any part thereof has been issued
and (B) no proceedings for that purpose have been instituted or threatened or
are contemplated by the Commission.
Such counsel shall also state that they have participated in the
preparation of the Registration Statement and the Prospectus and in conferences
with officers and other representatives of the Company, representatives of the
independent public accountants for the Company, and representatives of and
counsel to the Underwriters at which the contents of the Registration Statement,
the Prospectus and related matters were discussed and, although such counsel has
not passed upon or assumed any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus, and although such counsel has not undertaken to verify independently
the accuracy or completeness of the statements in the Registration Statement or
the Prospectus and, therefore, would not necessarily have become aware of any
material misstatement of fact or omission to state a material fact, on the basis
of and subject to the foregoing, nothing has come to such counsel's attention to
lead them to believe that the Registration Statement, or any further
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amendment thereto made prior to such Time of Delivery, on its effective date and
as of such Time of Delivery, contained or contains any untrue statement of a
material fact or omitted or omits to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or that the
Prospectus, or any amendment or supplement thereto made prior to such Time of
Delivery, as of its issue date and as of such Time of Delivery, contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading (provided that such
counsel need express no belief regarding the financial statements, the notes and
schedules thereto and other financial and statistical data contained in the
Registration Statement, any amendment thereto, or the Prospectus, or any
amendment or supplement thereto).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem proper, on certificates of officers of the
Company and public officials and letters from officials of the NASD and on the
opinions of other counsel reasonably satisfactory to you and your counsel as to
matters which are governed by laws other than the laws of the State of Indiana
and the Federal laws of the United States; provided that such counsel shall
state in their opinion that they are so relying, and they are justified in
relying on such other opinions. Copies of such certificates of officers of the
Company and other opinions shall be addressed and furnished to the Underwriters
and furnished to counsel for the Underwriters.
(h) You shall have received an opinion, dated such Time of
Delivery, of David L. Bates, Esquire, General Counsel of the Company and Parent,
in form and substance satisfactory to you and your counsel, to the effect that:
(i) The Company has been duly incorporated, is validly existing as
a corporation under the laws of the State of Indiana and has the corporate power
and authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus and to enter into
this Agreement and perform its obligations hereunder. The Company is duly
qualified to transact business as a foreign corporation and is in good standing
under the laws of each other jurisdiction in which it owns or leases property,
or conducts any business, so as to require such qualification, except where the
failure to so qualify would not have a material adverse effect on the financial
position, results of operations or business of the Company and its subsidiaries
taken as a whole. Parent has been duly incorporated, is validly existing as a
federally chartered corporation in good standing under the laws of Canada and
has the
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corporate power and authority to enter into this Agreement and perform its
obligations hereunder.
(ii) Each of the subsidiaries of the Company is validly existing
as a corporation in good standing under the laws of its jurisdiction of
incorporation and has the corporate power and authority to own or lease its
properties and conduct its business as described in the Registration Statement
and the Prospectus. Each such subsidiary is duly qualified to transact business
as a foreign corporation and is in good standing under the laws of each other
jurisdiction in which it owns or leases property, or conducts any business, so
as to require such qualification, except where the failure to so qualify would
not have a material adverse effect on the financial position, results of
operations or business of the Company and its subsidiaries taken as a whole.
(iii) Except as disclosed in the Prospectus, there are, to such
counsel's knowledge, no outstanding (A) securities or obligations of Parent, the
Company or any of the Company's subsidiaries convertible into or exchangeable
for any capital stock of the Company or any such subsidiary, (B) warrants,
rights or options to subscribe for or purchase from Parent, the Company or any
such subsidiary any such capital stock or any such convertible or exchangeable
securities or obligations or (C) obligations of Parent, the Company or any such
subsidiary to issue any shares of capital stock, any such convertible or
exchangeable securities or obligations, or any such warrants, rights or options.
(iv) Except for the Goran Registration Rights Agreement (as such
term is defined in the Prospectus), to such counsel's knowledge, there are no
contracts, agreements or understandings known to such counsel between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the Company to
include such securities in the securities registered pursuant to the
Registration Statement (or any such right has been effectively waived) or in any
securities being registered pursuant to any other registration statement filed
by the Company under the Act.
(v) To such counsel's knowledge, neither the Company nor any of
its subsidiaries nor Parent is, or with the giving of notice or passage of time
or both, would be, in violation of its Articles of Incorporation or Bylaws, in
each case as amended to date, or, in default in any material respect under any
indenture, mortgage, deed of trust, loan agreement, lease or other agreement or
instrument known to such counsel to
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which the Company, any such subsidiary or Parent is a party or to which any of
their respective properties or assets is subject.
(vi) To such counsel's knowledge and other than as disclosed in
or contemplated by the Prospectus, there is no litigation, arbitration, claim,
proceeding (formal or informal) or investigation pending or threatened, in which
the Company, any of its subsidiaries or Parent is a party or of which any of
their respective properties or assets is the subject which, if determined
adversely to the Company, any such subsidiary or Parent, would individually or
in the aggregate have a material adverse effect on the financial position,
results of operations or business of the Company and its subsidiaries taken as a
whole; and, to the best of such counsel's knowledge, neither the Company nor any
of its subsidiaries nor Parent is in violation of, or in default with respect
to, any law, statute, rule, regulation, order, judgment or decree, except as
described in the Prospectus or such as do not and will not individually or in
the aggregate have a material adverse effect on the financial position, results
of operations or business of the Company and its subsidiaries taken as a whole,
nor is the Company, any such subsidiary or Parent required to take any action in
order to avoid any such violation or default.
(vii) This Agreement has been duly authorized, executed and
delivered by each of the Company and Parent.
(viii) All offers and sales of the Company's capital stock prior
to the date hereof were at all relevant times duly registered or exempt from the
registration requirements of the Act, and were duly registered or the subject of
an available exemption from the registration requirements of the applicable
state securities or blue sky laws, or any actions in respect thereof are barred
by the applicable statutes of limitations.
(ix) To such counsel's knowledge, the Company and each of its
subsidiaries have received all permits, licenses, franchises, authorizations,
registrations, qualifications and approvals (collectively, "permits") of
governmental or regulatory authorities (including, without limitation, state
and/or other insurance regulatory authorities) as may be required of them to own
their properties and to conduct their businesses in the manner described in the
Prospectus, subject to such qualification as may be set forth in the Prospectus;
to the best of such counsel's knowledge, the Company and each of its
subsidiaries have fulfilled and performed all of their material obligations with
respect to such permits and no event has occurred which allows, or after notice
or lapse of time or both would allow, revocation or termination thereof or
result in any other material impairment of the rights of the holder of any such
permits, subject in each case to such qualifications as may be set forth
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in the Prospectus; and other than as described in the Prospectus, such permits
contain no restrictions that materially affect the ability of the Company and
its subsidiaries to conduct their businesses.
Such counsel shall also state that he has participated in the
preparation of the Registration Statement and the Prospectus and in conferences
with officers and other representatives of the Company, representatives of the
independent public accountants for the Company, and representatives of and
counsel to the Underwriters at which the contents of the Registration Statement,
the Prospectus and related matters were discussed and, although such counsel has
not passed upon or assumed any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus, and although such counsel has not undertaken to verify independently
the accuracy or completeness of the statements in the Registration Statement or
the Prospectus and, therefore, would not necessarily have become aware of any
material misstatement of fact or omission to state a material fact, on the basis
of and subject to the foregoing, nothing has come to such counsel's attention to
lead him to believe that the Registration Statement, or any further amendment
thereto made prior to such Time of Delivery, on its effective date and as of
such Time of Delivery, contained or contains any untrue statement of a material
fact or omitted or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or that the
Prospectus, or any amendment or supplement thereto made prior to such Time of
Delivery, as of its issue date and as of such Time of Delivery, contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading (provided that such
counsel need express no belief regarding the financial statements, the notes and
schedules thereto and other financial and statistical data contained in the
Registration Statement, any amendment thereto, or the Prospectus, or any
amendment or supplement thereto).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem proper, on certificates of officers of the
Company and Parent, and public officials and letters from officials of the NASD
and on the opinions of other counsel reasonably satisfactory to you and your
counsel as to matters which are governed by laws other than the laws of the
State of Indiana and the Federal laws of the United States; provided that such
counsel shall state in his opinion that he is so relying, and he is justified in
relying on such other opinions. Copies of such certificates of officers of the
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Company and Parent and other opinions shall be addressed and furnished to the
Underwriters and furnished to counsel for the Underwriters.
(i) You shall have received an opinion, dated such Time of
Delivery, of Smith Lyons, counsel for the Parent, in form and substance
satisfactory to you and your counsel, to the effect that:
(i) Parent has been duly incorporated and is validly existing
under the laws of Canada and has the corporate power and authority to enter into
this Agreement and perform its obligations hereunder.
(ii) The execution, delivery and performance by Parent of this
Agreement does not result in, and with the giving of notice or passage of time
or both, would not result in, a violation of its Articles of Amalgamation or
Bylaws, in each case as amended to date.
(iii) To such counsel's knowledge and other than as disclosed in
or contemplated by the Prospectus, there is no litigation, arbitration, claim,
proceeding (formal or informal) or investigation pending or threatened, in which
Parent is a party or of which any of its properties or assets is the subject
which, if determined adversely to Parent, would individually or in the aggregate
have a material adverse effect on the financial position, results of operations
or business of the Company and its subsidiaries taken as a whole; and, to such
counsel's knowledge, Parent is not in violation of, or in default with respect
to, any law, statute, rule, regulation, order, judgment or decree, except as
described in the Prospectus or such as do not and will not individually or in
the aggregate have a material adverse effect on the financial position, results
of operations or business of the Company and its subsidiaries taken as a whole,
nor is Parent required to take any action in order to avoid any such violation
or default.
(iv) This Agreement has been duly authorized, executed and
delivered by Parent.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel may deem proper, on certificates of officers of
Parent and public officials. Copies of such certificates of officers of Parent
and other opinions shall be addressed and furnished to the Underwriters and
furnished to counsel for the Underwriters.
(j) You shall have received from Coopers & Lybrand L.L.P., letters
dated, respectively, the date hereof (or, if the Registration Statement has been
declared effective prior
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to the execution and delivery of this Agreement, dated such effective date and
the date of this Agreement) and each Time of Delivery, in form and substance
satisfactory to you, which letters shall cover such matters as you shall request
as well as:
(i) confirming that they are independent certified public
accountants (within the meaning of the Act) with respect to the Company and its
subsidiaries;
(ii) stating that, in their opinion, the financial statements,
certain summary and selected consolidated financial and operating data, and any
supplementary financial information and schedules audited by them and included
in the Prospectus or the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of the Act; and
they have made a review in accordance with standards established by the American
Institute of Certified Public Accountants of the unaudited consolidated interim
financial statements, and any supplementary financial information and schedules,
selected financial data, and/or condensed financial statements derived from
audited financial statements of the Company for the periods specified in such
letter, and, as indicated in their report thereon, copies of which have been
furnished to the Representatives;
(iii) stating that, on the basis of specified procedures, which
included the procedures specified by the American Institute of Certified Public
Accountants ("AICPA") for a review of interim financial information, as
described in SFAS No. 71, Interim Financial Information (with respect to the
latest unaudited consolidated financial statements of the Company included in
the Registration Statement), a reading of the latest available unaudited interim
consolidated financial statements of the Company (with an indication of the date
of the latest available unaudited interim financial statements), a reading of
the latest available minutes of the meetings of the shareholders and the Board
of Directors of the Company and its subsidiaries, and audit and compensation
committees of such Boards, if any, and inquiries to certain officers and other
employees of the Company and its subsidiaries responsible for operational,
financial and accounting matters and other specified procedures and inquiries,
nothing has come to their attention that would cause them to believe that (A)
the unaudited consolidated financial statements included in the Registration
Statement (1) do not comply in form in all material respects with the applicable
accounting requirements of the Act or (2) any material modifications should be
made to such unaudited financial statements for them to be in conformity with
generally accepted accounting principles; (B) at the date of the latest
available unaudited interim consolidated financial statements of the Company and
a specified date not more than five business days prior to the date of such
letter, there
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was any change in the capital stock and other items specified by the
Representatives, increase in long-term debt, decrease in net current assets,
total assets, investments or shareholders' equity of the Company and its
subsidiaries, as compared with the amounts shown in the June 30, 1996 unaudited
consolidated balance sheet of the Company included in the Registration
Statement, or that for the periods from June 30, 1996 to the date of the latest
available unaudited financial statements of the Company and to a specified date
not more than five days prior to the date of the letter, there were any
decreases, as compared to the corresponding periods in the prior year, in gross
premiums written, net investment income, net realized capital gains, or total or
per share amounts of net income, or other items specified by the
Representatives, except in all instances for changes, decreases or increases
which the Registration Statement discloses have occurred or may occur and except
for such other changes, decreases or increases which the Representatives shall
in their sole discretion accept; or (C) any other unaudited income statement
data and balance sheet items included in the Registration Statement do not agree
with the corresponding items in the unaudited financial statements from which
such data and items were derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the basis for the
corresponding amounts in the audited consolidated financial statements included
or incorporated by reference in the Registration Statement;
(iv) stating that, on the basis of a reading of the unaudited
pro forma financial statements included in the Registration Statement and the
Prospectus (the "pro forma financial statements"), carrying out certain
specified procedures, inquiries of certain officials of the Company and its
subsidiary, Superior Insurance Company who have responsibility for financial and
accounting matters, and proving the arithmetic accuracy of the application of
the pro forma adjustments to the historical amounts in the pro forma financial
statements, nothing has come to their attention that would cause them to believe
that the pro forma financial statements do not comply in all material respects
with the applicable accounting requirements of Rule 11- 02 of Regulation S-X or
that the pro forma adjustments have not been properly applied to the historical
amounts in the compilation of such statements;
(v) stating that they have compared specific dollar amounts,
numbers of shares, percentage of revenues and earnings statements and other
numerical data and financial information pertaining to the Company and its
subsidiaries set forth in the Registration Statement and all of the dollar
amounts and percentages in the Registration Statement, in each case to the
extent that such information is derived from the accounting records subject to
the internal control structure, policies and
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procedures of the Company's and its subsidiaries' accounting system, or has been
otherwise derived in a manner permitted by AICPA Statement on Auditing Standards
No. 72 with the results obtained from the application of specific readings,
inquiries and other appropriate procedures (which procedures do not constitute
an audit in accordance with generally accepted auditing standards) set forth in
the letter and with the accounting records of the Company and its subsidiaries,
and found them to be in agreement.
In the event that the letters referred to in this Section 7(h) set forth any
changes, decreases or increases in the items identified by you, it shall be a
further condition to the obligations of the Underwriters that (i) such letters
shall be accompanied by a written explanation by the Company as to the
significance thereof, unless the Representatives deem such explanation
unnecessary and (ii) such changes, decreases or increases do not, in your sole
judgment, make it impracticable or inadvisable to proceed with the purchase,
sale and delivery of the Shares being delivered at such Time of Delivery as
contemplated by the Registration Statement, as amended as of the date of such
letter.
(k) Since the date of the latest audited financial statements
included in the Prospectus and except pursuant to claims made by insureds in the
ordinary course of business under policies of insurance issued by the Company's
subsidiaries which claims are reasonably consistent with the Company's
historical claims experience, neither the Company nor any of its subsidiaries
shall have sustained (i) any loss or interference with their respective
businesses from fire, explosion, flood, hurricane or other calamity, whether or
not covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as disclosed in or contemplated by the
Prospectus, or (ii) any change, or any development involving a prospective
change (including, without limitation, a change in management or control of the
Company), in or affecting the position (financial or otherwise), results of
operations, net worth or business prospects of the Company and its subsidiaries,
otherwise than as disclosed in or contemplated by the Prospectus, the effect of
which, in either such case, is in your sole judgment so material and adverse as
to make it impracticable or inadvisable to proceed with the purchase, sale and
delivery of the Shares being delivered at such Time of Delivery as contemplated
by the Registration Statement, as amended as of the date hereof.
(l) Subsequent to the date hereof, there shall not have occurred
any of the following: (i) any suspension or limitation in trading in securities
generally on the New York Stock Exchange, or any setting of minimum prices for
trading on
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such exchange, or in the Common Stock of the Company by the Commission or the
National Association of Securities Dealers Automated Quotation National Market
System (except for suspensions or limitations that last only a portion of one
business day); (ii) a moratorium on commercial banking activities in New York,
Indiana or Connecticut declared by either federal or state authorities; or (iii)
any outbreak or escalation of hostilities involving the United States,
declaration by the United States of a national emergency or war or any other
national or international calamity or emergency if the effect of any such event
specified in this clause (iii) in your sole judgment makes it impracticable or
inadvisable to proceed with the purchase, sale and delivery of the Shares being
delivered at such Time of Delivery as contemplated by the Registration
Statement, as amended as of the date hereof.
(m) The Company shall have furnished to you at such Time of
Delivery certificates of the chief executive and chief financial officers of the
Company satisfactory to you, as to the accuracy in all material respects of the
respective representations and warranties of the Company herein at and as of
such Time of Delivery with the same effect as if made at such Time of Delivery,
as to the performance by the Company of all of their respective obligations
hereunder to be performed at or prior to such Time of Delivery, and as to such
other matters as you may reasonably request, and the Company shall have
furnished or caused to be furnished certificates of such officers as to such
matters as you may reasonably request.
(n) The representations and warranties of each of the Company
and Parent in this Agreement and in the certificates delivered by each of the
Company and Parent pursuant to this Agreement shall be true and correct in all
material respects when made and on and as of each Time of Delivery as if made at
such time, and each of the Company and Parent shall have performed all covenants
and agreements and satisfied all conditions contained in this Agreement required
to be performed or satisfied by each of the Company and Parent at or before such
Time of Delivery.
(o) The Shares shall continue to be listed on the National
Association of Securities Dealers Automated Quotation National Market System.
(p) The Representatives shall have received copies of executed
lock-up agreements from each of Parent, Parent's principal shareholders and
Parent's officers and directors who own shares of common stock of Parent or
securities convertible into or exchangeable or exercisable for common stock of
Parent to the effect that such individuals and entities will not offer, sell,
contract to sell, or otherwise dispose of, any such shares of common stock of
Parent or securities convertible
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into or exchangeable or exercisable for common stock of Parent for a period of
180 days after the date of the Prospectus without the prior written consent of
Advest, Inc.
8. Indemnification and Contribution.
(a) Each of the Company and Parent agrees to jointly and severally
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement made by the Company or Parent
in Section 1(a) of this Agreement; (ii) any untrue statement or alleged untrue
statement of any material fact contained in (A) the Registration Statement or
any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or (B) any application or other document, or
amendment or supplement thereto, executed by the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to qualify the Shares under the securities or blue sky laws thereof or
filed with the Commission or any securities association or securities exchange
(each an "Application"); or (iii) the omission of or alleged omission to state
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or any
Application, a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating, defending against or appearing as a third-party
witness in connection with any such loss, claim, damage, liability or action;
provided, however, that neither the Company nor Parent shall be liable in any
such case to the extent that any such loss, claim, damage, liability or action
(i) arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement or
any amendment thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto or any Application in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through you expressly for use therein (which information is solely as set forth
in Section 1(a)(iii) hereof) or (ii) is asserted by a person who purchased any
of the Shares which are the subject thereof from an Underwriter and if a copy of
the Prospectus (as amended or supplemented) which corrected the untrue statement
or alleged untrue statement or omission or alleged omission which is the basis
of the loss, claim, damage, liability or action for which indemnification is
sought was not delivered or given to such person at or prior to the written
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confirmation of the sale to such person. Neither the Company nor Parent will,
without the prior written consent of the Representatives of the Underwriters,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding (or related cause of action or
portion thereof) in respect of which indemnification may be sought hereunder
(whether or not any Underwriter is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of each Underwriter from all liability arising out of such
claim, action, suit or proceeding (or related cause of action or portion
thereof).
(b) Each of the Company and Parent agrees to jointly and severally
indemnify and hold harmless each QIU, in its capacity as QIU, against any
losses, claims, damages or liabilities, joint or several, to which such QIU may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon: (i) any untrue statement or alleged untrue statement made by the Company
or Parent in Section 1(a) of this Agreement; (ii) any untrue statement or
alleged untrue statement of any material fact contained in (A) the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, or (B) any Application; (iii) the
omission of or alleged omission to state in the Registration Statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment
or supplement thereto, or any Application, a material fact required to be stated
therein or necessary to make the statements therein not misleading; or (iv)
other than as referred to in the preceding clauses (i) through (iii), such QIU's
actions as a QIU, except insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arising under this clause (iv) result from such
QIU's willful misconduct or gross negligence, and will reimburse each QIU for
any legal or other expenses reasonably incurred by such QIU in connection with
investigating, defending against or appearing as a third-party witness in
connection with any such loss, claim, damage, liability or action; provided,
however, that neither the Company nor Parent shall be liable in any such case to
the extent that any such loss, claim, damage, liability or action (i) arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in the Registration Statement or any amendment thereto,
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto or any Application in reliance upon and in conformity with written
information relating to such QIU furnished to the Company by or on behalf of
such QIU in such capacity through you expressly for use therein (it being
understood and acknowledged by the Company that such written information shall
consist solely
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of the three sentences that are set forth in the second to last paragraph of the
section entitled "Underwriting" in the Prospectus) or (ii) is asserted by a
person who purchased any of the Shares which are the subject thereof from an
Underwriter and if a copy of the Prospectus (as amended or supplemented) which
corrected the untrue statement or alleged untrue statement or omission or
alleged omission which is the basis of the loss, claim, damage, liability or
action for which indemnification is sought was not delivered or given to such
person at or prior to the written confirmation of the sale to such person.
(c) Each Underwriter, severally but not jointly, agrees to
indemnify and hold harmless the Company and Parent against any losses, claims,
damages or liabilities to which the Company and Parent may become subject under
the Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto, or any Application or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter through you expressly for use therein; and will
reimburse the Company and Parent for any legal or other expenses reasonably
incurred by the Company and Parent in connection with investigating or defending
any such loss, claim, damage, liability or action.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve the indemnifying party from any liability
which it may have to any indemnified party otherwise than under such subsection.
In case any such action shall be brought against any indemnified party and it
shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party); provided, however, that if the
defendants in any such action include both the indemnified
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party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be one or more legal defenses available to it or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnifying party shall not have the right to
assume the defense of such action on behalf of such indemnified party and such
indemnified party shall have the right to select separate counsel to defend such
action on behalf of such indemnified party. After such notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and approval by such indemnified party of counsel appointed to
defend such action, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses, other
than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence or (ii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party. Nothing in this Section 8(d) shall preclude an
indemnified party from participating at its own expense in the defense of any
such action so assumed by the indemnifying party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company and Parent on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (d) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and Parent on the one hand and the Underwriters on the
other in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative benefits received
by the Company and Parent on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company and Parent bear to
the total underwriting discounts and commissions received by the
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Underwriters. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company and Parent on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, Parent and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (e) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (e) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(f) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless a QIU under subsection (b) above
in respect of any losses, claims, damages or liabilities (or actions in respect
thereof) referred to therein, then each indemnifying party shall contribute to
the amount paid or payable by such QIU as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company and Parent
on the one hand and the QIUs on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (d) above, then each indemnifying party shall
contribute to such amount paid or payable by such QIU in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and Parent on the one hand and the QIUs on the other in
connection with the statements or
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omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and Parent on the
one hand and the QIUs on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company and Parent bear to the underwriting discounts and commissions
received by the QIUs. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company and Parent on the one hand or the QIUs on
the other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company,
Parent and the QIUs agree that it would not be just and equitable if
contributions pursuant to this subsection (f) were determined by pro rata
allocation (even if the QIUs were treated as one entity for such purpose) or by
any other method of allocation which does not take account of the equitable
considerations referred to above in this subsection (f). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this subsection
(f) shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this subsection (f), no QIUs
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it as shown on Schedule I and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The QIUs' obligations in this
subsection (f) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(g) The obligations of the Company and Parent under this Section 8
shall be in addition to any liability which the Company and Parent may otherwise
have and shall extend, upon the same terms and conditions, and to each officer,
director and employee of the Underwriters (including the QIUs) and to each
person, if any, who controls any Underwriter (including the QIUs) within the
meaning of the Act or the Exchange Act; and the obligations of the Underwriters
(including the QIUs) under this Section 8 shall be in addition to any liability
which the respective Underwriters (including the QIUs) may otherwise have
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and shall extend, upon the same terms and conditions, to each officer and
director of the Company and Parent and to each person, if any, who controls the
Company or Parent within the meaning of the Act or the Exchange Act.
9. Default of Underwriters.
(a) If any Underwriter defaults in its obligation to purchase
Shares at a Time of Delivery, you may in your discretion arrange for you or
another party or other parties to purchase such Shares on the terms contained
herein. If within thirty-six (36) hours after such default by any Underwriter
you do not arrange for the purchase of such Shares, the Company shall be
entitled to a further period of thirty-six (36) hours within which to procure
another party or other parties satisfactory to you to purchase such Shares on
such terms. In the event that, within the respective prescribed periods, you
notify the Company that you have so arranged for the purchase of such Shares, or
the Company notifies you that it has so arranged for the purchase of such
Shares, you or the Company shall have the right to postpone a Time of Delivery
for a period of not more than seven (7) days in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company agrees to file
promptly any amendments to the Registration Statement or the Prospectus that in
your opinion may thereby be made necessary. The cost of preparing, printing and
filing any such amendments shall be paid for by the Underwriters. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you or the Company as
provided in subsection (a) above, if any, the aggregate number of such Shares
which remains unpurchased does not exceed one-eleventh (1/11) of the aggregate
number of Shares to be purchased at such Time of Delivery, then the Company
shall have the right to require each non-defaulting Underwriter to purchase the
number of Shares which such Underwriter agreed to purchase hereunder at such
Time of Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made.
10. Termination.
(a) This Agreement may be terminated with respect to the Company
Shares or any Optional Shares in the sole
43
<PAGE>
discretion of the Representatives by notice to the Company given prior to the
First Time of Delivery or any Subsequent Time of Delivery, respectively, in the
event that (i) any condition to the obligations of the Underwriters set forth in
Section 7 hereof has not been satisfied, or (ii) the Company shall have failed,
refused or been unable to deliver such party's respective Shares or the Company
or Parent shall have failed, refused or been unable to perform all obligations
and satisfy all conditions on their respective parts to be performed or
satisfied hereunder at or prior to such Time of Delivery, in either case other
than by reason of a default by any of the Underwriters. If this Agreement is
terminated pursuant to this Section 10(a), the Company and/or Parent will
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including counsel fees and disbursements) that shall have been incurred by them
in connection with the proposed purchase and sale of the Shares.
(b) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in Section 9(a), the aggregate number of such Shares which remains
unpurchased exceeds one-eleventh (1/11) of the aggregate number of Shares to be
purchased at such Time of Delivery, or if the Company shall not exercise the
right described in Section 9(b) to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to a Subsequent Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the Optional Shares) shall
thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company, except for the expenses to be borne by the Company
and the Underwriters as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
11. Survival. The respective indemnities, agreements, representations,
warranties and other statements of the Company, Parent and their officers and
the several Underwriters, as set forth in this Agreement or made by or on behalf
of them, respectively, pursuant to this Agreement, shall remain in full force
and effect, regardless of any investigation (or any statement as to the results
thereof) made by or on behalf of any Underwriter or any controlling person
referred to in Section 8(e) or the Company, Parent or any officer or director or
controlling person of the Company or Parent referred to in Section 8(e), and
shall survive delivery of and payment for the Shares. The respective agreements,
covenants, indemnities and other statements set forth in Sections 6 and 8 hereof
shall remain in full force and effect, regardless of any termination or
cancellation of this Agreement.
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<PAGE>
12. Notices. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be mailed, delivered or telegraphed and
confirmed in writing to you in care of Advest, Inc., 90 State House Square,
Hartford, CT 06103, Attention: David Minot (with a copy to LeBoeuf, Lamb, Greene
& MacRae, L.L.P., 125 West 55th Street, New York, NY 10019, Attention: Lars
Bang-Jensen, Esquire); and if sent to the Company, shall be mailed, delivered or
telegraphed and confirmed in writing to Symons International Group, Inc., 4720
Kingsway Drive, Indianapolis, IN 46205, Attention: Alan G. Symons (with a copy
to Barnes & Thornburg, 11 South Meridian Street, Indianapolis, IN 46205,
Attention: Catherine Bridge, Esquire).
13. Representatives. You will act for the several Underwriters in
connection with the transactions contemplated by this Agreement, and any action
under this Agreement taken by you jointly or by Advest, Inc. will be binding
upon all the Underwriters.
14. Binding Effect. This Agreement shall be binding upon, and inure
solely to the benefit of, the Underwriters, the Company, Parent and to the
extent provided in Sections 8 and 10 hereof, the officers, directors and
employees and controlling persons referred to therein and their respective
heirs, executors, administrators, successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. No
purchaser of any of the Shares from any Underwriter shall be deemed a successor
or assign by reason merely of such purchase.
15. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to any
provisions regarding conflicts of laws.
16. Counterparts. This Agreement may be executed by any one or more of
the parties hereto in any number of counterparts, each of which shall be deemed
to be an original, but all such counterparts shall together constitute one and
the same instrument.
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If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us one of the counterparts hereof, and upon
the acceptance hereof by Advest, Inc., on behalf of each of the Underwriters,
this letter will constitute a binding agreement among the Underwriters, Parent
and the Company. It is understood that your acceptance of this letter on behalf
of each of the Underwriters is pursuant to the authority set forth in the
Agreement among Underwriters, a copy of which shall be submitted to the Company
for examination, upon request, but without warranty on your part as to the
authority of the signers thereof.
Very truly yours,
SYMONS INTERNATIONAL GROUP, INC.
By:/s/ Alan G. Symons
-----------------------------------
Name: Alan G. Symons
Title:Chief Executive Officer
GORAN CAPITAL INC.
By:/s/ Alan G. Symons
-----------------------------------
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date first
written above at Hartford, Connecticut.
ADVEST, INC.
MESIROW FINANCIAL, INC.
By: ADVEST, INC.
By:/s/ Phil M. Skidmore
-----------------------------------
Name: Phil M. Skidmore
Title: Group Vice President
Director Investment Banking
On behalf of each of the Underwriters
46
<PAGE>
JOINDER
The following subsidiary of the Company, intending to be legally bound,
hereby joins this Agreement for purposes of Sections 1 and 8 hereof.
IGF HOLDINGS, INC.
By:/s/ David L. Bates
------------------------
Title VP & Sec
47
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SCHEDULE I
Number of
Optional
Total Number Shares to be
of Company Purchased if
Shares Maximum
to be Option
Underwriter Purchased Exercised
Advest, Inc. 920,000 138,000
Mesirow Financial, Inc. 920,000 138,000
Dean Witter Reynolds Inc. 60,000 9,000
Deutsche Morgan Grenfell Inc. 60,000 9,000
Donaldson, Lufkin & Jenrette Securities
Corporation 60,000 9,000
Dresdner Kleinwort Benson North America LLC 60,000 9,000
A.G. Edwards & Sons, Inc. 60,000 9,000
Goldman, Sachs & Co. 60,000 9,000
Lehman Brothers Inc. 60,000 9,000
Morgan Stanley & Co. Incorporated 60,000 9,000
Oppenheimer & Co., Inc. 60,000 9,000
NatCity Investments, Inc. 60,000 9,000
J.C. Bradford & Co. 35,000 5,250
Brean Murray & Co., Inc. 35,000 5,250
City Securities Corporation 35,000 5,250
Dominick & Dominick, Inc. 35,000 5,250
EVEREN Securities, Inc. 35,000 5,250
First of Michigan Corporation 35,000 5,250
Friedman, Billings, Ramsey & Co., Inc. 35,000 5,250
Janney Montgomery Scott Inc. 35,000 5,250
Ladenburg, Thalmann & Co. Inc. 35,000 5,250
Legg Mason Wood Walker, Incorporated 35,000 5,250
McDonald & Company Securities, Inc. 35,000 5,250
Morgan Keegan & Company, Inc. 35,000 5,250
The Robinson-Humphrey Company, Inc. 35,000 5,250
Sands Brothers & Co., Ltd. 35,000 5,250
Stephens Inc. 35,000 5,250
Wheat, First Securities, Inc. 35,000 5,250
--------- -------
Total 3,000,000 450,000
========= =======
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 (5) 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 (10) days nor more than sixty (60) 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.
<PAGE>
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.
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 (11)
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:
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<PAGE>
(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 (50) days nor more
than ninety (90) days prior to the meeting; provided,
however, that in the event that less than sixty (60)
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 (10th) 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:
(a) a brief description of the business desired
to be brought before the meeting;
(b) the name and address, as they appear on the
Corporation's stock records, of the
Shareholder proposing such business;
(c) the class and number of shares of the
Corporation which are beneficially owned by
the Shareholders; and
(d) 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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<PAGE>
Section II. 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:
(a) the name, age, business address and
residence address of such person;
(b) the principle occupation or employment of
such person;
(c) the class and number of shares of the
Corporation which are beneficially owned by
such person;
(d) 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 name in
the Proxy Statement as a nominee and to
serving as a Director if elected); and
(e) 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 Acquisition.
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
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<PAGE>
during the period ending sixty (60) 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 (7). 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 (3) years, to hold office until their
respective successors are elected and qualified;
except that:
(a) 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;
(b) 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
(c) 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 (3) 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.
-5-
<PAGE>
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 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 (2) 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. 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
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<PAGE>
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 Articles 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 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.
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<PAGE>
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
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 resigned 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
($1,000,000) Dollars. 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.
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<PAGE>
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 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 perforrn 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
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<PAGE>
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 proceeding
and 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.
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<PAGE>
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
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<PAGE>
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 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.
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<PAGE>
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 (70) before the meeting or action
requiring a determination of Shareholders.
ARTICLE VII LIABILITY.
Section 1. 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
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<PAGE>
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:
(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.
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<PAGE>
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
(B) in all other cases, that
the individual's conduct
was at least not opposed to
the corporation's best
interests.
Section 3. Methods Of Determining Whether Standards For
Indemnification Have Been Met.
Any indemnification under Sections 1 or 2 of this
Article VIII (unless ordered by a court) shall be
made by the corporation only as authorized in the
specific case upon a determination that
indemnification of the Director, Officer, employee or
agent is proper in the circumstances because he has
met the applicable standards of conduct set forth in
Section 1 or 2. In the case of
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<PAGE>
Directors of the corporation such determination shall
be made by any one of the following procedures:
(a) by the Board of Directors by a majority vote
of a quorum consisting, of Directors not at
the time parties to the proceeding;
(b) if a quorum cannot be obtained under (a), by
majority vote of a Committee duly designated
by the Board of Directors (in which
designation Directors who are parties may
participate), consisting solely of two or
more Directors not at the time parties to
the proceeding; or
(c) by special legal counsel:
(i) selected by the Board of Directors
or a Committee thereof in the
manner proscribed in (a) or (b); or
(ii) if a quorum of the Board of
Directors cannot be obtained under
(a) and a Vommittee cannot be
designated under (b), selected by a
majority vote of the full Board of
Directors (in which selection
directors who are parties may
participate).
In the case of persons who are not Directors of the
corporation, such determination shall be made (a) by
the Chief Executive Officer of the corporation or (b)
if the Chief Executive Officer so directs or in his
absence, in the manner such determination would be
made if the person were a Director of the
corporation.
Section 4. 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 4 shall
mean any other corporation or any partnership, joint
venture, trust, employee benefit plan or other
enterprise of which such
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<PAGE>
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 4
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 5. 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 5 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 6. 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;
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<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 7. 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 I 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.
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 8. 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 9. 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.
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<PAGE>
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 it "not opposed to the best interest of
the corporation" referred to in this Article VII.
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 10. 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.
Section 1. These bylaws may be altered, amended or repealed and
new bylaws may be made by a majority of the whole
Board of Directors at any regular or special meeting
of the Board of Directors.
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[CHASE LOGO]
September 26, 1996
GGS Management, Inc.
GGS Management Holdings, Inc.
c/o Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attention: David L. Bates, Esq.
Re: Consent and Amendment
Gentlemen:
We refer to the Credit Agreement dated as of April 30, 1996 (as
amended, supplemented and otherwise modified and in effect on the date hereof,
the "Credit Agreement"; terms defined in the Credit Agreement to have their
respective defined meanings when used herein) between GGS Management, Inc. (the
"Company") certain banks (the "Banks") and The Chase Manhattan Bank (successor
by merger to The Chase Manhattan Bank (National Association)), as agent for the
Banks (the "Administrative Agent").
In connection with a public offering by SIG of up to 3,450,000 shares
of its common stock pursuant to Form S-1 dated September __, 1996, we understand
that (1) the parties to the Stockholder Agreement wish to amend and restate such
Stockholder Agreement in substantially the form of Exhibit A attached hereto
(the "Amended and Restated Stockholder Agreement") so that the Company and GGS
may be consolidated with SIG for financial reporting purposes and (2) the
parties to the GGS Stock Purchase Agreement wish to enter into a Third Amendment
to the Stock Purchase Agreement in substantially the form of Exhibit B attached
hereto (the "Third Amendment").
<PAGE>
- 2 -
With the consent of the Majority Banks, we consent to GGS entering the
Amended and Restated Stockholder Agreement and the Third Amendment on the
condition that simultaneously therewith, the Credit Agreement shall,
automatically and without any further action by the parties hereto, be amended
in the following respects:
1. The first sentence of Section 8.08 of the Credit Agreement shall be
amended by deleting therefrom the text from and including the words "except that
Pafco may pay to SIG a dividend" to and including the words "and Goran".
2. Section 8.12 of the Credit Agreement shall be amended by deleting
the words "clauses (e) and (f)" and replacing them with "clause (b)".
The foregoing consent shall become effective upon receipt by the
Administrative Agent of a copy of this letter duly executed on behalf of the
Company and GGS as below provided. This letter agreement shall be governed by
and construed in accordance with, the law of the State of New York.
Very truly yours,
THE CHASE MANHATTAN BANK,
as Administrative Agent
By /s/ J. David Parker, Jr.
------------------------
J. David Parker
Vice President
CONSENT:
GGS MANAGEMENT, INC.
By /s/ A Y Zuror
- ------------------------
Title: President
GGS MANAGEMENT HOLDINGS, INC.
By /s/ A Y Zuror
- ------------------------
Title: President
[CHASE LOGO]
<PAGE>
December 31, 1996
GGS Management, Inc.
GGS Management Holdings, Inc.
c/o Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attention: David L. Bates, Esq.
Re: Second Amendment
Gentlemen:
We refer to the Credit Agreement dated as of April 30, 1996 (as amended
by a Consent and Amendment dated as of October 31, 1996, the "Credit Agreement";
terms defined in the Credit Agreement to have their respective defined meanings
when used herein) between GGS Management, Inc. (the "Company") certain banks
(the "Banks") and The Chase Manhattan Bank (successor by merger to The Chase
Manhattan Bank (National Association)), as agent for the Banks (the
"Administrative Agent").
You have requested that the Credit Agreement be amended to provide for
an amendment of a certain mandatory prepayment provision in the Credit
Agreement. Having received the consent of the all the Banks, we agree that the
Credit Agreement is hereby amended in the following respect:
Subsection (a) of Section 2.08 of the Credit Agreement shall be amended
to add the following at the end thereof:
"; provided that, without making any such prepayment, the Company may
make an Equity Issuance for up to but not exceeding $6,000,000 in the
aggregate to GGS at any time from and including December 20, 1996 to
and including December 31, 1996 so long as all of such proceeds are
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<PAGE>
contributed as Statutory Surplus to the Insurance Subsidiaries on or
before December 31, 1996."
The foregoing amendment shall become effective upon receipt by the
Administrative Agent of a copy of this letter duly executed on behalf of the
Company and GGS as below provided. This letter agreement shall be governed by
and construed in accordance with, the law of the State of New York.
THE CHASE MANHATTAN BANK,
as Administrative Agent
By /s/ J. David Parker, Jr.
------------------------
J. David Parker
Vice President
CONSENT:
GGS MANAGEMENT, INC.
By /s/
- ---------------------------------
Title: CFO
GGS MANAGEMENT HOLDINGS, INC.
By /s/ David L. Bates
- ---------------------------------
Title: VP & General Counsel
[Execution Copy]
AMENDMENT NO. 3
Amendment No. 3 dated as of December 31, 1996, between GGS
MANAGEMENT, INC., a corporation duly organized and validly
existing under the laws of the State of Delaware (the "Company");
each of thelenders that is a signatory hereto (individually, a "Bank" and
collectively, the "Banks"); and THE CHASE MANHATTAN BANK,
a New York banking company, as agent for the Banks (in such
capacity, together with its successors in such capacity, the "Administrative
Agent").
The Company, the Banks and the Administrative Agent (successor by
merger to The Chase Manhattan Bank (National Association)) are parties
to a Credit Agreement dated as of April 30, 1996 (as heretofore modified
and supplemented and in effect on the date hereof, the "Credit Agreement"),
providing, subject to the terms and conditions thereof, for loans to be
made by said Banks to the Company in an aggregate principal amount
not exceeding $48,000,000.
The Company, the Banks and the Administrative Agent wish to amend
the Credit Agreement in certain respects, and accordingly, the parties hereto
hereby agree as follows:
Section 1. Definitions. Except as otherwise defined in this Amendment
No. 3, terms defined in the Credit Agreement are used herein as defined
therein.
Section 2. Amendments. Subject to the satisfaction of the conditions
precedent specified in Section 4 below, but effective as of the date hereof,
the Credit Agreement shall be amended as follows:
2.01. References in the Credit Agreement (including references to the
Credit Agreement as amended hereby) to "this Agreement" (and indirect
references such as "hereunder", "hereby", "herein" and'hereof") shall be
deemed to be references to the Credit Agreement as amended hereby.
2.02. Section 1.01 of the Credit Agreement shall be amended by
adding the following new definitions and inserting the same in the
appropriate alphabetical locations, as follows:
"Guaranteed Note" shall mean the promissory note of GGS date
December 31, 1996 in the principal amount of $4,800,000 payable
to Superior on or before March 28, 1997, guaranteed in part by
SIG in accordance with terms thereof.
Amendment No. 3
<PAGE>
-2-
"1997 Equity Contribution" shall mean a common equity capital
contribution by SIG and GS Capital to GGS during the period from
and including March 17, 1997 to andincluding March 28, 1997,
aggregating not less than $4,800,000 and not more than $6,000,000,
a portion of which shall be used directly for the payment in full of the
principal of and accrued interest on Guaranteed Note on or before
March 28, 1997 and the remainder of which will be contributed to the
common equity of the Company.
2.03. The proviso to subsection (a) of Section 2.08 of the Credit
Agreement shall be amended to read in its entirety as follows:
"; provided that, no such prepayment need be made in respect
of any Equity Issuance to GGS resulting from either (x) the 1997 Equity
Contribution (or the use of the proceeds thereof) or (y) the issuance to
Superior of, or any payment made in respect of the Guaranteed Note;
and any such Equity Issuance and any payment made in respect of the
Guaranteed Note shall not be deemed to violate any provision of Section
8.15."
2.04. Section 8.07(b) of the Credit Agreement shall be amended
by adding the following proviso immediately after the first proviso of
said Section 8.07(b):
"; provided further, that, notwithstanding the forgoing, Superior
may make the Investment referred to in the proviso to subsection
(a) of Section 2.08 hereof."
2.05. Section 8.09(e) of the Credit Agreement shall be amended
to read in its entirety as follows:
"(e) Maximum Statutory Net Premiums Written. The Company
shall not permit its Insurance Subsidiaries (on a combined basis) to have
Statutory Net Premiums Written during any period of four consecutive
fiscal quarters of such Insurance Subsidiaries (including any portion of
such period prior to the Closing Date when they were not Subsidiaries
of the Company) to exceed 3 times the combined Statutory Surplus of
Pafco and Superior as at the end of such period, provided that for the
period of four consecutive fiscal quarters ending September 30, 1996
and December 31, 1996 and March 31, 1997, the Company shall not
permits its Insurance Subsidiaries (on a combined basis) to have
Statutory Net Premiums Written during such period to
Amendment No. 3
<PAGE>
-3-
exceed 3.15 times the combined Statutory Surplus of Pafco and
Superior as at the end of such period."
2.06. Section 8.10 of the Credit Agreement shall be amended to
read in its entirety as follows:
"8.10 Risk-Based Capital Ratio. The Company will not on any
date permit the Risk Based Capital Ratio (a) of Pafco to be less than
2 to 1 or (b) of Superior to be less than (x) 2.70 to 1 prior to June
30, 1997 or (y) 3 to 1 on or after June 30, 1997."
Section 3. Representations and Warranties. The Company
represents and warrants to the Banks that the representations and
warranties set forth in Section 7.01, 7.04, 7.05 and 7.06 of the
Credit Agreement are true and correct on the date hereof as if made
on and as of the date hereof and as if each reference in said Sections
to "the Agreement" included reference to the Credit Agreement as
amended by this Amendment No. 3.
Section 4. Conditions Precedent. As provided in Section 2 above,
the amendments to the Credit Agreement set forth in said Section 2
shall become effective, as of the date hereof, upon the satisfactions of
the following conditions precedent:
4.01. Execution by All Parties. This Amendment No. 3 shall have
been executed and delivered by each of the parties hereto.
4.02 1997 Equity Contribution. Evidence that the 1997 Equity
Contribution shall have occurred, and the Administrative Agent shall
have receivec copies of each of the documents and instruments
pursuant to which the 1997 Equity Contribution shall have occurred.
4.03 Repayment of Guaranteed Note. Evidence that the
Guaranteed Note has been paid in full in cash.
4.04. Stock Certificates. Pursuant to the Pledge Agreements, the
Administrative Agent shall have received in connection with the
Equity Issuances referred to in the proviso to subsection (a) of
Section 2.08 of the Credit Agreement (a) all stock certificates (if
any) received in consideration for any Equity Issuance by the Company,
accompanied by stock powers executed in blank and (b) all stock
certificates (if any) received in consideration for any Equity Issuance by
Superior, accompanied by stock powers executed in blank.
Amendment No. 3
<PAGE>
-4-
4.05. Amendment Fee; Expenses. Chase shall have received
payment by the Company, in immediate available funds, of (a)
an amendment fee as separately agreed to by the Company and
Chase in the Fee Letter date of even date herewith and (b) all
reasonable out-of-pocket costs and expenses of Chase (including,
without limitation, the reasonable fees and expenses of Milbank,
Tweed, Hadley & McCloy, special New York counsel of Chase)
from October 29, 1996 to the execution and delivery of this
Amendment No. 3 in connection with the preparation,
negotiation, execution and delivery of this Amendment No. 3.
4.06. Other Documents. The Administrative Agent shall have
received such other documents as the Administrative Agent or any
Bank or special New York counsel to Chase may reasonably request.
The Administrative Agent shall notify the Company and the Banks of
the date on which the conditions specified in this Section 4 have
been satisfied. Such letter shall constitute conclusive evidence that
such conditions have been satisfied.
Section 5. Miscellaneous. Except as herein provided, the Credit
Agreement shall remain unchanged and in full force and effect. This
Amendment No. 3 may be executed in any number of counterparts,
all of which taken together shall constitute one and the same
amendatory instrument and any of the parties hereto may execute
this Amendment No. 3 by signing any such counterpart. This
Amendment No. 3 shall be governed by, and construed in accordance
with, the law of the State of New. York.
Amendment No. 3
<PAGE>
-5-
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 3 to be duly executed and delivered as of the day
and year first above written.
GGS MANAGMENT, INC.
By: /s/ David L. Bates
Title: Vice President,
General Counsel &
Secretary
<PAGE>
-6-
THE CHASE MANHATTAN BANK
By: /s/ Peter Platten
Title: Vice President
DRESDNER BANK AG NEW YORK AND
GRAND CAYMAN BRANCH
By:
Title:
DEUTSCHE BANK
By:
Title:
COMERICA BANK
By:
Title:
Amendment No. 3
<PAGE>
-6-
THE CHASE MANHATTAN BANK
By:
Title:
DRESDNER BANK AG NEW YORK AND
GRAND CAYMAN BRANCH
By: /s/ John S. Runnion
Title: Vice President
/s/ John Sweeney
Title: Vice President
DEUTSCHE BANK
By:
Title:
COMERICA BANK
By:
Title:
Amendment No. 3
<PAGE>
-6-
THE CHASE MANHATTAN BANK
By:
Title:
DRESDNER BANK AG NEW YORK AND
GRAND CAYMAN BRANCH
By:
Title:
DEUTSCHE BANK AG, NEW YORK AND/
OR CAYMAN ISLANDS BRANCHS
By: /s/ Eckhard Osenberg
Title: Assistant Vice
President
/s/ John S. McGill
Title: Vice President
COMERICA BANK
By:
Title:
Amendment No. 3
<PAGE>
THE CHASE MANHATTAN BANK
By:
Title:
DRESDNER BANK AG NEW YORK AND
GRAND CAYMAN BRANCH
By:
Title:
DEUTSCHE BANK
By:
Title:
COMERICA BANK
By: /s/ Phillip A. Coosaia
Title: Vice President
Amendment No. 3
[COVER]
SIG LOGO
1996 Annual Report
[Large SIG logo with three photos]
<PAGE>
Corporate Profile
Symons International Group, Inc. owns niche insurance companies principally in
the crop and nonstandard automobile insurance markets. Its crop subsidiary, IGF
Insurance Company of Des Moines, Iowa is the fifth largest crop insurer in the
United States. Its nonstandard automobile division, Pafco General Insurance
Company of Indianapolis, Indiana and Superior Insurance Company of Tampa,
Florida, is the sixteenth largest provider of nonstandard automobile insurance
in the United States. The crop segment markets and sells crop and multi-peril
coverages to farmers. This is the fastest growing sector of the commercial
insurance market. The nonstandard automobile division markets and sells
insurance through the independent agency system to drivers who are unable to
obtain coverage from insurers at standard or preferred rates. This market is the
fastest growing of the personal lines market.
The common stock of Symons International Group, Inc. was initially offered to
the public on November 5, 1996 and trades on The NASDAQ Stock Market's National
Market under the symbol "SIGC".
<PAGE>
Table of Contents
Financial Highlights 1
Chairman's Report 2
Selected Financial Data 4
Management's Discussion and Analysis 6
Consolidated Financial Statements 20
Notes to Consolidated Financial Statements 24
Report of Independent Accountants 49
Stockholder Information 50
Board of Directors and Executive Officers 51
Subsidiary and Branch Offices IBC
[GRAPH OMITTED]
1992 1993 1994 1995 1996
Gross Premiums Written $109,219 $88,936 $103,134 $124,634 $305,499
Gross Premiums Written By Year
<PAGE>
Financial Highlights
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the years ended December 31, 1992 1993 1994 1995 1996
- ------------------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Gross premiums written $109,219 $88,936 $103,134 $124,634
$305,499
Net earnings (loss)(1) $ 817 $ (323) $ 2,117 $ 4,821 $ 13,256
Net operating earnings
(loss)(2) $ 496 $ (244) $ 2,222 $ 5,048 $ 13,916
Earnings (loss) per share(1) $ 0.12 $ (0.05) $ 0.30 $ 0.69 $ 1.76
Operating earnings (loss)
per share (1)(2) $ 0.07 $ (0.03) $ 0.32 $ 0.72 $ 1.85
Stockholders' equity $ 1,193 $ 2,219 $ 4,255 $ 9,535 $ 60,900
Return on beginning equity 168.8% (27.1%) 95% 113.3%
139.0%
Book value per share $ 0.17 $ 0.32 $ 0.61 $ 1.36 $ 5.83
Market value per share(3) N/A N/A N/A N/A $ 16.75
</TABLE>
(1) In 1993, the Company recognized an increase to net earnings as a result of
a cumulative effect of a change in accounting principle of $1,175. Earnings
and operating earnings per share excluding this effect were $(0.20).
(2) Operating earnings and per share amounts exclude the after tax effects of
realized capital gains and losses.
(3) The Company's shares were first publicly traded on November 5, 1996.
CORPORATE STRUCTURE
[graphic omitted]
Symons International Group,
Inc, Indianapolis, Indiana
("SIG or the "Company")
|
|
----------------------------------
| |
100% Owned 52% Owned Funds Affiliated
IGF Holdings, Inc. GGS Management ----48%---- with Goldman
("IGFH") Holdings, Inc. Sachs & Co.
("GGSH" or "GGS Holdings") ("GS Funds")
| |
| |
100% Owned 100% Owned
IGF Insurance GGS Management, Inc.
Company "GGS Management"
("IGF")
|
|
-----------------------------------
| |
| |
100% Owned 100% Owned
PAFCO General Superior Insurance Company
Insurance Company ("Superior")
("Pafco") |
|
|
----------------------------
| |
| |
100% Owned 100% Owned
Superior Guranty Superior
Insurance Company American
Insurance
Company
<PAGE>
Chairman's Report
- --------------------------------------------------------------
Symons International Group, Inc.
- --------------------------------------------------------------
1996 saw Symons International Group, Inc. ("SIG") change from being a
wholly-owned subsidiary of Goran to a 67% owned newly listed (NASDAQ) public
company on the occasion of its Initial Public Offering on November 5, 1996.
Three million of its ten million outstanding common shares were offered to the
public at $12.50 per share, and a further 450,000 shares were issued under the
terms of the "over-allotment" agreement. The total proceeds were $43.1 million.
While this was a significant adventure for SIG, it came late in a year of
several outstanding achievements produced by its subsidiary companies.
The year started with the completion on January 31, 1996, of an agreement with
the Fortis Group to purchase their nonstandard automobile insurance division,
the Superior Group of Insurance Companies. The purchase price was 105% of the
"book" value, which developed a selling value to Fortis of $66,600,000, a most
satisfactory arrangement for SIG as we will demonstrate.
The funds were raised by the following:
The substantial financial house of Goldman Sachs, through their affiliate, GS
Capital Partners II, L.P. contributed $21.2 million in cash to a newly formed
nonstandard automobile insurance holding company, GGS Management Holdings Inc.
We contributed our previously wholly-owned, nonstandard auto insurer, Pafco
General Insurance Company. For its contribution, GS Capital Partners II, L.P.
received a 48% interest in GGS Management Holdings, Inc. and we, of course,
retained the other 52% of GGS Management Holdings, Inc. in SIG.
With the assistance of our new investors, GS Capital Partners II, L.P., GGS
Management Holdings, Inc. borrowed $48 million thus satisfying the cash
requirement for the acquisition and a definitive agreement was concluded for the
purchase with Fortis on January 31, 1996. The necessary application seeking
approval of the purchase was expeditiously made to the regulators and by April
30, 1996, the Florida Department of Insurance sanctioned the deal and GGS
Management Holdings, Inc. was in business.
With the keys to Superior firmly in our hands, we proceeded to make several
major improvements in the sales and administration of the nonstandard automobile
companies. This field of insurance is one of our core lines and we felt most
comfortable with the acquisition from the outset. Our first chore was to
implement proven and constructive systems and to reduce redundancies that might
prevail within our two active nonstandard auto insurers. Time proved that these
changes were effective in that by the end of 1996, only eight months after we
acquired Superior, gross premiums of the Company had risen from $95 million in
1995 to $159 million. For 1996, we were also able to reduce the operating ratios
from 107.6% of premiums to 99.5% over this period.
During 1996 we reduced operation costs and increased production at Pafco as
well.
<PAGE>
In combination with Pafco, the two nonstandard entities now under the banner of
GGS Management Holdings, Inc. moved into 16th place in this the fastest growing
segment of personal insurance.
IGF Insurance Company, our crop insurer, now occupies 5th place in volume of
income in the crop insurance business, which has been categorized as the fastest
growing segment of the commercial insurance business. The company, since we
acquired it in November 1990, has progressed from a relatively small writer of
this sophisticated line of insurance, doing $22 million of premium income in
1990, to gross premiums for 1996 of $110 million - an increase of 56% over 1995.
Pre-tax earnings increased from $11 million in 1995 to $17.7 million in 1996.
A gentleman employed with a major investment house asked a short time ago if we
expected to see results, such as we have displayed over the past years, continue
into the future. It is a good question and if we could look into a crystal ball
and come up with the answer that might prove useful, too. The fact of the matter
is that there have been sound and understandable reasons for our growth and we
can take credit for that. We have stuck to the business philosophy developed
some years back of being a "niche" company, carefully selecting our areas of
development. These have been the nonstandard auto insurance and crop insurance
segments. We have made antidilutive acquisitions, and managed above average
growth while increasing profitability. As the large standard auto insurers
tightened their underwriting criteria, this threw a large number of motorists
into the nonstandard market. As the nonstandard market grew to accept more
business, various legislators brought in tougher laws to eliminate the uninsured
motorist. Florida even introduced bounty hunters to hound out the noninsured
motorists. Other states have been introducing tighter laws to impose a mandatory
obligation to insure with seizure of the car and large fines in the event of
non-compliance. The market for nonstandard auto insurance has now reached more
than $17 billion and there is still some shortfall in the capacity to absorb
these premiums by the insurers. We are selective in the risks we accept which
accounts for our results bettering the averages.
Dating as far back as the period following the Dust Bowl of the 30's, there was
a lack of insurance markets to accept the risks of farmers for damage or loss of
crops. This was not a serious problem in the past for many farmers were not
prone to purchase the coverage and relied on the luck of the draw, or as the
more religious put it, the hand of God to look after them. The time came,
however, when losses became too severe for the well-being of the nation's
farmers and the central government in the U.S. had to step in and offer to
provide assistance with the creation of a sound insurance market. With
reluctance, the Federal Crop Insurance Corporation was established and for some
time, along with a small group of speciality insurance companies, a suitable
market existed.
In 1993 devastating floods hit the farms in mid-America following some turbulent
and unpredictable weather in the years preceding. There were disaster areas
aplenty and of course many farmers, as was their tradition, had not insured. The
demands for "Disaster Fund" assistance was loud and insistent and the
government, of course with taxpayers funds, did its best to render useful
assistance. The upshot of this was the 1994 Crop Reform bill
<PAGE>
and the 1996 Freedom to Farm legislature. These bills, while modernizing many
aspects of protection to farmers and the way in which they conducted their
business affairs, imposed an obligation on the farmers to purchase protection
for their own security. Premiums in the crop insurance industry have doubled
since while the number of insurance providers has shrunk. IGF has increased its
segment of this business by a greater amount than the overall factor of growth.
We have added many capable people to our staff over the past few years, some
through acquisition of companies such as IGF and Superior, but others garnered
from other insurers and businesses. Our goal is to continue to grow by increased
sales and acquisitions, but the proof of the pudding is in the eating and we
have become an efficient producer of business, both in the nonstandard auto
field and crop insurance business. We have developed unique marketing strategies
and our underwriting results and expense ratios are comparable to the largest
and most experienced companies.
G. Gordon Symons, Chairman
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
Years Ended December 31,
- --------------------------------------------------------------------------------
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 and should
be read in conjunction with the consolidated financial statements of the Company
and the notes thereto, included elsewhere in this Report.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(in thousands except per share amounts and ratios)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Gross Premiums Written $ 109,219 $ 88,936 $ 103,134 $ 124,634 $ 305,499
Net Premiums Written 35,425 31,760 35,139 53,447 209,592
Net Premiums Earned 35,985 31,428 32,126 49,641 191,759
Net Investment Income 1,319 1,489 1,241 1,173 6,733
Other Income - - - - 886 1,632 2,170 9,286
Net Realized Capital Gain
(Loss) 486 (119) (159) (344) (1,015)
--------- --------- --------- --------- ---------
Total Revenues 37,790 33,684 34,840 52,640 206,763
========= ========= ========= =========
=========
Losses and Loss Adjustment
Expenses 27,572 25,080 26,470 35,971 137,109
Policy Acquisition and General
and Administrative Expenses 7,955 8,914 5,801 7,981 42,013
Interest Expense 459 996 1,184 1,248 3,938
--------- --------- --------- --------- ---------
Total Expenses 35,986 34,990 33,455 45,200 183,060
========= ========= ========= =========
=========
Earnings (Loss) Before Taxes,
Extraordinary Item, Cumulative
Effect Of An Accounting Change
And Minority Interest 1,804 (1,306) 1,385 7,440 23,703
Income Taxes 996 83 (718) 2,619 8.046
========= ========= ========= =========
=========
Earnings (Loss) Before
Extraordinary Item,
Cumulative Effect Of An
Accounting Change And
Minority Interest $ 808 $ (1,389) $ 2,103 $ 4,821 $ 15,657
Net Earnings (Loss) $ 817 $ (323) $ 2,117 $ 4,821 $ 13,256
========= ========= ========= =========
=========
</TABLE>
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
Years Ended December 31,
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Per Common Share Data:
Earnings (Loss) Before
Extraordinary Item,
And Cumulative Effect Of
An Accounting Change And
Minority Interest $ 0.12 $ (0.20) $ 0.30 $ 0.69 $ 2.08
--------- --------- --------- --------- ---------
Net Earnings (Loss) $ 0.12 $ (0.05) $ 0.30 $ 0.69 $ 1.76
========= ========= ========= =========
=========
Weighted Average Shares
Outstanding 7,000 7,000 7,000 7,000 7,537
GAAP Ratios:
Loss and LAE Ratio 76.6% 79.8% 82.4% 72.5% 71.5%
Expenses Ratio 23.4 31.5 21.7 18.6 24.0
--------- --------- --------- --------- ---------
Combined Ratio 100.0% 111.3% 104.1% 91.1% 95.5%
========= ========= ========= =========
=========
Consolidated Balance Sheet Data:
Investments $ 27,941 $ 21,497 $ 18,572 $ 25,902 $ 178,429
Total Assets 75,001 81,540 66,628 110,516 344,679
Losses and Loss Adjustment
Expenses 38,616 54,143 29,269 59,421 101,719
Total Debt 11,528 9,341 10,683 11,776 48,000
Minority Interest 55 - - - - 16 - - - - 21,610
Total Shareholders Equity 1,193 2,219 4,255 9,535 60,900
Book Value Per Share $ 0.17 $ 0.32 $ 0.61 $ 1.36 $ 5.83
Statutory Capital And Surplus:
Pafco $ 10,363 $ 8,132 $ 7,848 $ 11,875 $ 18,112
IGF $ 6,400 $ 2,789 $ 4,512 $ 9,219 $ 29,412
Superior $57,121
</TABLE>
<PAGE>
[photographs of automobiles down right margin]
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
- --------------------------------------------------------------------------------
Overview
Symons International Group, Inc. (the "Company" or "SIG") is a 67% subsidiary of
Goran Capital Inc. ("Goran"). Prior to the Company's Initial Public Offering
(the "Offering") on November 5, 1996, it was a wholly-owned subsidiary of Goran.
The Company underwrites and markets nonstandard private passenger automobile
insurance and crop insurance.
Formation of GGS Management Holdings, Inc. ("GGSH" or "GGS Holdings"), The
Holding Company For Its Nonstandard Operations
SIG entered into a Letter of Intent on June 3, 1995 with Fortis, Inc. to buy
Superior Insurance Company ("Superior"), a nonstandard automobile insurance
company operating principally in Florida, Texas, California and four other
states. SIG needed to finance the purchase so it turned to Goldman Sachs & Co.
("Goldman Sachs") which has a large fund that invests in equity of growing and
profitable companies. SIG formed GGSH through contribution of its nonstandard
subsidiary, Pafco General Insurance Company ("Pafco") and a contribution by
Goldman Sachs of about $21 Million, or 48% of GGS Holdings' stock. With this
cash and the value of Pafco, GGS Holdings borrowed from Chase Manhattan Bank,
N.A. ("Chase") $48 Million through a term loan of 6 years at LIBOR plus 2.75%.
With these funds, GGS Holdings bought Superior for $66.6 Million in cash and
closed the deal on April 30, 1996 (the "Acquisition"). Today, GGS Holdings is
the sixteenth largest nonstandard automobile insurance writer in the United
States with gross written premiums for 1996 of $187,176,000 compared to
$49,005,000 for 1995. GGS Holdings is an acquisition and growth company in the
nonstandard automobile insurance sector, which is the fastest growing sector of
the personal lines market.
<PAGE>
[photographs of automobiles down left margin and across top of page]
The Company wanted to define its business as two distinct units, crop and
nonstandard. The Company also wanted Goldman Sachs to invest only in the
nonstandard division. In order to accomplish this, SIG moved IGF Insurance
Company ("IGF") out from being a subsidiary of Pafco to become a subsidiary of
SIG. After all the accountants and lawyers got through their deliberations, IGF
Holdings, Inc. ("IGFH") was formed as a subsidiary of SIG and IGFH owned 100% of
IGF, now the fifth largest crop insurer in the United States. To replace the
value of IGF to Pafco, IGF paid a dividend of $11 Million to Pafco and funded
same through our friendly local bank for $7.5 Million (the "IGFH Bank Debt") and
a note back from Pafco for $3.5 Million. Both of these loans were paid off
through the Offering proceeds.
Nonstandard Automobile Insurance Operations
The Company owns 52% of GGS Holdings, our nonstandard division, with the
remaining 48% owned by certain funds affiliated with Goldman Sachs. GGS
Holdings, through its wholly-owned subsidiaries, Pafco and Superior, is engaged
in the writing of insurance coverage on automobile insurance 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. 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 occurrence and
settlement of losses under nonstandard policies is shorter than many other types
of insurance. The nonstandard automobile market is the fastest growing sector of
the personal lines market. This is fueled by two main factors. (A) As states
clamp down on uninsured motorists, more insureds find their way to our market.
For example, Florida, our biggest state, has bounty hunters who take your plates
off your car if you fail to have insurance. Further, California just passed
strong laws to enforce insurance or lose your car. (B) The baby boomers'
children are now reaching driving age and they mainly find their way to our
market.
<PAGE>
[photographs of crops down right margin]
Crop Insurance Operations
General
Crop insurance consists of two main products. Hail insurance, which is
controlled by the private insurance industry, receives no subsidy from the
government. The other, Multi-Peril Crop Insurance ("MPCI"), is a government
sponsored product that receives subsidy for the farmer to reduce their cost and
provide protection for major catastrophic loss. When a farmer wants to borrow
money to buy his seed, the bank wants insurance on the seed so it knows the loan
can be repaid either through normal harvest or through an insurance policy
covering the yield on the crop. There are many types of coverages and
percentages that farmers can purchase. Our job is to work with our independent
agent to counsel the farmer on the best coverage and premium for his farm. The
government supports this effort through commissions it pays us to do this work
and through premium subsidy for the farmer's insurance costs. The government
also provides back-up risk protection to the 18 or so crop insurance providers
in the event of major loss. Based on the results for any given year, the Company
and the government share in the results of profit and loss. In order to protect
IGF from the loss part of this equation, IGF buys third party reinsurance to
reduce the downside from a loss year.
Certain Accounting Policies for Crop Insurance Operations
The majority of the Company's crop insurance business consists of 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 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 partially offset by the CAT
Coverage Fee, which is also reflected in other income. 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 the profit-sharing
formula established by the Federal Crop Insurance Corporation ("FCIC"). For
income statement purposes under GAAP, gross premiums written consist of the
aggregate amount of premiums paid by farmers for "Buy-up Coverage" (MPCI
coverage in excess of CAT Coverage), and any related federal premium subsidies,
but do not include any MPCI Imputed Premium
<PAGE>
[photographs of crops down left margin]
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. 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 federal regulation 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. Amounts receivable from the FCIC are reflected on the Company's
consolidated balance sheet as reinsurance recoverables.
The Company also 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 of two hundredths of one percent (.02%)
of MPCI Retention (as defined herein) to the extent the Company's MPCI loss
ratios on a per state basis exceed certain levels (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. The
Company is working to reduce costs in order to preserve the profit margins of
the Company. For GAAP income statements purposes, the Buy-up Expense
Reimbursement Payment is treated as a contribution to income and reflected as an
offset against 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.
In 1996, the Company instituted a policy of recognizing (i) 35% of its estimated
MPCI gross premiums written for each of the first and second quarters, (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. In the third quarter, if a sufficient volume of
policyholder acreage reports have been received and processed by the Company,
the Company's policy is to recognize MPCI gross premiums written for the first
nine months based on a re-estimate. If an insufficient volume of policies has
been processed, the Company's policy is to recognize 20% of its full year
estimate of MPCI gross premiums written in the third quarter. The remaining
amount of gross premiums written is recognized in the fourth quarter, when all
amounts are reconciled. In prior years, recognition of MPCI gross premiums
written was 30%, 30%, 30% and 10%, for the first, second, third and fourth
quarters, respectively. Commencing with its June 30, 1995 financial statements,
the Company also began recognizing MPCI underwriting gain or loss during the
<PAGE>
first and second quarters, as well as the third quarter, reflecting the
Company's best estimate of the amount of such gain or loss to be recognized for
the full year, based on, among other things, historical results, plus a
provision for adverse developments. In the fourth quarter, a reconciliation
amount is recognized for the underwriting gain or loss based on final premium
and loss information.
Discontinuance of Surplus Lines Underwriting Unit
Prior to January 1, 1996, the Company, through its wholly-owned subsidiary,
Symons International Group, Inc. - Florida ("SIGF"), a surplus lines
underwriting unit based in Florida, provided commercial insurance products
through independent insurance agents. SIGF writes these specialty products
through Pafco as well as a number of other insurers. Effective January 1, 1996,
the Company transferred SIGF to Goran and reinsured all current and future
policies issued by Pafco on this business through Goran's subsidiary, Granite
Reinsurance Company Ltd. ("Granite Re").
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 operations nor does it include
the results of operations of Superior prior to May 1, 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1994 1995 1996
(in thousands, except ratios)
Nonstandard -Automobile Insurance Operations:
<S> <C> <C> <C> <C>
Gross premiums written $ 52,187 $ 45,593 $ 49,005 187,176
Net premiums written 26,479 28,114 37,302 186,579
Net premiums earned 26,747 25,390 34,460 168,746
Net investment income 1,144 904 624 6,489
Other income, principally
billing fees 886 1,545 1,787 7,578
Net realized capital loss (44) (55) (508) (1,014)
Total revenues 28,733 27,784 36,363 181,799
Losses and loss adjustment
expenses 17,152 18,303 25,423 124,385
Policy acquisition and general and
administrative expenses 5,855 8,709 12,929 46,796
Interest and amortization of
intangibles - - - - - - - - - - - 3,184
Total expenses 23,007 27,012 38,352 174,365
Earnings (loss) before income
taxes $ 5,726 $ 772 $ (1,989) $ 7,434
GAAP Ratios (Nonstandard Automobile Only):
Loss ratio 55.5% 62.3% 65.8% 65.1%
LAE ratio 8.6% 9.8% 8.0% 8.6%
Expense ratio, net of bilLing fees 18.6% 28.2% 32.3% 25.1%
Combined ratio 82.7% 100.3% 106.1% 98.8%
Crop Insurance Operations:
Gross premiums written $ 35,156 $ 54,455 $ 70,374 $ 110,059
Net premiums written 4,281 4,565 11,608 23,013
Net premiums earned 4,281 4,565 11,608 23,013
Net investment income 347 339 674 181
Other income 0 73 384 1,672
Net realized capital gain (loss) 114 (104) 164 (1)
Total revenues 4,742 4,873 12,830 24,865
Losses and loss adjustment expenses 6,774 7,031 8,629 12,724
Policy acquisition and general and
administrative expenses 1,468 (4,802) (7,466) (6,095)
Interest expense 235 492 627 551
Total expenses 8,477 2,721 1,790 7,180
Earnings (loss) before income taxe $ (3,735) $ 2,152 $ 11,040 $ 17,685
Statutory Capital and Surplus:
Pafco $ 8,132 $ 7,848 $ 11,875 $ 18,112
IGF 2,789 4,512 9,219 29,412
Superior 56,656 43,577 49,277 57,121
</TABLE>
<PAGE>
Results of Operations
Overview
1996 Compared To 1995
Net earnings and earnings per share increased 175.0% to $13,256,000 and 155.1%
to $1.76 in 1996 from $4,821,000 and $0.69 in 1995. Improved earnings in 1996
were attributable to both the nonstandard automobile and crop segments. The
nonstandard automobile segment benefited from significant premium growth from
the acquisition of Superior, elimination of quota share reinsurance and internal
growth. The nonstandard automobile segment also benefited from lower loss and
expense ratios due to improved claims management, introduction of multi-tiered
products and operating efficiencies through reengineering, management changes
and gains from technological advancements. The crop insurance segment also
benefited from significant premium growth in both crop hail and MPCI premiums.
The crop insurance segment's profitability was enhanced by a lower crop hail
loss ratio and improved MPCI underwriting gains.
1995 Compared To 1994
Net earnings and earnings per share increased 128% to $4,821,000 and 130% to
$0.69 in 1995 from $2,117,000 and $0.30 in 1994. Improved earnings in 1995 were
attributable to the crop insurance segment which demonstrated premium growth,
lower loss ratios and higher MPCI underwriting gains than in 1994.
Years Ended December 31, 1996 and 1995:
Gross Premiums Written. Gross premiums written in 1996 increased to $305,499,000
from $124,634,000 in 1995 reflecting a 282% increase in nonstandard automobile
insurance and an increase of 56.4% in crop insurance. Other written premiums
consist of premiums on commercial business which were 100% ceded to Granite Re
effective January 1, 1996. The increase in nonstandard automobile gross premiums
written was due to the Acquisition, which generated gross premiums written of
$118,661,000 subsequent to the Acquisition, as well as a 21% increase in
policies in-force issued by Pafco. The increase in Pafco policies in-force
primarily resulted from improved service and product improvements. The increase
in crop insurance gross premiums written was primarily due to (i) farmers
electing higher percentage of crop price levels to be insured under MPCI Buy-up
Coverages, (ii) an increase in MPCI policies in-force and (iii) an increase in
the number of acres insured, together with an increase of $10,990,000, or 64.8%,
in crop hail premiums in 1996 compared to 1995.
Net Premiums Written. The Company's net premiums written in 1996 increased
292.1% to $209,592,000 from $53,447,000 in 1995 was due to the Acquisition,
which generated net premiums written for Superior of $118,298,000 subsequent to
the Acquisition, and the increase in gross premiums written in Pafco's
nonstandard automobile insurance business. In addition, the increase in net
premiums written resulted from the Company's election not to renew, as of
January 1, 1996, its 25% quota share reinsurance on its nonstandard automobile
business. As a result of increases over time in its statutory capital, the
Company determined that it no longer required the additional capacity provided
by this coverage in order to maintain acceptable premium to surplus ratios.
<PAGE>
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 in 1996 increased 286.3%
reflecting the increase in net premiums written. The ratio of net premiums
earned to net premiums written for nonstandard automobile business in 1996
decreased to 90.4% from 92.4% in 1995 due to growth in net premiums written in
1996 exceeding growth in net premiums written in 1995.
Net Investment Income. The Company's net investment income in 1996 increased
474.0%. This increase was due primarily from the investment earnings of
$4,996,000 at Superior subsequent to the Acquisition. Also contributing to the
increase in net investment income is an increase in average invested assets (not
including Superior) to $30,911,000 in 1996 from $22,653,000 in 1995.
Other Income. The Company's other income in 1996 increased 327.9% due
principally to (i) billing fee revenue of $4,655,000 at Superior subsequent to
the Acquisition, (ii) increased billing fee revenue at Pafco of $998,000 from
nonstandard automobile insurance policies, resulting from the increase in the
in-force policy count described above, and an increase in fees charged per
installment in late 1995, and (iii) increased CAT Coverage Fees and CAT LAE
Reimbursement Payments resulting from the introduction of CAT Coverages in the
Federal Crop Insurance Reform Act of 1994 (the "1994 Reform Act").
Net Realized Capital Gain (Loss). The Company recorded a net realized capital
loss from the sale of investments of $1,015,000 in 1996 compared to a net
realized capital loss from the sale of investments of $344,000 in 1995. The net
realized capital loss in 1996 was the result of sales of securities to shorten
the portfolio's overall maturity to provide a better duration match with claims
payments.
Losses and LAE. The loss and LAE ratio for the nonstandard automobile segment in
1996 was 73.7% as compared to 73.8% in 1995. The reduction in the loss and LAE
ratio for 1996 was a function of rate increases and improved claim closure
ratios. Crop hail loss ratios decreased in 1996 to 55.3% from 74.3% in 1995 due
to more favorable weather conditions and a broader geographic expansion of
premiums which serves to reduce exposure.
Policy Acquisition and General and Administrative Expenses. The expense ratio
for the nonstandard automobile segment decreased to 29.6% in 1996 from 37.5% in
1995. Excluding interest on the Acquisition debt and amortization of goodwill
and other intangibles associated with the Acquisition would reduce this ratio to
27.7% in 1996. This decrease was due to several factors including (i) lower
commission expense at Superior through utilization of multi-tiered products,
(ii) lower staff expenses as a result of higher utilization and work flow
re-engineering, and (iii) technological advancements in the underwriting,
premium processing and claims areas. 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 $6,095,000 in 1996 compared to a contribution to income of $7,466,000 in
1995. This decrease in contribution resulted from a combination of several
factors. The primary difference is the decrease in ceding commission income of
$2,036,000 which is due to only a 10%
<PAGE>
quota share agreement for crop hail in 1996 versus a 25% quota share in 1995.
Other items include a commission expense increase of $6,217,000 due to higher
premium writings and an increase in other operating expenses of $4,153,000. This
net increase in expense of $10,370,000 was reduced by an increase of $8,490,000
in Buy-up Expense Reimbursement and an increase in the MPCI underwriting gain of
$2,624,000.
Interest Expense. The Company's interest expense in 1996 increased to $3,938,000
from $1,248,000 in 1995 due primarily to interest of $2,774,000 on the $48
Million indebtedness incurred by a subsidiary of GGSH to partially fund the
Acquisition (the "GGS Senior Credit Facility").
Income Tax Expense. The effective tax rate in 1996 reflects a 33.9% provision
compared to a 35.2% provision in 1995. The reduction in the effective tax rate
is due to higher tax-exempt interest and dividend income.
Years Ended December 31, 1995 and 1994:
Gross Premiums Written. Gross premiums written in 1995 increased 20.8%, to
$124,634,000 from $103,134,000 in 1994 reflecting an increase in gross premiums
written of 29.2% in crop insurance and 7.5% in nonstandard automobile insurance.
The increase in gross premiums written for the nonstandard automobile insurance
segment was primarily attributable to an increase in policies in-force of 13.4%.
The Company experienced a greater percentage increase in certain states due to
the introduction of product improvements. In Colorado, policies in-force
increased due to the increased number of its deductible options and more
favorable pricing for certain personal injury protection coverages. 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 primarily 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 Reform Act. The net
increase in MPCI gross premiums written to $53,408,000 in 1995 from $44,325,000
in 1994 resulted from an increase in the number of acres insured in 1995
following the 1994 Reform Act.
Net Premiums Written. The Company's net premiums written in 1995 increased
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. The
percentage of the Company's nonstandard automobile premiums ceded under its
quota share reinsurance treaty was reduced to 25% from an effective percentage
ceded of 38% in 1994 as a result of a reduction in the Company's need for the
additional capacity provided by this reinsurance. Net Premiums Earned. The
Company's net premiums earned in 1995 increased 54.5% reflecting an increase in
net premiums written and a reduction in quota share reinsurance on the
nonstandard automobile insurance business. The ratio of net premiums earned to
net premiums written for nonstandard automobile insurance in 1995 remained
relatively unchanged at 92.4% as compared to 90.3% in 1994.
Net Investment Income. Net investment income in 1995 decreased 5.5% 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
<PAGE>
in 1995, the average yield on investments declined primarily as a result of the
repositioning of the Company's investment portfolio, begun in the latter part of
1995, into a higher concentration in fixed income securities, particularly
including 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 34.0% as a result of
increased billing fee income of $351,000 on nonstandard automobile business due
primarily to the increase in the in-force policy count as described above, with
the remainder due primarily to the receipt of CAT Coverage Fees and CAT LAE
Reimbursement Payments following the 1995 introduction of CAT Coverages.
Net Realized Capital Gain (Loss). The Company recorded a net realized capital
loss of $344,000 from the sale of investments 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 appointing a new investment manager in October 1995 and the
resulting repositioning of the Company's investment portfolio described above,
as well as certain write-downs taken on investments with an other than temporary
decline in estimated fair value.
Losses and LAE. The nonstandard automobile segment 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. The crop hail 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 37.6%, to
$7,981,000 from $5,801,000 in 1994. The nonstandard automobile segment expense
ratio increased to 37.5% in 1995 from 34.3% in 1994 primarily due to a
$2,390,000, or 44%, 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 of $2,521,000
due to higher gross premium writings in 1995, together with an increase in the
MPCI underwriting gain of 6,396,000.
Interest Expense. The Company's interest expense in 1995 increased 5.4% 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.
<PAGE>
[photographs of a building down right margin]
Income Tax Expense. 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 reduction in the valuation allowance the Company had previously
established for its deferred tax assets.
Liquidity and Capital Resources
The primary sources of funds available to the Company and its Subsidiaries are
premiums, billing fees, expense reimbursements, 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. Accordingly, the
Company maintains investment programs generally intended to provide adequate
funds to pay claims without the forced sale of investments.
Net cash provided by operating activities in 1996 was $10,003,000 compared to
$9,654,000 in 1995 for an increase of $349,000. This increase was due to
improved profitability and growth in written premiums. Loss payments in the
nonstandard automobile insurance business tend to lag behind receipt of premiums
thus providing cash for operations. Net cash provided by operating activities in
1995 was $9,654,000 compared to net cash used by operating activities of
$3,302,000 in 1994. Operations in 1995 provided an additional $12,956,000 in
cash compared to 1994 due to additional net earnings of $2,704,000 and cash flow
provided of $5,109,000 relating to premium receipts and loss payments, including
effects of reinsurance, due primarily to growth in operations with the remainder
due to timing of tax and other liability payments.
Net cash used in investing activities increased from $8,835,000 in 1995 to
$92,769,000 in 1996. Included in 1996 was a $66,590,000 use of cash for the
Acquisition. The remaining increase in cash used in investing activities in 1996
related to the growth in investments due to increased cash provided by operating
activities. Net cash of $8,835,000 was used in investing activities in 1995
compared to net cash provided by investing activities in 1994 of $1,473,000. The
increase in the use of cash in 1995 over 1994 primarily relates to investing of
excess funds generated by additional operating earnings in fixed income
securities. Due to the nature of insurance operations, the Company does not have
a significant amount of expenditures on property and equipment.
The primary items comprising the $93,550,000 of cash provided by financing
activities in 1996 were the $48,000,000 of proceeds from the GGS Senior Credit
Facility, $21,200,000 minority interest investment received as part of the
formation of GGS Holdings and the funding of the Acquisition and $37,969,000 of
proceeds from the Offering.
Cash provided or used by financing activities in 1995 and 1994 primarily related
to activity in the Company's line of credit for its crop segment. The
nonstandard automobile segment generates sufficient cash from operations to
preclude the need for working capital borrowings while the timing of receipts
and payments in the crop segment is such that an operating line of credit is
necessary.
<PAGE>
[photographs of a building down right margin and across top of page]
After the Offering, the Company, on a stand-alone basis, requires funds to
defray operating expenses consisting primarily of legal, accounting and other
fees and expenses in connection with the disclosure and regulatory obligations
of a public company. In order to satisfy its cash requirements, the Company
intends to rely primarily on the fees from an administrative agreement between
the Company and IGF (the "Administration Agreement") pursuant to which the
Company provides 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, the Company is currently in the process of
seeking approval from the Indiana Department of Insurance to implement a new
arrangement whereby the underwriting, marketing and administrative functions of
IGF will be assumed by, and employees will be transferred to, IGFH. There can,
however, be no assurance that the required regulatory approval will be obtained.
In accordance with industry practice, the FCIC will continue to pay Buy-up
Expense Reimbursement Payments to IGF, which will in turn pay management fees to
IGFH. Accordingly, IGFH will be able to pay dividends to the Company to the
extent that such fees exceed the operating and other expenses of IGFH. There
can, however, be no assurance that IGFH will have sufficient excess cash flow to
permit the payment of any dividends to the Company.
As a result of the 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,
Inc., a wholly-owned subsidiary of GGSH ("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 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 under its management agreement with
Pafco and Superior. When the Florida Department of Insurance approved the
acquisition of Superior by GGS Holdings, it prohibited Superior from paying any
dividends (whether extraordinary or not) for four years without the prior
written approval of the Florida Department of Insurance, and extraordinary
dividends, within the meaning of the Indiana Insurance Code, cannot be paid by
Pafco without the prior approval of the Indiana Commissioner of Insurance. The
management fees charged to Pafco and Superior by GGS Management are subject to
review by the Indiana and Florida Departments of Insurance.
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
<PAGE>
remaining annual installments to be paid as follows: 1998 - $6,494,500; 1999 -
$7,938,000; 2000 - $9,742,000; 2001 - $11,611,500; and 2002 $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 8.85% through January 31, 1997, 9.08%
through April 30, 1997, 9.24% through July 30, 1997 and 8.80% through October
30, 1999. 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. GGS Management intends to rely primarily on
management fees from Pafco and Superior and billing fee income to satisfy these
debt service requirements which are subject to review by the Indiana and Florida
Departments of Insurance.
As of December 31, 1996, GGS Management was in default of three covenants in the
GGS Senior Credit Facility. The first covenant requires Pafco and Superior to
maintain a combined ratio of statutory net premiums written for the prior four
quarters to surplus of 3:1 (three dollars of premiums to 1 dollar of surplus).
As at December 31, 1996 such ratio was 3.06:1. The commercial bank lenders under
the GGS Senior Credit Facility amended the agreement to cure this default for
the four consecutive fiscal quarters ended December 31, 1996. As of December 31,
1996, GGS Management contributed additional capital to Pafco $3,737,000 and GGS
Holdings contributed $4,800,000 to Superior in the form of a note payable, due
March 28, 1997, of which the Company guaranteed $2,496,000. The Company loaned
$500,000 to GGS Holdings, which was used to fund a portion of the note at
December 31, 1996. The outstanding balance of the note payable from GGS Holdings
to Superior of $4,300,000 at December 31, 1996 was funded by its due date. The
Company believes that premium volume in 1997 will be at a level where capital
contributions from GGS Management will be necessary to maintain compliance with
this covenant. The Company believes GGS Management will have sufficient cash
flow after debt service to provide a significant portion of this capital need.
However, GGS Management believes, based on 1997 projcted premium writings, it
will need to either obtain reinsurance, reduce premium writings or obtain
additional funding of approximately $12,000,000 from either SIG or additional
financing. The Company is currently exploring its options including negotiating
with its lenders. Should the Company experience less than satisfactory loss
experience, it will reduce its premium writings either internally or through
additional reinsurance. Certain factors will influence the Company's ability to
maintain adequate capital including actual level of premium writings, loss
trends, commission rates, investment yields and cash flow. There can be no
assurance that GGS Management's plans will provide adequate capital.
<PAGE>
The second covenant violation relates to insufficient funds posted by an
affiliate reinsurer to cover ceded premiums and loss reserves. Such deficiency
was approximately $770,000 at December 31, 1996, or less than 10% of total funds
required to be held for ceded premiums and loss reserves. In addition to cash,
the affiliate had posted a $1.5 Million letter of credit as of December 31,
1996. However, reserve development calculated subsequent to December 31 created
most of the deficiency. The affiliate has posted sufficient funds in March, 1997
and the Company doesnot expect future violations of this covenant to occur. The
commercial bank lenders have agreed in writing that this violation has been
cured.
The third covenant violation relates to Superior's risk-based capital rating
being less than 3 to 1 as of December 31, 1996 due to premium growth. The
commercial bank lenders have amended the agreement to cure this violation as of
December 31, 1996.
The Company believes cash flows in the nonstandard automobile segment from
premiums, investment income and billing fees are sufficient to meet that
segment's obligations to policyholders, operating expenses and debt service on
both a short and long term basis. This is due primarily to the lag time between
receipt of premiums and claims payments. Therefore, the Company does not
anticipate additional borrowings for this segment other than in the event of an
acquisition or funding of surplus for premium growth. The Company also believes
cash flows in the crop segment from premiums and expense reimbursements are
sufficient to meet the segment's obligations on both a short and long term
basis. Due to the more seasonal nature of the crop segment's operations, it is
necessary to obtain short term funding at times during a calendar year in the
form of an existing line of credit. Except for this short term funding and
normal increases therein resulting from an increase in the business in force,
the Company does not anticipate any significant short or long term additional
borrowing needs for this segment. Accordingly, while there can be no assurance
as to the sufficiency of the Company's cash flow in future periods, the Company
believes that its cash flow will be sufficient to meet all of the Company's
operating expenses and debt service for the foreseeable future and, therefore,
does not anticipate additional borrowings except as may be necessary to finance
acquisitions or funding of surplus for premium growth.
While GAAP shareholders' equity was $60,900,000 at December 31, 1996, it does
not reflect the statutory equity upon which the Company conducts its various
insurance operations. Pafco, Superior and IGF individually had statutory surplus
at December 31, 1996 of $18,112,000, $57,121,000 and $29,412,000, respectively.
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.
MPCI premiums are not received from farmers until covered crops are harvested.
Such premiums are required to be paid over in full to the FCIC by the Company,
with interest, if not paid by a specified date in each crop year.
<PAGE>
During 1996, IGF continued the practice of borrowing funds under a revolving
line of credit to finance premium payables to the FCIC 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 6.0%, 8.1%, 9.7% and 8.6%, in 1993, 1994, 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, and (iii) make loans to
others, including affiliates. The IGF Revolver also contains other customary
covenants which, among other things, restricts IGF's ability to participate in
mergers, acquire another enterprise or participate in the organization or
creation of any other business entity. At December 31, 1996, $7,000,000 remains
available under the IGF Revolver. At December 31, 1996, IGF was in compliance
with all covenants associated with the line, except the covenant pertaining to
certain investments as a percentage of total admitted assets, for which IGF
obtained a waiver.
Effects of Inflation
Due to the short term that claims are outstanding in the two product lines the
Company underwrites, inflation does not pose a significant risk to the Company.
Primary Variances Between GAAP and SAP
The financial statements in this Annual Report 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:
Certain assets are excluded as "Nonadmitted Assets" under statutory accounting.
Costs incurred by the Company relating to the acquisition of new business are
expensed for statutory purposes.
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.
Fixed maturity investments are reported at amortized cost or market value based
on their National Association of Insurance Commissioners ("NAIC") rating.
The liability for losses and loss adjustment expenses and unearned premium
reserves are recorded net of their reinsured amounts for statutory accounting
purposes.
<PAGE>
Deferred income taxes are not recognized on a statutory basis.
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 Departments of the States of
Indiana and Florida, principally statutory solvency.
New Accounting Standards
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 an increase in stockholders'
equity of $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.
On January 1, 1996, the Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". 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. Adoption of SFAS No. 121 did not have a
material impact on the Company's results of operations.
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. The Company has
chosen not to adopt the new rules but has provided the appropriate disclosure as
required.
In February 1996, SFAS No. 128, Earning Per Share, was issued. This Statement
establishes standards for computing and presenting Earnings per Share (EPS) and
applies to entities with publicly held common stock or potential common stock.
This Statement simpliflies the standards for computing Earning per Share
previously found in APB Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presention
of basic and diluted EPS on the face of theincome statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
<PAGE>
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the the period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed similarly to
fully diluted EPS pursuant to Opinion 15.
This Statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. This Statement requires restatement of all prior-period EPS data
presented. The Company has not yet determined the effects of adopting this
Statement.
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 permitted the Company to continue,
for its statutory financial statements through December 31, 1996, its practice
of recording its MPCI business as 100% ceded to the FCIC with net underwriting
results recognized in ceding commissions, the Indiana Department of Insurance
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 of Insurance. 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. The Company can not
predict what accounting methodology will eventually be implemented or when the
Company will be required to adopt such methodology. The Company anticipates that
any such new crop accounting methodology will not affect GAAP net income.
The NAIC currently has a project under way to codify SAP, as existing SAP does
not address all accounting issues and may differ from state to state. Upon
completion, the Codification is expected to replace prescribed or permitted SAP
in each state as the new comprehensive statutory basis of accounting for
insurance companies. The final format of the Codification is uncertain at this
time, yet implementation could be required as early as January 1, 1998. Due to
the project's uncertainty, the Company has not yet quantified the impact any
such changes would have on the statutory capital and surplus or results of
operations of the Company's insurance subsidiaries. The impact of adopting this
new comprehensive statutory basis of accounting is, however, expected to
materially impact statutory capital and surplus.
<PAGE>
Consolidated FINANCIAL STATEMENTS
as of December 31, 1996 and 1995
(in thousands, except share data)
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
Assets 1996 1995
Investments
Available for sale:
Fixed maturities, at market $127,681 $12,931
Equity securities, at market 27,920 4,231
Short-term investments, at
amortized cost, which
approximates market 9,565 5,283
Real estate, at cost 466 487
Mortgage loans, at cost 2,430 2,920
Other 75 50
-------- --------
Total investments 168,137 25,902
Investments in and advances to
related parties 1,152 2,952
Cash and cash equivalents 13,095 2,311
Receivables (net of allowance
for doubtful accounts of
$1,480 and $927 in 1996 and
1995, respectively) 65,194 8,203
Reinsurance recoverable on paid
and unpaid losses, net 48,294 54,136
Prepaid reinsurance premiums 14,983 6,263
Federal income taxes recoverable 319 ---
Deferred policy acquisition costs 12,800 2,379
Deferred income taxes 3,329 1,421
Property and equipment, net of
accumulated depreciation 8,137 5,502
Other assets 9,239 1,447
-------- --------
Total assets $344,679 $110,516
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses $101,719 $ 59,421
Unearned premiums 87,285 17,497
Reinsurance payables 6,508 6,206
Payables to affiliates 366 6,474
Federal income tax payable --- 133
Line of credit and notes payable --- 5,811
Term debt 48,000 ---
Other 18,291 5,439
-------- --------
Total liabilities 262,169 100,981
-------- --------
Minority interest in consolidated
subsidiary 21,610 ---
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value,
100,000,000 shares authorized,
10,450,000 and 7,000,000 shares
issued and outstanding in 1996
and 1995, respectively 38,969 1,000
Additional paid-in capital 5,905 3,130
Unrealized gain (loss) on invest-
ments, net of deferred tax of
$625 in 1996 and $(23) in 1995 820 (45)
Retained earnings 15,206 5,450
-------- --------
Total stockholders' equity 60,900 9,535
-------- --------
Total liabilities and stockholders'
equity $344,679 $110,516
======== ========
<PAGE>
Consolidated FINANCIAL STATEMENTS
for the years ended December 31, 1996, 1995
and 1994 (in thousands, except per share data)
- --------------------------------------------------------------------------------
Consolidated Statements of Earnings
- --------------------------------------------------------------------------------
1996 1995 1994
Gross premiums written $ 305,499 $ 124,634 $ 103,134
Less ceded premiums (95,907) (71,187) (67,995)
--------- --------- ---------
Net premiums written 209,592 53,447 35,139
Change in unearned premiums (17,833) (3,806) (3,013)
Net premiums earned 191,759 49,641 32,126
Net investment income 6,733 1,173 1,241
Other income 9,286 2,170 1,632
Net realized capital loss (1,015) (344)
--------- --------- ---------
Total revenues 206,763 52,640 34,840
--------- --------- ---------
Expenses:
Losses and loss adjustment expenses 137,109 35,971 26,470
Policy acquisition and general
and administrative expenses 42,013 7,981 5,801
Interest expense 3,938 1,248 1,184
Total expenses 183,060 45,200 33,455
--------- --------- ---------
Earnings before income taxes
and minority interest 23,703 7,440 1,385
--------- --------- ---------
Income taxes:
Current income tax expense 7,982 2,275 462
Deferred income tax expense
(benefit) 64 344 (1,180)
Total income taxes 8,046 2,619 (718)
--------- --------- ---------
Net earnings before minority
interest 15,657 4,821 2,103
Minority interest (2,401) --- 14
--------- --------- ---------
Net earnings $ 13,256 $ 4,821 $ 2,117
========= ========= =========
Weighted average shares outstanding 7,537 7,000 7,000
========= ========= =========
Net earnings per share $ 1.76 $ 0.69 $ 0.30
========= ========= =========
<PAGE>
Consolidated FINANCIAL STATEMENTS
for the years ended
December 31, 1996, 1995 and 1994 (in thousands)
- --------------------------------------------------------------------------------
Consolidated Statements of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Additional Gain(Loss) Retained Total
Common Paid-in on Earnings Stockholders'
Stock Capital Investments (Deficit) Equity
----- ------- ----------- --------- ------
Balance at
<S> <C> <C> <C> <C> <C>
January 1, 1994 $ 1,000 $3,130 $ (423) $ (1,488) $ 2,219
Unrealized gain
on fixed maturities
resulting from a
change in accounting
principle, net of
deferred taxes --- --- 139 --- 139
Change in unrealized
loss on investments,
net of deferred taxes --- --- (220) --- (220)
Net earnings --- --- --- 2,117 2,117
------- ------ ------- -------- -------
Balance at December
31, 1994 1,000 3,130 (504) 629 4,255
Change in unrealized
loss on investments,
net of deferred taxes --- --- 459 --- 459
Net earnings --- --- --- 4,821 4,821
------- ------ ------- -------- -------
Balance at December
31, 1995 1,000 3,130 (45) 5,450 9,535
Sale of subsidiary
stock --- 2,775 --- --- 2,775
Change in unrealized
loss on investments,
net of deferred taxes --- --- 865 --- 865
Issuance of common
stock 37,969 --- --- --- 37,969
Dividend to parent --- --- --- (3,500) (3,500)
Net earnings --- --- --- 13,256 13,256
------- ------ ------- -------- -------
Balance at December
31, 1996 $38,969 $5,905 $ 820 $ 15,206 $60,900
======= ====== ======= ======== =======
</TABLE>
<PAGE>
Consolidated Statements of Cash Flows
for the years ended December 31, 1996,1995 and 1994
(in thousands)
1996 1995 1994
Cash flows from operating activities:
Net earnings $ 13,256 $ 4,821 $ 2,117
Adjustments to reconcile net earnings
to net cash provided from (used in)
operations:
Minority interest 2,401 --- (14)
Depreciation and amortization 2,194 742 690
Deferred income tax expense (benefit) 64 344 (1,180)
Net realized capital loss 1,015 344 159
Net changes in operating as
sets and liabilities
(net of assets acquired):
Receivables (22,673) 6,462 (9,057)
Reinsurance recoverable on paid and
unpaid losses, net 5,842 (41,250) (25,130)
Prepaid reinsurance premiums (8,720) 725 (3,343)
Federal income taxes recoverable
(payable) (1,270) 325 759
Deferred policy acquisition costs (2,496) (900) (727)
Other assets (2,923) 1,019 98
Losses and loss adjustment expenses (2,125) 30,152 (24,874)
Reinsurance payables (1,978) 2,133 1,982
Unearned premiums 24,508 3,081 6,356
Other liabilities 2,908 1,656 (1,398)
-------- -------- --------
Net cash provided from (used in) operations 10,003 9,654 (3,302)
-------- -------- --------
Cash flow from investing activities:
Cash paid for Superior (66,590) --- ---
Net sales (purchases) of short-term
investments 8,026 (4,493) (308)
Proceeds from sales, calls and
maturities of fixed maturities 56,903 8,603 8,460
Purchases of fixed maturities (73,503) (12,517) (7,587)
Proceeds from sales of equity securities 19,796 29,599 10,510
Purchase of equity securities (34,157) (28,173) (10,122)
Proceeds from the sale of real estate --- --- 1,165
Purchases of mortgage loans --- (100) (50)
Proceeds from repayment of mortgage loans 490 120 60
Purchase of property and equipment (3,734) (1,874) (655)
-------- -------- --------
Net cash (used in) provided from investing
activities (92,769) (8,835) 1,473
-------- -------- --------
Cash flow from financing activities:
Proceeds from initial public offering,
net of expenses 37,969 --- ---
Proceeds from line of credit and
notes payable --- 1,620 26,900
Proceeds from term debt 48,000 0 ---
Payments on line of credit and notes
payable (5,811) (1,250) (26,459)
Proceeds from consolidated subsidiary
minority interest owner 21,200 --- ---
Payment of dividend to parent (3,500) --- ---
Repayments from related parties 1,800 44 711
Loans from and (repayments to) related
parties (6,108) 1,036 425
-------- -------- --------
Net cash provided from financing
activities 9,355 1,450 1,577
-------- -------- --------
Increase (decrease) in cash and
cash equivalents 10,784 2,269 (252)
Cash and cash equivalents, beginning
of year 2,311 42 294
-------- -------- --------
Cash and cash equivalents, end of year $ 13,095 $ 2,311 $ 42
======== ======== ========
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies:
Symons International Group, Inc. (the "Company") is a 67% owned subsidiary of
Goran Capital, Inc. (Goran). The Company is primarily involved in the sale of
personal nonstandard automobile insurance and crop insurance. Nonstandard
automobile represents approximately 61% of the Company's premium 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
subsidiaries as follows:
GGS Management Holdings, Inc. (GGSH)-a holding company for the nonstandard
automobile operations which includes GGS Management, Inc., Pafco General
Insurance Company, Pafco Premium Finance Company and the Superior entities,
as described below - 52% owned;
GGS Management, Inc. (GGS)-a management company for the nonstandard
automobile operations-52% owned;
Superior Insurance Company (Superior)-an insurance company domiciled in
Florida-52% owned;
Superior American Insurance Company (Superior American)-an insurance
company domiciled in Florida-52% owned;
Superior Guaranty Insurance Company (Superior Guaranty)-an insurance
company domiciled in Florida-52% owned;
Pafco General Insurance Company (Pafco)-an insurance company domiciled in
Indiana-52% owned;
Pafco Premium Finance Company (PPFC)-an Indiana-based premium finance
company-52% owned;
IGF Holdings, Inc. (IGFH)-a holding company for the crop operations which
includes IGF and Hail Plus Corp.-100% owned;
IGF Insurance Company (IGF)-an insurance company domiciled in Indiana-100%
owned; and
Hail Plus Corp.-an Iowa-based premium finance company-100% owned.
On January 31, 1996, the Company entered into an agreement with GS Capital
Partners II, L.P. (Goldman Funds) to create a company, GGSH, to be owned 52% by
the Company and 48% by Goldman Funds. GGSH created GGS, a management company for
the nonstandard automobile operations which include PGIC and the Superior
entities.
On April 30, 1996, GGSH acquired the Superior entities through a purchase
business combination. The Company's Consolidated Results of Operations for the
year ended December 31, 1996 include the results of operations of the Superior
entities subsequent to April 30, 1996. (See Note 2.)
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
On January 1, 1996, the Company sold its excess and surplus lines insurance
operations, Symons International Group, Inc. of Florida (SIGF), with a net book
value of $2, to Goran for $2. Accordingly, no gain or loss was recognized in
1996 on the transaction.
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:
Certain assets are excluded as "Nonadmitted Assets" under statutory accounting.
Costs incurred by the Company relating to the acquisition of new business are
expensed for statutory purposes.
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.
Fixed maturity investments are reported at amortized cost or market value based
on their National Association of Insurance Commissioners' (NAIC) rating.
The liability for losses and loss adjustment expenses and unearned premium
reserves are recorded net of their reinsured amounts for statutory accounting
purposes.
Deferred income taxes are not recognized on a statutory basis.
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 Departments of the States of
Indiana and Florida, principally statutory solvency.
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.
Net earnings and capital and surplus for the insurance subsidiaries reported on
the statutory accounting basis is as follows:
1996 1995 1994
Capital and surplus:
Superior entities $57,121 N/A N/A
PGIC 18,112 11,875 7,848
IGF 29,412 9,219 4,512
Net earnings (losses):
Superior entities 1,978 N/A N/A
PGIC 5,151 (553) (571)
IGF 12,122 6,574 1,511
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.
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
e. Investments: Investments are presented on the following bases:
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 stockholders' equity, net of deferred
tax, and accordingly, has no effect on net income.
Real estate-at cost, less allowances for depreciation.
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 are deferred and amortized
over the terms of the policies to which they relate. Acquisition costs that
exceed estimated losses and loss adjustment expenses and maintenance costs are
charged to expense in the period in which those excess costs are determined.
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. Other Assets: Other assets consists primarily of goodwill, debt acquisition
costs, and organization costs. Goodwill resulting from the acquisition of the
Superior entities is amortized over a 25-year period on a straight-line basis
based upon management's estimate of the expected benefit period. Deferred debt
acquisition costs are amortized over the term of the debt (six years).
Organization costs are amortized over five years.
j. 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 $4,766 and $948 at December 31, 1996 and 1995,
respectively.
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
k. Income Taxes: The Company utilizes 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 11.) 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.
l. 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.
m. Certain Accounting Policies for Crop Insurance Operations: In 1996, IGF
instituted a policy of recognizing (i) 35% of its estimated Multi Peril Crop
Insurance (MPCI) gross premiums written for each of the first and second
quarters, (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. In the third quarter, if a
sufficient volume of policyholder acreage reports have been received and
processed by IGF, IGF's policy is to recognize MPCI gross premiums written for
the first nine months based on a reestimate which takes into account actual
gross premiums processed. IGF followed the foregoing approach for the 1996 third
quarter. If an insufficient volume of policies has been processed, IGF's policy
is to recognize in the third quarter 20% of its full year estimate of MPCI gross
premiums written, unless other circumstances require a different approach. The
remaining amount of gross premiums written is recognized in the fourth quarter,
when all amounts are reconciled. In prior years, recognition of MPCI gross
premiums written was 30%, 30%, 30% and 10%, for the first, second, third and
fourth quarters, respectively. Commencing with its June 30, 1995 financial
statements, IGF also began recognizing MPCI underwriting gain or loss during the
first and second quarters, as well as the third quarter, reflecting IGF's best
estimate of the amount of such gain or loss to be recognized for the full year,
based on, among other things, historical results, plus a provision for adverse
developments.
n. 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 had no effect on net earnings. The effect of
this change in accounting principle was an increase to stockholders' equity of
$139, net of deferred taxes of $73, of net unrealized gains on fixed maturities
classified as available for sale that were previously carried at amortized cost.
On January 1, 1996, the Company adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. 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. Adoption of SFAS No. 121 did not have a
material impact on the Company's results of operations.
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. The Company has
adopted the disclosure provisions of SFAS No. 123 (see Note 22).
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
In February 1996, SFAS No. 128, Earnings per Share, was issued. This statement
establishes standards for computing and presenting earnings per share (EPS) and
applies to entities with publicly held common stock or potential common stock.
This statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures, and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to Opinion 15.
This statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. This statement requires restatement of all prior period EPS data
presented. The Company has not yet determined the effects of adopting this
statement.
o. Vulnerability from Concentration: At December 31, 1996, the Company did not
have a material concentration of financial instruments in an industry or
geographic location. Also at December 31, 1996, 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.
p. Earnings Per Share: The Company's net earnings 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. The weighted
average shares outstanding in 1996 have been increased by 44,000 shares for the
$3.5 million dividend paid to Goran from the proceeds of the offering, in
accordance with generally accepted accounting principles. Stock options were not
considered to be common stock equivalents and, thus, not included in the
calculation of earnings per share as the Company's shares have been traded for
less than one calendar quarter.
2. Corporate Reorganization and Acquisition:
In April 1996, Pafco contributed all of the outstanding shares of capital stock
of IGF to IGF Holdings, a wholly owned and newly formed subsidiary of Pafco, and
the Board of Directors of IGF Holdings declared an $11,000 distribution to Pafco
in the form of cash of $7,500 and a note payable of $3,500 (PGIC Note). IGFH
borrowed the $7,500 portion of the distribution from a bank (IGFH Note). The
notes were paid in full from the proceeds of the Offering. Immediately following
the distribution, Pafco distributed all of the outstanding common stock of IGF
Holdings to the Company. 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.
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
On January 31, 1996, the Company entered into an agreement (Agreement) with GS
Capital Partners II, L.P. to create GGSH, to be owned 52% by the Company and 48%
owned by the Goldman Funds. In accordance with the Agreement, on April 30, 1996,
the Company contributed certain fixed assets and PGIC with a combined book
value, determined in accordance with generally accepted accounting principles,
of $17,186, to GGSH. Goldman Funds contributed $21,200 to GGSH, in accordance
with the Agreement. In return for the cash contribution of $21,200, Goldman
Funds received a minority interest share in GGSH at the date of contribution of
$18,425, resulting in a $2,775 increase to additional paid-in capital. At
December 31, 1996, Goldman Funds' minority interest share consisted of the
following:
Contribution, April 30, 1996 $18,425
GGSH earnings 2,401
Unrealized gains, net of deferred tax of $599 784
-------
$21,610
=======
In connection with the above transactions, GGSH acquired (the "Acquisition") all
of the outstanding shares of common stock of Superior Insurance Company and its
wholly owned subsidiaries, domiciled in Florida, (collectively referred to as
"Superior") for cash of $66,590. In conjunction with the Acquisition, the
Company's funding was through a senior bank facility of $48,000 and a cash
contribution from Goldman Funds of $21,200.
The acquisition of Superior was accounted for as a purchase and was recorded as
follows:
Assets acquired:
Invested assets $118,665
Receivables 34,933
Deferred acquisition 7,925
Other assets 2,082
--------
Total 163,605
--------
Liabilities assumed:
Unpaid losses and loss adjustment expense 44,423
Unearned premiums 45,280
Other liabilities 10,863
--------
Total 100,566
--------
Net assets required 63,039
Purchase price 65,590
--------
Excess purchase price 3,551
Less amounts allocated to deferred income
taxes on unrealized gains on investments 1,334
--------
Goodwill $ 2,217
========
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
2. Corporate Reorganization and Acquisitin, continued:
The Company's results from operations for the year ended December 31, 1996
include the results of Superior subsequent to April 30, 1996.
3. Initial Public Offering:
On November 5, 1996, the Company sold 3,000,000 shares at $12.50 per share in an
initial public offering of common stock (the "Offering"). An additional 450,000
shares were sold in December 1996 representing the exercise of the overallotment
option. The Company generated net proceeds, after underwriter's discount and
expenses, of $37,900 from the Offering. The proceeds were used to repay the IGFH
Note and PGIC Note totaling $11,000, repay indebtedness to Goran and Granite Re
of approximately $7,500, pay Goran a dividend of $3,500 and contribute capital
to IGF of $9,000. The remainder will be used for general corporate purposes,
including acquisitions. After completion of the Offering, Goran owns 67% of the
total common stock outstanding.
Assuming that these transactions, described in Notes 2 and 3, took place
(including the Offering) at January 1, 1995 or at January 1, 1996, the pro forma
effect of these transactions on the Company's Consolidated Statements of
Earnings is as follows:
1996 1995
(unaudited)
Revenues $250,848 $159,899
======== ========
Net Income 15,238 6,701
======== ========
Net Income per common share 1.42 0.65
======== ========
Assuming that these transactions took place (including the Offering) at January
1, 1995 or January 1, 1996 and that shares outstanding only included shares
issued in connection with the IPO whose proceeds were used to repay
indebtedness, the pro forma effect of these transactions on the Company's net
income per common share is as follows:
1996 1995
(unaudited)
Net Income per common share $ 1.86 $ 0.81
======== ========
Outstanding shares used in the above calculation include the 7,000,000 shares
outstanding before the Offering plus 1,200,000 shares issued in connection with
the Offering whose proceeds were used to pay external indebtedness. The latter
calculation was determined by dividing the aggregate amount of the repayment of
the $7.5 million IGFH Note and the $7.5 million repayment of parent indebtedness
by the Offering price of $12.50 per share.
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.
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
4. Investments:
Investments are summarized as follows:
<TABLE>
<CAPTION>
Cost or Estimated
Amortized Unrealized Market
December 31, 1996 Cost Gain Loss Value
--------- ----------------------- ---------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Treasury securities
and obligations of U.S.
government operations and
agencies $ 55,034 $ 343 $ (233) $ 55,144
Foreign governments 1,515 0 (30) 1,485
Obligations of states
and political
subdivisions 2,945 11 (4) 2,952
Corporate securities 67,545 977 (422) 68,100
--------- --------- --------- ---------
Total Fixed Maturities $127,039 $ 1,331 $ (689) $ 127,681
--------- --------- --------- ---------
Equity Securities:
Common stocks 25,734 2,884 (698) 27,920
Short-term investments 9,565 0 0 9,565
Real Estate 466 0 0 466
Mortgage Loans 2,430 0 0 2,430
Other loans 75 0 0 75
--------- --------- --------- ---------
Total Investments $ 165,309 $ 4,215 $ (1,387) $ 168,137
========= ========= ========= =========
December 31, 1995
Fixed maturities:
U.S. Treasury securities
and obligations of U.S.
government operations and
agencies $ 10,978 $ 63 $ (1) $ 11,040
Obligations of states
and political
subdivisions 1,470 57 (1) 1,526
Corporate securities 364 1 0 365
--------- --------- --------- ---------
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
Short-term investments 5,283 0 0 5,283
Real Estate 487 0 0 487
Mortgage Loans 2,920 0 0 2,920
Other loans 50 0 0 50
--------- --------- --------- ---------
Total Investments $ 25,970 $ 230 $ (298) $ 25,902
========= ========= ========= =========
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
4. Investments, continued:
At December 31, 1996, 90.2% of the Company's fixed maturities were considered
investment grade by The Standard & Poors Corporation or Moody's Investor
Services, Inc. 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 at December
31, 1996, 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:
Estimated
Amortized Market
Maturity: Cost Value
-------- --------
Due in one year or less $ 6,412 $ 6,423
Due after one year through
five years 70,848 71,086
Due after five years through
ten years 43,109 43,404
Due after ten years 6,670 6,768
-------- --------
Total $127,039 $127,681
======== ========
Gains and losses realized on sales of investments in fixed maturities are as
follows:
1996 1995 1994
Proceeds from sales $40,153 $7,903 $4,083
Gross gains realized 92 106 119
Gross losses realized 561 291 29
Real Estate is reported net of accumulated depreciation of $164 and $143 for
1996 and 1995, respectively. Investments in a single issuer greater than 10% of
stockholders' equity at December 31, 1996 are as follows:
Fixed
Description Maturities
----------
United States Treasury Notes $26,318
Federal National Mortgage Association $41,203
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
An analysis of net investment income for the years ended December 31, 1996,
1995, and 1994 follows:
1996 1995 1994
Fixed maturities $5,714 $ 534 $ 470
Equity securities 756 256 677
Cash and short-term investments 281 194 99
Real Estate 51 52 273
Mortgage Loans 207 231 132
Other 25 270 96
Total Investment Income 7,034 1,537 1,747
Investment expenses (301) (364) (506)
------ ------ ------
Net Investment Income $6,733 $1,173 $1,241
====== ====== ======
In 1992, PGIC acquired a hotel property through a deed in lieu of foreclosure on
a mortgage it held in the amount of $2,985. In 1993, the property was renovated
and changed to a Comfort Inn. In June 1994, the property was sold for net
proceeds of $4,166, resulting in a gain on sale of $147. Upon the sale, PGIC
issued an 8% mortgage loan due in the year 2001 in the amount of $3,000. It
calls for monthly principal payments of $10 plus interest. All payments on the
mortgage were current at December 31, 1996.
Investments with a market value of $23,419 and $6,410 (amortized cost of $22,749
and $6,296) as of December 31, 1996 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 $1,539
(amortized cost of $1,571) as of December 31, 1996 were pledged as collateral on
an unused letter of credit of $1,500 issued to a ceding reinsurer.
5. 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, premium taxes, and
underwriting expenses net of reinsurance commission income on such policies.
Policy acquisition costs both acquired and deferred, and the related
amortization charged to income were as follows:
1996 1995 1994
Balance, beginning of year $ 2,379 $ 1,479 $ 752
Deferred policy acquisition
costs purchased in the
Superior acquisition 7,925 0 0
Costs deferred during year 27,657 8,050 5,579
Amortization during year (25,161) (7,150) (4,852)
-------- ------- ------
Balance, end of year $ 12,800 $ 2,379 $1,479
======== ======= ======
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
6. Property and Equipment:
Property and equipment at December 31 are summarized as follows:
1996 Accumulated 1996 1995
Cost Depreciation Net Net
------- ------------- ------ ------
Land $ 226 $ 0 $ 226 $ 226
Buildings 4,342 (1,186) 3,156 3,209
Office furniture and
equipment 2,032 (999) 1,024 610
Automobiles 20 (7) 13 1
Computer equipment 5,535 (1,817) 3,718 1,456
------- ------- ------ ------
$12,146 $(4,009) $8,137 $5,502
======= ======= ====== ======
Accumulated depreciation at December 31, 1995 was $2,226. Depreciation expense
related to property and equipment for the years ended December 31, 1996, 1995
and 1994 were $1,783, $637, and $374, respectively.
7. Other Assets:
Other assets at December 31, 1996 includes the following intangible assets:
Accumulated Amortization
Cost Amortization Expense
---- ------------ -------
Goodwill $2,217 $ 95 $ 95
Deferred debt costs 1,386 154 154
Organization costs 1,689 162 162
----- --- ---
5,292 411 411
===== === ===
No such amounts existed at December 31, 1995.
8. Line of Credit:
At December 31, 1996, IGF maintained a revolving bank line of credit in the
amount of $7,000. At December 31, 1996 and 1995, the outstanding balance was $0
and $5,811, respectively. Interest on this line of credit was at the New York
prime rate (8.25% at December 31, 1996) plus 0.25% 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
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, 1996, IGF was in compliance with all covenants associated with
the line, except the covenant pertaining to certain investments as a percentage
of total admitted assets, for which IGF obtained a waiver.
The weighted average interest rate on the line of credit was 8.6%, 9.7%, and
8.1% during December 31, 1996, 1995, and 1994, respectively.
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
9. Term Debt:
The term debt, with an outstanding principal balance of $48,000, matures on
April 30, 2002, and will be repaid in 11 consecutive semiannual installments,
the first of which will occur on the first anniversary of the closing date. The
first installments of principal repayments will be $3,128 and $2,886 in 1997,
respectively, with the remaining annual installments over the term of the debt
to be paid as follows: 1998-$6,494; 1999-$7,938; 2000-$9,742; 2001- $11,612; and
2002-$6,200. Interest on the term debt is payable quarterly at LIBOR plus 2.75%.
In 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 term debt at 8.31% through November 1996, 8.85% through
January 1997, 9.08% through April 1997, 9.24% through July 1997, and 8.80%
through October 1999. The term debt is collateralized by a pledge of all of the
tangible and intangible assets of GGSH, including all of the outstanding shares
of GGS, and by a pledge of all of the tangible and intangible assets of GGS,
including all of the outstanding shares of capital stock of PGIC and Superior.
As of December 31, 1996, GGS was in default of three covenants in the term debt.
The first covenant required Pafco and Superior to maintain a combined ratio of
statutory net premiums written to surplus of 3:1. The commercial bank lenders
under the term debt have amended the agreement to cure this default. While there
can be no assurance that GGS will have in the future sufficient cash flow after
satisfaction of its debt service requirements to permit GGS to infuse sufficient
capital into its insurance subsidiaries to permit them to maintain a ratio of
net premiums written to surplus not in excess of 3:1, the Company believes that
it or GGS will be able either to contribute additional capital to PGIC and
Superior or, if necessary, to obtain reinsurance, reduce premium writings, or
obtain additional financing in order to permit them to satisfy this covenant in
future years.
The second covenant violation relates to insufficient funds posted by an
affiliate reinsurer to cover its obligations under reinsurance treaties with
Pafco. The affiliate has posted sufficient funds in 1997, and the Company does
not expect future violations of this covenant to occur. The commercial bank
lenders under the term debt have agreed that this violation has been cured. The
third violation relates to Superior's risk-based capital ratio being less than
300% due to growth in premium writings. The commercial lenders under the term
debt have amended the agreement to cure this default.
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
10. Unpaid Losses and Loss Adjustment Expenses:
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
1996 1995 1994
-------- ------- -------
Balance at January 1 $ 59,421 $29,269 $54,143
Less reinsurance recoverables 37,798 12,542 36,891
-------- ------- -------
Net balance at January 1 21,623 16,727 17,252
-------- ------- -------
Reserves required in
connection with the
Superior Acquisition 44,423 0 0
-------- ------- -------
Incurred related to:
Current year 183,618 35,184 26,268
Prior years (1,509) 787 202
-------- ------- -------
Total Incurred 137,109 35,971 26,470
Paid related to:
Current year 102,713 21,057 16,647
Prior years 28,182 10,018 10,348
-------- ------- -------
Total paid 130,895 31,075 26,995
-------- ------- -------
Net balance at December 31 72,260 21,623 16,727
Plus reinsurance recoverables 29,459 37,798 12,542
-------- ------- -------
Balance at December 31 $101,719 $59,421 $29,269
======== ======= =======
The foregoing reconciliation shows that the (redundancies) deficiencies of
$(1,509), $787, and $202 in the December 31, 1995, 1994 and 1993 reserves,
respectively, emerged in the following year. These (redundancies) deficiencies
resulted from (lower) 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.
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
11. Income Taxes:
The Company files a consolidated federal income tax return with its wholly owned
subsidiaries. GGSH files a consolidated tax return with its wholly owned
subsidiaries. Intercompany tax sharing agreements between the Company and its
wholly owned subsidiaries and GGSH and its wholly owned subsidiaries provide
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 35% in 1996 and 34% in 1995 and 1994 to income before
income taxes and the income tax provision is as follows:
1996 1995 1994
Computed income taxes at
statutory rate $8,296 $2,531 $ 468
Dividends received deduction (158) (54) (30)
Tax-exempt interest (270) (32) (36)
Change in valuation allowance (23) (237) (1,492)
Change in tax rate (14) 0 0
Other 215 414 372
------ ------ ------
Income Taxes $8,046 $2,622 $ (718)
====== ====== ======
State income taxes for 1996, 1995 and 1994 are not significant. Therefore, state
income taxes have been recorded in general and administrative expenses and not
as part of income taxes.
The net deferred tax asset at December 31, 1996 and 1995 is comprised of the
following:
1996 1995
Deferred tax assets:
Unpaid losses and loss adjustment expenses $2,705 $ 422
Unearned premiums 5,061 764
Allowance for doubtful accounts 518 315
Unrealized losses on investments 0 23
Net operating loss carryforwards 328 457
Other 685 411
------ ------
9,297 2,392
Valuation allowance 0 23
------ ------
Net deferred tax asset 9,297 2,369
------ ------
Deferred tax liabilities:
Deferred policy acquisition costs (4,480) (809)
Unrealized gains on investments (1,224) 0
Other (264) (139)
------ ------
(5,968) (948)
------ ------
Net Deferred tax asset $3,329 $1,421
====== ======
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
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, 1996 since management believes it is more
likely than not that the Company will realize the benefit of its deferred tax
assets through utilization of such amounts under the carryback rules and through
future taxable income.
As of December 31, 1996, the Company has unused net operating loss carryovers
available as follows:
Years ending not later than December 31: Amount
------
2000 $811
2002 126
---- ---
Total $937
====
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.
12. Leases:
The Company has certain commitments under long-term operating leases for a
branch office and sales offices for Superior Insurance Company. Rental expense
under these commitments was $751 for 1996. Future minimum lease payments
required under these noncancelable operating leases are as follows:
1997 $ 928
1998 466
1999 373
2000 62
2001 and thereafter 0
------
Total $1,829
======
13. 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.
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
13. Reinsurance, continued:
Approximately 66% of amounts recoverable from reinsurers are with the FCIC, a
branch of the federal government. Another 28% of recoverable amounts are with
Granite Re, a foreign corporation, which has not applied for an A.M. Best
rating. An additional 5% of uncollateralized recoverable amounts are with
companies which maintain an A.M. Best rating of at least A+. Company management
believes amounts recoverable from reinsurers are collectible. Amounts
recoverable from reinsurers relating to unpaid losses and loss adjustment
expenses were $29,459, $37,798, and $12,542 as of December 31, 1996, 1995, and
1994, respectively. These amounts are reported gross of the related reserves for
unpaid losses and loss adjustment expenses in the accompanying Consolidated
Balance Sheets.
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 was 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 and $2,380,
respectively. No gain or loss was recognized in 1996 on the transaction. 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 was
ceded to Granite Re effective January 1, 1996. (See Note 17.)
Reinsurance activity for 1996, 1995, and 1994, which includes reinsurance with
related parties, is summarized as follows:
1996 Direct Assumed Ceded Net
-------- ------ -------- --------
Premiums written $298,596 $6,903 $(95,907) $209,592
Premiums earned 279,061 6,903 (94,205) 191,759
Incurred losses and loss
adjustment expenses 223,879 4,260 (91,030) 137,109
Commission expenses
(income) 44,879 3,663 (46,716) 1,826
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 expenses 125,382 2,839 (92,250) 35,971
Commission expenses
(income) 17,177 174 (27,092) (9,741)
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 expenses 57,951 1,588 (33,069) 26,470
Commission expenses
(income) 19,619 48 (24,174) (4,507)
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
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.
The following balances were outstanding at December 31, 1996 and 1995:
1996 1995
Investments in and advances to related parties:
Nonredeemable, nonvoting preferred
stock of Granite $ 702 $ 702
Secured notes receivable from
related parties 0 1,355
Unsecured mortgage loan from
director and officer 278 278
Due from directors and officers 172 199
Other receivables from related parties 0 418
------ ------
$1,152 $2,952
====== ======
1996 1995
Payable to affiliates:
Loan and related interest payable
to Goran $ 0 $2,232
Loan and related interest payable
to Granite Re 0 3,733
Other payable to Goran 350 500
Other payables to related parties 16 9
------ ------
$ 366 $6,474
====== ======
The following transactions occurred with related parties in the years ended
December 31, 1996, 1995, and 1994:
1996 1995 1994
Management fees charged
by Goran $ 139 $ 414 $ 494
Reinsurance under various
treaties, net:
Ceded premiums earned 5,463 5,235 (73)
Ceded losses and loss
adjustment expenses incurred 5,168 2,612 0
Ceded commissions 2,620 1,142 0
Consulting fees charged by
various related parties 180 26 75
Interest charged by Goran 196 208 188
Dividend income from Granite Re 0 0 18
Interest charged by Granite Re 385 346 312
The unsecured mortgage loan to the Chairman and CEO of the Company was repaid in
full in February 1997.
Amounts due from directors and officers of the Company bear interest at the
180-day Treasury bill rate payable semiannually. Loan principal is payable on
demand.
The loans payable, including accrued interest, to Goran and Granite Re at
December 31, 1995, were repaid in full in 1996 from the proceeds of the
offering.
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
15. Stockholders' Equity:
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 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.
16. Effects of Statutory Accounting Practices and Dividend Restrictions:
At December 31, 1996 and 1995, PGIC's statutory capital and surplus was $18,112
and $11,875, respectively, and IGF's statutory capital and surplus was $29,412
and $9,219, respectively. The minimum regulatory requirement for capital and
surplus is $1,250. 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 April 1996 and December 1995 extraordinary dividends to PGIC in the amounts
of $11 million and $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.
At December 31, 1996, the Superior entities' statutory capital and surplus was
$57,121. In the consent order approving the Acquisition, the Florida Department
has prohibited Superior from paying any dividends for four years without the
prior written approval of the Florida Department.
17. 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). The Superior entities, 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 NAIC, as well as state laws, regulations, and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed.
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
IGF received written approval through December 31, 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, 1996, that permitted transaction had no effect on statutory surplus
or net income. The underwriting profit results of the FCIC business, net of
reinsurance of $12,277, $9,653, and $3,257, are netted with policy acquisition
and general and administrative expenses for the years ended December 31, 1996,
1995, and 1994, respectively, in the accompanying Consolidated Statements of
Earnings.
PGIC received approval from the IDOI to record its quota share reinsurance
agreement with Granite Re for its commercial business as reinsurance effective
January 1, 1996 for statutory accounting purposes, which differs from prescribed
statutory practices. SAP prescribed by the IDOI require certain administrative
matters to be completed by an insurance company to recognize a reinsurance
agreement as of its effective date. As of December 31, 1996, these permitted
transactions increased statutory surplus by $512 over what it would have been
had prescribed accounting practices been followed.
The 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
permitted the Company to continue for its statutory financial statements through
December 31, 1996 its practice of recording its MPCI business as 100% ceded to
the FCIC with net underwriting results recognized in ceding commissions, 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. The Company cannot predict
what accounting methodology will eventually be implemented or when the Company
will be required to adopt such methodology. The Company anticipates that any
such new crop accounting methodology will not affect GAAP net earnings.
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. As of December 31, 1996, IGF,
PGIC and the Superior entities had Ratios that were in excess of the minimum RBC
requirements.
The NAIC currently has a project under way to codify SAP, as existing SAP does
not address all accounting issues and may differ from state to state. Upon
completion, the Codification is expected to replace prescribed or permitted SAP
in each state as the new comprehensive statutory basis of accounting for
insurance companies. The final format of the Codification is uncertain at this
time, yet implementation could be required as early as January 1, 1998. Due to
the project's uncertainty, the Company has not yet quantified the impact any
such changes would have on the statutory capital and surplus or results of
operations of the Company's insurance subsidiaries. The impact of adopting this
new comprehensive statutory basis of accounting is, however, expected to
materially impact statutory capital and surplus.
18. Commitments and 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
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
18. Commitments and Contingencies:, continued
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 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.
The Company received a commitment from a commercial bank which provided funds to
certain executives and a director of the Company to purchase 69,500 shares in
the Directed Share Program in the Company's Offering. The Company agreed to
guarantee 100% of the aggregate principal amount, including unpaid accrued
interest, extended by the commercial bank under this commitment. The amount of
the Company's guarantee under this commitment is approximately $869.
The Company has entered into a purchase agreement to acquire an office building
in Des Moines, Iowa, to be used as its crop insurance division home office. The
purchase price was $2.6 million, of which $2.4 million was escrowed on February
1, 1997. The terms include a floating closing date whereby the transaction will
close on the earlier of February 1, 1998 or thirty days after the closing of the
Company's currently occupied home office building, also located in Des Moines.
The purchase of the new building is not contingent on the sale of the current
building.
19. Supplemental Cash Flow Information:
Cash paid for interest and income taxes are summarized as follows:
1996 1995 1994
Cash paid for interest $5,178 $ 553 $685
Cash paid for income taxes,
net of refunds 9,825 1,953 166
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 $3,000 plus cash of $1,166.
During 1996, the Company contributed the stock of PGIC and certain assets of the
Company totaling $17,186 to GGSH in exchange for a 52% ownership interest in
GGSH. In addition, Goldman Funds received a minority interest share of $18,425
in GGSH for its $21,200 contribution, resulting in a $2,775 increase to
additional paid-in capital from the sale of PGIC common stock and certain
assets.
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
20. 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 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 estimated fair value of the
mortgage loan was $2,360 at December 31, 1996.
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 Consolidated 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 1996, the rate on the Company's term debt approximated
8.38%, below the current rate of 8.41% for similar types of borrowing
arrangements. The estimated fair value of the term debt was $49,047 at
December 31, 1996. For short-term debt, the carrying value approximates
fair value.
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, 1996 and 1995, because
these are related party obligations and no comparable fair value
measurement is available.
21. Segment Information:
The Company has two business segments: Nonstandard automobile and Crop
insurance. The Nonstandard automobile segment offers personal nonstandard
automobile insurance coverages through a network of independent general
agencies. These products are sold by PGIC in seven states, Superior in eight
states, and IGF in three states. Effective in the first quarter of 1996, all
nonstandard automobile business will be retained in PGIC (see Note 13). The Crop
segment writes 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).
Identifiable assets by business segment are those assets in the Company's
operations in each segment. Corporate and other assets are principally cash,
short-term investments, related-party assets, intangible assets, and property
and equipment. Capital expenditures are reported exclusive of the Acquisition.
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
Segment information for 1994 through 1996 is as follows (certain information for
1995 and 1994 is not available by segment due to general use by all segments of
corporate assets):
Year Ended December 31,
1996 1995 1994
Revenue:
Nonstandard automobile $181,799 $36,363 $27,784
Crop 24,865 12,830 4,873
Corporate and other 99 3,447 2,183
-------- ------- -------
Total Revenue $206,763 $52,640 $34,840
======== ======= =======
Earnings (loss) before taxes
and minority interest:
Nonstandard automobile $ 7,434 $(1,989) $ 722
Crop 17,685 11,040 2,152
Corporate and other (1,416) (1,611) (1,539)
-------- ------- -------
Total earnings (loss) before
taxes and minority interest $ 23,703 $ 7,440 $ 1,385
======== ======= =======
Identifiable assets:
Nonstandard automobile $260,332
Crop 72,916
Corporate and other 6,550
--------
Total Identifiable assets: $339,798
========
Depreciation and amortization:
Nonstandard automobile $ 1,568
Crop 574
Corporate and other 52
--------
Total depreciation and
amortization $ 2,194
========
Capital expenditures:
Nonstandard automobile $ 2,058
Crop 1,676
Corporate and other 0
--------
Total capital expenditures $ 3,374
========
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
22. Stock Option Plans:
On November 1, 1996, the Company adopted the SIG 1996 Stock Option Plan (the
"SIG Stock Option Plan"). The SIG Stock Option Plan provides the Company
authority to grant nonqualified stock options and incentive stock options to
officers and key employees of the Company and its subsidiaries and nonqualified
stock options to nonemployee directors of the Company and Goran. A total of
1,000,000 shares of common stock have been reserved for issuance under the SIG
Stock Option Plan. On November 1, 1996, the Company issued 830,000 stock options
to the Company's nonemployee directors and certain Goran directors and certain
officers, and certain other key employees of the Company and Goran. The options
were granted at an exercise price equal to the Offering price of the Company's
common stock. The Company has granted (i) options to purchase 20,000 shares of
common stock to the nonemployee directors of the Company, (ii) options to
purchase 791,000 shares of common stock to officers and key employees of the
Company and the subsidiaries, (iii) options to purchase 6,000 shares of common
stock to certain nonemployee directors of Goran and (iv) options to purchase
13,000 shares of common stock to certain employees of Goran and its subsidiaries
who have provided valuable services or assistance for the benefit of the Company
and the subsidiaries. The options granted to the Company's Chairman (375,000
shares) vest and become exercisable in full on the first anniversary of the
grant date. All of the remaining outstanding stock options vest and become
exercisable in three equal installments on the first, second and third
anniversaries of the date of grant.
The Board of Directors of GGSH 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 GGSH'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 GGS Stock Option Plan. A total of 111,111
shares of common stock of GGSH have actually been reserved for issuance under
the GGS Stock Option Plan, which authorizes the granting of nonqualified and
incentive stock options to such officers and other key employees as may be
designated by the Board of Directors of GGSH. During 1996, 55,922 options have
been granted under the GGS Stock Option Plan. 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 GGSH shall determine, but in any event not
prior to the earlier of (i) an initial public offering of GGS Holdings, and (ii)
a GGSH Sale, as defined, 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% for the duration of the vesting period. 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 for the duration of the vesting period. 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 Goldman Funds.
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands)
At December 31, 1996, the Company applied APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its stock option plans in the accompanying Statement of
Earnings. Had compensation cost for the Company's stock option plan been
determined consistent with FASB Statement No. 123, the Company's net earnings
and earnings per share would have been reduced to the pro forma amounts
indicated below:
1996
------------------------------
As Reported Pro Forma
----------- ---------
Net earnings $13,256 $13,021
======= =======
Net earnings per share $ 1.76 $ 1.73
======= =======
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used: no dividend yield for all years; expected volatility of 40%
for the SIG Stock Option Plan and no percentage for the GGSH Stock Option Plan,
since the GGSH stock is privately held; risk-free interest rate of 6.0% to 6.50%
for the SIG Stock Option Plan and 6.4% for the GGSH Stock Option Plan; and an
expected life of two to four years for the SIG Stock Option Plan and five years
for the GGSH Stock Option Plan.
23. Quarterly Financial Information (unaudited):
Quarterly financial information is as follows:
Quarters
-------------------------------------
1996 First Second Third Fourth Total
------- -------- ------- ------- --------
Gross written premiums $41,422 $105,528 $71,813 $86,736 $305,499
Net earnings 1,586 2,718 4,589 4,363 13,256
Earnings per share 0.22 0.39 0.66 0.49 1.76
1995
Gross written premiums 28,272 67,487 16,978 11,897 124,634
Net earnings 1,066 940 1,464 1,351 4,821
Earnings per share 0.15 0.14 0.21 0.19 0.69
As is customary in the crop insurance industry, insurance company participants
in the FCIC program receive more precise financial results from the FCIC in the
fourth quarter based upon business written on spring-planted crops. On the basis
of FCIC-supplied financial results, IGF recorded, in the fourth quarter, an
additional underwriting gain, net of reinsurance, on its FCIC business of $5,572
during 1996 and $3,139 during 1995.
<PAGE>
FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report which are not historical facts,
including but not limited to, statements concerning (i) the impact of federal
and state laws and regulations on the Company's business and results of
operations, (ii) the competitive advantage afforded to the Company's crop
insurance operations by approaches adopted by management in the areas of
information, technology, claims handling and underwriting, (iii) the sufficiency
of the Company's cash flow to meet the operating expenses, debt service
obligations and capital needs of the Company and its subsidiaries, and (iv) the
impact of declining MPCI Buy-up Expense Reimbursements on the Company's results
of operations, are forward-looking statements. The company desires to take
advantage of the "safe harbor" afforded such statements under the Private
Securities Litigation Reform Act of 1995 when they are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those in the forward-looking statements. Such
cautionary statements which discuss certain risks associated with the Company's
business including the variability of the results of operations of the Company's
crop insurance business as a result of weather and natural perils, the highly
competitive nature of both the Company's crop insurance and nonstandard
automobile insurance business and the effects of state and federal regulation,
the capital intensive nature of the property and casualty business and potential
limitations on the ability of the Company to raise additional capital set forth
under the heading "Forward-Looking Statements -- Safe Harbor Provisions" in Item
1 - Business in the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1996.
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT RESPONSIBILITY
- --------------------------------------------------------------------------------
Management recognizes its responsibility for conducting the Company's affairs in
the best interests of all its shareholders. The consolidated financial
statements and related information in this Annual Report are the responsibility
of management. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which involve the use
of judgement and estimates in applying the accounting principles selected. Other
financial information in this Annual Report is consistent with that in the
consolidated financial statements.
The Company maintains systems of internal controls which are designed to provide
reasonable assurance that accounting records are reliable and to safe-guard the
Compnay's assets. The independent accounting firm of Coopers & Lybrand L.L.P.
has audited and reported on the Company's financial statements. Their opinion is
based upon audits conducted by them in accordance that the consolidated
financial statements are free of material misstatements.
The Audit Committee of the Board of Directors, the members of which include
outside directors, meets with the independent external auditors and management
representative to review the internal accounting controls, the consolidated
financial statements and other financial reporting matters. In addition to
having unrestricted access to the books and records of the Company, the
independent external auditors also have unrestricted access to the Audit
Committee. The Audit Committee reports its findings and makes recommendations to
the Board of Directors.
Alan G. Symons
Chief Executive Officer
/s/ Gary P. Hutchraft
Gary P. Hutchraft
Vice Presidnet and Chief Financial Officer
March 21, 1997
<PAGE>
Board of directors and Stockholders 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, 1996 and 1995, and
the related consolidated statements of earnings, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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, 1996 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, 1996 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand
Indianapolis, Indiana
March 21, 1997
<PAGE>
STOCKHOLDER INFORMATION
Corporate Offices
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
(317) 259-6300
Registrar and Transfer Agent
National City Bank
4100 West 150th Street
3rd Floor
Cleveland, Ohio 44135-1385
Independent Public Accountants
Coopers & Lybrand L.L.P.
Indianapolis, Indiana
Annual Meeting of Stockholders
Tuesday, May 20, 1997
10:00 a.m.
Corporate Offices
Annual Report on Form 10-K
A copy of the Annual Report on Form 10-K for Symons International Group, Inc.
for the year ended December 31, 1996, filed with the Securities and Exchange
Commission, may be obtained, without charge, upon request to the individual and
address noted under Shareholder Inquiries.
Market and Dividend Information
Symons International Group, Inc. effected its initial public offering on
November 5, 1996. Symons International Group, Inc.'s common stock trades on the
NASDAQ Stock Market's National Market under the symbol SIGC. The initial
offering price of its shares of Common Stock was $12.50 per share. The high and
low trading prices of the Common Stock for the period from November 5, 1996
through December 31, 1996 were $16.75 and $12.50, respectively.
Trading Period High Low
- -------------- ---- ---
11/5/96-12/31/96 $16.75 $12.50
As of March 20, 1997, the Company had approximately 120 stockholders based on
the number of holders of record and an estimate of the number of individual
participants represented by securities position listings.
Symons International Group, Inc. did not declare or pay cash dividends on its
common stock during the year ended December 31, 1996. The Company does not plan
to pay cash dividends on its common stock in order to retain earnings to support
the growth of its business.
Shareholder Inquiries
Inquiries should be directed to:
Alan G. Symons
Chief Executive Officer
Symons International Group, Inc.
Tel: (317) 259-6402
<PAGE>
Board of Directors
G. Gordon Symons
Chairman of the Board
Symons International Group, Inc.
Goran Capital Inc.
Alan G. Symons
Chief Executive Officer, Symons International Group, Inc.
President and Chief Executive Officer, Goran Capital Inc.
Douglas H. Symons
President and Chief Operating Officer, Symons International Group, Inc.
Vice President and Chief Operating Officer, Goran Capital Inc.
John K. McKeating
Retired former President and Owner of Vision 2120 Optometric Clinics
Robert C. Whiting
President, Prime Advisors, Ltd
James G. Torrance, Q.C.
Partner Emeritus, Smith, Lyons
Barristers & Solicitors
David R. Doyle
Vice President and Chief
Fnancial Officer
Avantec, Inc.
<PAGE>
Executive Officers
G. Gordon Symons
Chairman of the Board
Symons International Group, Inc.
Alan G. Symons
Chief Executive Officer
Symons International Group, Inc.
Douglas H. Symons
President and Chief Operating Officer
Symons International Group, Inc.
Gary P. Hutchcraft
Vice President, Chief Financial Officer and Treasurer
Symons International Group, Inc.
David L. Bates
Vice President, General Counsel and Secretary
Symons International Group, Inc.
Dennis G. Daggett
President and Chief Operating Officer
IGF Insurance Company
Thomas F. Gowdy
Executive Vice President
IGF Insurance Company
Roger C. Sullivan Jr.
Executive Vice President
Superior Insurance Company
Donald J. Goodenow
Executive Vice President
Pafco General Insurance Company
<PAGE>
COMPANY, SUBSIDIARIES AND BRANCH OFFICES
CORPORATE OFFICE IGF South
Symons International Group, Inc. 101 Business Park Drive
4720 Kingsway Drive Jackson, Mississippi 39213
Indianapolis, Indiana 46205 Tel: 601 957-9780
Tel: 317 259-6300 Fax: 601 957-9793
Fax: 317 259-6395
IGF East
SUBSIDIARIES AND BRANCHES 4720 Kingsway Drive
Pafco General Insurance Company Indianapolis, Indiana 46205
4720 Kingsway Drive Tel: 317 259-6300
Indianapolis, Indiana 46205 Fax: 317 259-6395
Tel: 317 259-6300
Fax: 317 259-6395 IGF West
407 Campus Drive
Superior Insurance Company Garden City, Kansas 67846
280 Interstate North Circle, N.W. Tel: 316 276-4111
Atlanta, Georgia 30339 Fax: 316 275-6453
Tel: 770 952-4885
Fax: 770 952-6616 IGF North
208 S. Main
Superior Insurance Company Stanley, North Dakota 58784
3030 N. Rocky Point Drive Tel: 701 628-3536
Suite 770 Fax: 701 628-3537
Tampa, Florida 33607
Tel: 813 281-2444 IGF California
Fax: 831 281-8036 1750 Bullard Avenue
Suite 106
Superior Insurance Company Fresno, California 93710
1745 West Orangewood Road Tel: 209 432-0196
Orange, California 92868 Fax: 209 432-0294
Tel: 714 978-6811
Fax: 714 978-0353
IGF Insurance Company
Corporate Office
2882 106th Street
Des Moines, Iowa 50322
Tel: 515 276-2766
Fax: 515 276-8305
<PAGE>
SIG Logo
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana
46205
Tel: 317-259-6300
Fax: 317-259-6395
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001013698
<NAME> SYMONS INTERNATIONAL GROUP, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.000
<DEBT-HELD-FOR-SALE> 127,631
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 27,920
<MORTGAGE> 2,430
<REAL-ESTATE> 466
<TOTAL-INVEST> 168,137
<CASH> 13,095
<RECOVER-REINSURE> 48,294
<DEFERRED-ACQUISITION> 12,800
<TOTAL-ASSETS> 344,679
<POLICY-LOSSES> 101,719
<UNEARNED-PREMIUMS> 87,285
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 48,000
<COMMON> 0
0
38,969
<OTHER-SE> 21,931
<TOTAL-LIABILITY-AND-EQUITY> 344,679
191,759
<INVESTMENT-INCOME> 6,733
<INVESTMENT-GAINS> (1,015)
<OTHER-INCOME> 9,286
<BENEFITS> 206,763
<UNDERWRITING-AMORTIZATION> (2,496)
<UNDERWRITING-OTHER> 44,509
<INCOME-PRETAX> 27,703
<INCOME-TAX> 8,046
<INCOME-CONTINUING> 15,657
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,256
<EPS-PRIMARY> 1.76
<EPS-DILUTED> 0
<RESERVE-OPEN> 59,421
<PROVISION-CURRENT> 138,618
<PROVISION-PRIOR> (1,509)
<PAYMENTS-CURRENT> 102,713
<PAYMENTS-PRIOR> 28,182
<RESERVE-CLOSE> 101,719
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
SYMONS INTERNATIONAL GROUP, INC.
4720 KINGSWAY DRIVE
INDIANAPOLIS, INDIANA 46205
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held On Tuesday, May 20, 1997
NOTICE IS HEREBY GIVEN that the Annual Meeting of
Shareholders of Symons International Group, Inc. ("Company") will
be held at the Company's offices, 4720 Kingsway Drive,
Indianapolis, Indiana on Tuesday, May 20, 1997, at 10:00 a.m.,
Indianapolis time.
The Annual Meeting will be held for the following purposes:
1. Election of Directors. Election of 3 Directors for
terms to expire in 2000.
2. Ratification of Auditors. Ratification of the
appointment of Coopers & Lybrand L.L.P. as auditors for the
Company for the year ending December 31, 1997.
3. Other Business. Such other matters as may properly
come before the meeting or any adjournment thereof.
Shareholders of record as of the close of business on March
21, 1997 are entitled to vote at the meeting or any adjournment
thereof.
Please read the enclosed Proxy Statement carefully so that
you may be informed about the business to come before the
meeting, or any adjournment thereof. At your earliest
convenience, please sign and return the accompanying Proxy in the
postage-paid envelope furnished for that purpose.
A copy of the Company's Annual Report for the year ended
December 31, 1996 is enclosed. The Annual Report is not a part
of the Proxy soliciting material enclosed with this letter.
FOR THE BOARD OF DIRECTORS
G. Gordon Symons
Chairman
Indianapolis, Indiana
March 27, 1997
IT IS IMPORTANT THAT THE PROXIES BE RETURNED PROMPTLY.
THEREFORE, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE
ANNUAL MEETING, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY
AND RETURN IT IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE
IF MAILED IN THE UNITED STATES.<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
4720 Kingsway Drive, Indianapolis, Indiana 46205
PROXY STATEMENT
The accompanying Proxy is solicited by the Board of
Directors of Symons International Group, Inc. (the "Company") for
use at the Annual Meeting of Shareholders to be held May 20, 1997
and any adjournments thereof. When the Proxy is properly
executed and returned, the shares it represents will be voted at
the meeting in accordance with any directions noted on that
Proxy. If no direction is indicated, the Proxy will be voted in
favor of the proposals set forth in the Notice attached to this
Proxy Statement.
The election of Directors will be determined by a plurality
of the shares present in person or represented by Proxy.
Abstentions, broker non-votes and instructions on the
accompanying Proxy Card to withhold authority to vote for one or
more nominees might result in some nominees receiving fewer
votes. However, the number of votes otherwise received by the
nominee will not be reduced by such action. The holder of each
outstanding share of common stock is entitled to vote for as many
persons as there are Directors to be elected. All other matters
to come before the meeting will be approved if the votes cast in
favor exceed the votes cast against. Any abstention or broker
non-vote on any such matter will not change the number of votes
cast for or against the matter, however, such abstaining shares
will be counted in determining whether a quorum is present
pursuant to the applicable provisions of the Indiana Business
Corporation Law.
The Board of Directors knows of no matters, other than those
reported herein, which are to be brought before the meeting.
However, if other matters properly come before the meeting, it is
the intention of the persons named in the enclosed Form of Proxy
to vote such Proxy in accordance with their judgment on such
matters. Any shareholder giving a Proxy has the power to revoke
it at any time before it is voted by a written notice delivered
to the Secretary of the Company or in person at the meeting. The
approximate date of mailing of this Proxy Statement is April 10,
1997.
<PAGE>
VOTING SECURITIES AND BENEFICIAL OWNERS
Only shareholders of record as of the close of business on
March 21, 1997 will be entitled to vote at the Annual Meeting.
On the Record Date, there were 10,450,000 shares of Common Stock
outstanding, the only class of the Company's stock which is
currently outstanding.
The following table shows, as of March 14, 1997 the number
and percentage of shares of Common Stock held by each person
known to the Company who owned beneficially more than 5% of the
issued and outstanding Common Stock of the Company and Goran by
the Company's Directors and Named Executive Officers:
Symons International Goran
Group, Inc. Capital Inc.
Name of Amount and Percent Amount and Percent
Beneficial Nature of of Class Nature of of Class
Owner Beneficial Beneficial
Owernship Ownership
G. Gordon
Symons1 385,000 3.4% 2,817,080 46.0%
Alan G.
Symons2 227,500 2.0% 541,557 8.9%
Douglas H.
Symons3 140,500 1.2% 299,368 4.9%
Robert C.
Whiting4 10,000 * 35,900 *
James G.
Torrance5 7,000 * 4,000 *
David R.
Doyle6 10,000 * - - - - - -
John K.
McKeating7 7,000 * 2,000 *
Jerome B.
Gordon8 - - - - - - 3,420 *
Goran Capital
Inc. 7,000,000 62.1% - - - - - -
FMR Corp./
Fidelity
Canadian
Growth
Company Fund - - - - - - 344,600 5.6%
Symons
International
Group Ltd.9 - - - - - - 1,646,413 26.9%
David L.
Bates10 15,000 * 4,866 *
Gary P.
Hutchcraft11 12,500 * 1,450 *
All Executive
Officers
and Directors
as a
Group (9
Persons) 814,500 7.2% 3,709,641 60.1%
*Less than 1% of class
1With respect to Symons International Group, Inc., 10,000 shares
are owned directly and 375,000 are subject to option.
With respect to the shares of Goran Capital Inc., 890,167 shares
are held by trusts of which Mr. Symons is the beneficiary,
280,500 are subject to option and 1,646,413 of the shares
indicated are owned by Symons International Group Ltd., of which
Mr. Symons is the controlling shareholder.
2 With respect to Symons International Group, Inc., 27,500 shares
are owned directly and 200,000 shares are subject to option.
With respect to the shares of Goran Capital Inc., 449,183 are
owned directly and 92,374 are subject to option.
3 With respect to Symons International Group, Inc., 20,500 shares
are owned directly and 120,000 shares are subject to option.
With respect to the shares of Goran Capital Inc., 197,483 are
owned directly and 101,885 are subject to option.
4 Mr. Whiting owns 5,000 shares of Symons International Group,
Inc. directly and 5,000 shares are subject to option.
With respect to Goran Capital Inc., all shares indicated are
owned directly.
5 Mr. Torrance owns 2,000 shares of Symons International Group,
Inc. directly and 5,000 shares are subject to option.
With respect to Goran Capital Inc., 2,000 shares are owned
directly and 2,000 shares are subject to option.
6 Mr. Doyle owns 5,000 shares of Symons International Group, Inc.
directly and 5,000 shares are subject to option.
With respect to Goran Capital Inc., all shares indicated are
owned directly.
7 Mr. McKeating owns 2,000 shares of Symons International Group,
Inc. directly and 5,000 shares are subject to option.
With respect to Goran Capital Inc., 2,000 shares are subject to
option.
8 Mr. Gordon's shares of Goran Capital Inc. are owned directly.
9 Mr. G. Gordon Symons is the controlling shareholder of Symons
International Group Ltd., a private company.
<PAGE>
10 Mr. Bates owns 5,000 shares of Symons International Group,
Inc. directly and 10,000 shares are subject to option.
With respect to Goran Capital Inc., 997 are held in Mr. Bates'
401(k) account pursuant to the Symons International Group, Inc.
Retirement Savings Plan and 3,869 shares are subject to option.
11 Mr. Hutchcraft owns 2,500 shares of Symons International
Group, Inc. directly and 10,000 shares are subject to
option. Mr. Hutchcraft also owns 450 shares of Goran Capital
Inc. directly and 1,000 shares are subject to option.
SECTION 16(a) REPORTING
Section 16(a) of the Securities Exchange Act of 1934
requires the Company's Officers and Directors, as well as persons
who own more than 10% of the outstanding common shares of the
Company, to file reports of ownership with the Securities and
Exchange Commission. Officers, Directors and greater than 10%
shareholders are required to furnish the Company with copies of
all Section 16(a) forms they file. Based solely on its review of
copies of such forms received by it, or written representations
from certain reporting persons that no reports were required for
those persons, the Company believes that during 1996, all
filing requirements applicable to its Officers, Directors and
greater than 10% shareholders were met and, with the exception of
an approximate two week delay in filing Form 3s (Statement of
Initial Ownership), all required filings were made on a timely
basis.
PROPOSALS
Proposal No. 1: Election Of Directors
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.
With the exception of Jerome B. Gordon, all other current
Directors of the Company were elected by Goran Capital Inc.
("Goran") as the sole shareholder of the Company prior to the
Initial Public Offering ("IPO") of the Company which occurred on
November 5, 1996. On March 19, 1997, Mr. Jerome B. Gordon was
elected by the Board to fill a vacancy created when the Board
amended the Company's Bylaws to increase the number of Directors
from seven to eight.
<PAGE>
Present
Principal Director Term to
Name Age Occupation Since Expire
G. Gordon Symons 75 Chairman of the 1987 1999
Board of the
Company and
Goran Capital
Inc.
James G. Torrance, 68 Partner Emeritus, 1996 1998
Q.C. Smith, Lyons
Alan G. Symons 50 CEO of the 1995 1997
Company and
President and
CEO of Symons
International
Group, Inc.
John K. McKeating 61 Owner, Vision 1996 1999
2120
Robert C. Whiting 64 President, Prime 1996 1997
Advisors Ltd.
Douglas H. Symons 44 President and COO 1987 1998
of the Company
and COO of Goran
Capital Inc.
David R. Doyle 50 Vice President, 1996 1999
Finance and
Administration,
Avantec, Inc.
Jerome B. Gordon 58 President, Lutine 1997 1997
Corporation
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 Capital Inc. the 67% Shareholder of the
Company ("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 of Goran 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. Mr. Symons is the father of Alan G.
Symons and Douglas H. Symons.
<PAGE>
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. 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 and as it Chief
Operating Officer since July, 1996. Mr. Symons served as Chief
Executive Officer of the Company from 1989 until July, 1996. 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 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 2120 Optometric Clinics ("Vision 2120") for 36 years.
Vision 20/20, located in Montreal, Quebec, is a chain of Canadian
full-service retail clinics offering all aspects of professional
eye care.
Mr. Whiting has served as a Director of the Company since
1996. 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 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 was re-elected as a
Director of Goran in 1995 after having left the Board of
Directors of Goran in 1991. He 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 and 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 and 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. Gordon. Managing Director of Lutine Corporation,
Fairfield, Connecticut since June, 1995. Mr. Gordon has served
as a financial advisor to the Company and its parent, Goran
Capital Inc., on various financing and acquisition projects since
1987. From 1989 to June 1995, Mr. Gordon was managing director
of Schwartz, Gordon & Heslin. Prior to that time, Mr. Gordon
served as a Vice President of Nesbitt, Burns Securities, Inc., a
wholly owned subsidiary of the Bank of Montreal. Mr. Gordon has
held various other positions with finance and investment banking
concerns and served a 2 year term as a Special Assistant to the
Commissioner of Insurance for the State of New Jersey.
Consistent with the provisions of IND. CODE Section 23-1-39-1, the
Company's Board of Directors at its meeting on March 19, 1997
amended the Bylaws of the Company to provide that the Company's
Board of Directors shall consist of eight (8) persons. Unless
otherwise directed, each proxy executed and returned by a
shareholder will be voted for the election of the nominees listed
below. If any person named as a nominee shall be unable or
unwilling to stand for election at the time of the Annual
Meeting, the proxy holders will nominate and vote for a
replacement nominee recommended by the Board. At this time, the
Board knows of no reason why the nominees listed below may not be
able to serve as Directors if elected.
The Board of Directors unanimously recommends the election
of the following nominees for a three (3) year term to expire in
the year 2000:
Present
Principal Director
Name Age Occupation Since
Alan G. Symons 50 CEO of the Company 1995
Robert C. Whiting 64 President, Prime 1996
Advisors, Ltd.
Jerome B. Gordon 58 President, Lutine 1997
Corporation
<PAGE>
Meetings And Committees Of The Board
During the year ended December 31, 1996, the Board of
Directors of the Company met six (6) times, including
teleconferences, in addition to taking a number of actions by
unanimous written consent. During 1996, no incumbent Director of
the Company attended fewer than 75% of the Board meetings and
Committee meetings of the Board on which such Directors served.
The Board of Directors of the Company has an Audit
Committee, a Compensation Committee and an Executive Committee.
The Company's Audit Committee is responsible for
recommending the appointment of the Company's independent
auditors, meeting with the independent auditors to outline the
scope, and review the results of, the annual audit and reviewing
with the auditor the systems of internal control and audit
reports. The current members of this Committee are Messrs.
Torrance, McKeating and Alan G. Symons.
During 1996, the Compensation Committee of the Company's
Board of Directors was comprised of Messrs. Torrance, Doyle and
Douglas H. Symons. At its meeting on March 19, 1997, the Board
reconstituted the Compensation Committee to consist of Messrs.
Douglas H. Symons, Doyle, Whiting and Gordon. The Committee
makes recommendations concerning executive compensation and
benefit levels to the Board of Directors and has the authority to
approve all specific transactions pursuant to the Symons
International Group, Inc. 1996 Stock Option Plan (the "Plan").
The Executive Committee is comprised of Messrs. G. Gordon
Symons, Alan G. Symons and Douglas H. Symons. The Executive
Committee is empowered by the board to take action on behalf
of the board when the need arises.
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 its 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 receives a meeting fee of $1,000 for each
Board meeting or Board Committee meeting attended.
Compensation Committee Report
During 1996, the Compensation Committee met one (1) time
during 1996 wherein it reviewed and recommended approval of the
Symons International Group, Inc. Stock Option Plan. At that same
meeting, the Committee recommended (and the Board of Directors of
the Company subsequently awarded) stock options pursuant to the
Plan to certain directors, executive officers and other key
employees of the Company and its subsidiaries. The objectives of
the Plan are to align executive and shareholder long-term
interests by creating a strong and direct link between executive
compensation and shareholder return and to enable executive
officers and other key employees to develop and maintain a
long-term ownership position in the Company's common stock. A
total of 1 million shares of the Company's common stock have been
reserved for issuance under the Plan, of which Options for
830,000 shares were granted by the Board to Directors, executive
officers and other key employees on October 21, 1996. The grants
to senior executives of the Company and its subsidiaries were as
follows:
Name Options
G. Gordon Symons 375,000
Alan G. Symons 200,000
Douglas H. Symons 120,000
Dennis G. Daggett
(President of IGF Insurance Company) 20,000
Thomas F. Gowdy
(Executive Vice President of IGF Insurance
Company) 20,000
Robert C. Sullivan
(Executive Vice President of Superior Insurance
Company) 10,000
David L. Bates 10,000
Gary P. Hutchcraft 10,000
Donald J. Goodenow
(Executive Vice President of Pafco General 10,000
Insurance Company)
The Company's total compensation program for Officers
includes base salaries, bonuses and the grant of stock options
pursuant to the Plan. The Company's primary objective is to
achieve above-average performance by providing the opportunity to
earn above-average total compensation (base salary, bonus and
value derived from stock options) for above-average performance.
Each element of total compensation is designed to work in
concert. The total program is designed to attract, motivate,
reward and retain the management talent required to serve
shareholder, customer and employee interests. The Company
believes that this program also motivates the Company's
officers to acquire and retain appropriate levels of stock
ownership. It is the opinion of the Compensation Committee that
the total compensation earned by Company officers during 1996
achieves these objectives and is fair and reasonable. At its
meeting on March 19, 1997, the Board of Directors of the Company
voted to retain an independent compensation consultant to review
the Company's executive compensation plan and to make
recommendations concerning the compensation levels and type
necessary to achieve the Company's stated objectives.
Consistent with that, certain of the Company's Officers have
entered into employment contracts with the Company or one of its
subsidiaries.
Alan G. Symons, Chief Executive Officer of the Company and
Douglas H. Symons, President and Chief Operating Officer of the
Company, have entered into employment agreements with GGS
Management Holdings, Inc. ("GGSH"), a 52% owned subsidiary of the
Company, with such agreements calling for a base salary of not
less than $200,000 per year for Alan G. Symons and $150,000 for
Douglas H. Symons. These agreements became effective on April
30, 1996 and continue in effect for an initial period of five (5)
years. Upon the expiration of the initial five (5) year period,
the term of each agreement is automatically extended from year to
year thereafter and are cancelable (after the expiration of the
initial five (5) year term) upon six (6) months' notice.
These two agreements contain customary restrictive covenants
respecting confidentiality and non-competition which, among other
things, prevent the executives from competing with GGSH in
various capacities both during the term of their employment and
for a period of two (2) years after the termination of the
agreement. In addition to annual salary, the agreements with
Alan G. Symons and Douglas H. Symons stipulate that Alan G.
Symons may earn a bonus in an amount ranging from 25% to 100% of
base salary and that Douglas H. Symons may earn a bonus in an
amount ranging from 25% to 50% of base salary. Based upon the
performance of the Company's business units in exceeding budgeted
operating income, both Alan G. Symons and Douglas H. Symons
received the maximum bonus permitted by their employment
agreement of $133,333 and $50,000, respectively. At the
discretion of the Board, bonus awards may be greater than the
amounts indicated if agreed upon financial targets are exceeded.
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. Pursuant to the term of
this 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.
In 1993, Congress enacted Section 162(m) of the Internal
Revenue Code that disallows corporate deductibility for
"compensation" paid in excess of $1 Million, unless such
compensation is payable solely on account of achievement of an
objective performance goal. The Compensation Committee does not
anticipate that the compensation paid to any executive officer in
the form of base salaries, bonus and stock options will exceed $1
Million in the near future. However, as part of its on-going
responsibilities with respect to executive compensation, the
Compensation Committee will monitor this issue to determine what
actions, if any, should be taken as a result of the limitation on
deductibility.
<PAGE>
Compensation Committee Interlocks And Insider Participation
The Company's Compensation Committee consists of Messrs.
Whiting, Gordon, Doyle and Douglas H. Symons. Neither Messrs.
Whiting or Gordon, nor Mr. Doyle, have any interlocks
reportable under Item 402(j)(3) and (4) of Regulation S-K.
Douglas H. Symons has served as a Director and Executive Officer
of the Company since its formation in 1987 and as a Director and
Chief Operating Officer of Goran since 1989. Douglas H. Symons
is also an Executive Officer of each of the Company's
subsidiaries. Since Alan G. Symons, the Chief Executive Officer
of the Company, is a Director of each of the Company's
subsidiaries and is empowered to determine the compensation of
the managers of the Company's subsidiaries, Douglas and Alan
Symons have reportable interests under Item 402(j)(3) (i)-(iii)
of Regulation S-K.
Remuneration Of Executive Officers
The following table sets forth the compensation awarded to,
earned by or paid to the Chief Executive Officer and the four
most highly compensated executive officers of the Company other
than the Chief Executive Officer (collectively, the "Named
Executive Officers") during the last two (2) years.
<PAGE>
SUMMARY COMPENSATION TABLE
Securities All
Name and Underlying Other
Principal Position Year Salary Bonus Options Compensation
G. Gordon Symons, 1996 $ 0 $ 0 375,000 $ 27,999(3)
Chairman 1995 $ 0 $ 0 - - - - $ 26,000
Alan G. Symons, 1996 $142,786 $133,333 200,000
Chief Executive 1995 $ 50,000 $ 0 - - - -
Officer
Douglas H. Symons, 1996 $195,973 $ 50,000 120,000
President and Chief 1995 $149,982 $100,000 - - - -
Operating Officer
Gary P. Hutchcraft, 1996(1) $ 55,415 $ 28,000 10,000
Vice President, 1995 $ 0 $ 0 - - - -
Chief Financial
Officer and
Treasurer
David L. Bates, 1996 $ 95,162 $97,076 10,000
Vice President, 1995(2) $ 62,237 $ 0 - - - -
General Counsel
and Secretary
1Mr. Hutchcraft joined the Company on July 1, 1996.
2Mr. Bates joined the Company on April 1, 1995.
3Consulting fees paid to companies owned by Mr. G. Gordon Symons.
STOCK OPTION GRANTS
The following table provides details regarding stock options
granted to the Company's Executive Officers in 1996. In addition
there are shown the hypothetical gains or "option spreads" that
would exist for the respective options. These gains are based on
assumed rates of annual compound stock price appreciation of 5%
and 10% from the date the options were granted over the full
option term. These amounts represent certain assumed rates of
appreciation only. Actual gains,if any, on stock option
exercises and common stock holdings are dependent on the future
performance of the Company's common stock and the overall stock
market conditions. There can be no assurance that the amounts
reflected on this table will be achieved.
<PAGE>
Percentage
of Total
Options Exercise Potential Realized
Granted To Price At Assumed Annual
Options Employees Per Expiration Rates of Stock
Name Granted During 1996 share Date Appreciation for
Option Term
5% 10%
G. Gordon
Symons 375,000 45.18 $12.50 11-1-2007 $2,947,500 $7,470,000
Alan G.
Symons 200,000 24.10 $12.50 11-1-2007 $1,572,000 $3,484,000
Douglas
H. Symons 120,000 14.46 $12.50 11-1-2007 $ 943,200 $2,390,400
Gary P.
Hutchcraft 10,000 1.2 $12.50 11-1-2007 $ 78,600 $ 199,200
David L.
Bates 10,000 1.2 $12.50 11-1-2007 $ 78,600 $ 199,200
The options in the immediately preceeding table were issued
at the IPO price for the Company's stock. The options granted to
Mr. G. Gordon Symons vest one (1) year from the date of grant.
All other options to purchase the Company's stock vest ratably
over three (3) years and all options expire ten (10) years from
date of grant.
OPTION EXERCISES AND YEAR-END VALUES
The following table shows stock options held by the
Company's Named Executive Officers during 1996. In addition,
this table includes the number of shares covered by both
exercisable and non-exercisable stock options. As of December
31, 1996, none of the options granted pursuant to the Plan were
exercisable. Also reported are the value of unexercised
in-the-money options as of December 31, 1996.
<PAGE>
1996 STOCK OPTIONS
OUTSTANDING GRANTS AND VALUE AS OF DECEMBER 31, 1996
Value Number of Value of
Shares Realized Shares Underlying Unexercised In-The-
Acquired At Unexercised Options Money Options at
on Exercise at 12-31-96 12-31-96
Name Exercise Date
Exer- Unexer- Exer- Unexer-
cisable(1) cisable(2) cisable cisable(3)
G. Gordon
Symons 0 $0.00 0 375,000 $0.00 $1,593,750
Alan G.
Symons 0 $0.00 0 200,000 $0.00 $ 850,000
Douglas H.
Symons 0 $0.00 0 120,000 $0.00 $ 510,000
Gary P.
Hutchcraft 0 $0.00 0 10,000 $0.00 $ 42,500
David L.
Bates 0 $0.00 0 10,000 $0.00 $ 42,500
1None of the Options granted to date by the Company are yet exercisable.
2The shares represented could not be acquired by the respective executive as of
December 31, 1996.
3Amount reflecting gains on outstanding options are based on the December 31,
1996 closing NASDAQ stock price which was $16.75 per share.
INDEBTEDNESS OF MANAGEMENT
The following Directors and Executive Officers of the
Company were indebted to the Company, or its parent or
subsidiaries, in amounts exceeding $60,000 during 1996.
Date of Largest Loan Balance Present
Name Loan During 1996 Balance
G. Gordon
Symons June 27, 1986 $148,000 $148,000
June 30, 1986 $200,000 $200,000
May 31, 1988 $ 52,729 (US) $ 52,729 (US)
Alan G.
Symons June 30, 1986 $ 48,172 $ 29,772
February 25,1988 $ 27,309 (US) $ 27,309 (US)
Douglas H.
Symons June 30, 1986 $ 15,000 $ 15,000
February 25, 1988 $ 2,219 (US) $ 2,219 (US)
<PAGE>
The foregoing loans to Messrs. G. Gordon Symons, Alan G.
Symons and Douglas H. Symons are on account of loans to
purchase common stock of Goran. Such 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 and is payable
on demand and is interest-free. Douglas H. Symons has a demand
loan payable to the Company in the amount of $39,377 plus
accrued interest of $21,169 collateralized by a second mortgage
on his personal residence. Interest on this loan is prime plus 1%. In
addition, the Company held 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 and
when paid off in full during February of 1997, had a principal
balance of $277,502.
David L. Bates received a $100,000 relocation loan to
facilitate his move to the Company's Indianapolis headquarters.
This loan was repaid upon the closing of the sale of his former
residence in February, 1996.
Coincident with the closing of the Company's IPO, the
Company retired an outstanding debt owing to Goran and its
affiliates in the approximate amount of $7.5 Million. The
Company incurred this debt in 1992 and, prior to its retirement,
carried an interest rate of 10%.
PROPOSAL #2 - RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors proposes the ratification by the
Shareholders at the Annual Meeting of the appointment of the
accounting firm of Coopers & Lybrand L.L.P. ("Coopers") as
independent auditors for the Company's year ending December 31,
1997. Coopers has served as auditors for the Company for the
year 1996 and worked with the Company in effecting its Initial
Public Offering. A representative of Coopers is expected to be
present at the Annual Meeting with the opportunity to make a
statement if he or she so desires. This individual will also be
available to respond to any appropriate questions the
shareholders may have.
RATIFICATION OF THE APPOINTMENT OF AUDITORS REQUIRES THAT
THE VOTES CAST (IN PERSON OR BY PROXY) AT THE ANNUAL MEETING OR
AT ANY ADJOURNMENT THEREOF IN FAVOR OF RATIFICATION EXCEED THOSE
CAST AGAINST.
CERTAIN RELATIONSHIPS/RELATED TRANSACTIONS
Simultaneously with the acquisition of Superior Insurance
Company, Goran, the Company, GGS Management Holdings, Inc.
("GGSH") and certain investment funds affiliated with Goldman
Sachs & Co. ("GS Funds") entered into an agreement to capitalize
GGSH and cause GGSH to issue its capital stock to the Company and
to the GS Funds. This transaction gave the Company a 52%
ownership interest in GGSH and the GS Funds a 48% interest in
GGSH. Pursuant to this transaction, the Company contributed to
GGSH all of the common stock of Pafco General Insurance Company
("Pafco"), the Company's right to acquire Superior Insurance
Company and certain fixed assets with an approximately value of
$350,000. The GS Funds contributed $21.2 Million in cash.
Prior to the transfer of the stock of Pafco to GGSH, Pafco
transferred all of the outstanding capital stock of IGF Insurance
Company ("IGF") to the Company in order to improve the risk-based
capital rating of Pafco and to permit GGSH to focus exclusively
on the nonstandard auotmobile insurance business. Pafco
accomplished this 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. The stock
of IGF Holdings was then distributed to the Company.
Prior to the transfer of the stock of IGF Holdings to the
Company, Pafco received a dividend from IGF Holdings in cash and
a note from IGF having an aggregate value of approximately $11
Million.
Jerome B. Gordon, a nominee to the Board of Directors of the
Company, received fees in the amount of $177,994 (including
reimbursement of expenses) for his consulting service to the
Company during 1996 as well as 4,000 shares of Goran stock worth
approximately $80,000 at the time of receipt.
Two (2) of the Company's subsidiaries, IGF and Pafco, have
entered into reinsurance agreements with Granite Reinsurance
Company Ltd., ("Granite Re"), an affiliate of Goran.
Granite Re reinsures all Pafco insurance policies which were
previously issued through Symons International Group, Inc. -
Florida, ("SIGF"), a former subsidiary of the Company and now
a subsidiary of Goran. This agreement is in respect of business
other than nonstandard automobile insurance. Granite Re
reinsures 100% of this SIGF business on a quota share basis.
Also, IGF reinsures a portion of its crop insurance with
Granite Re and for 1996, Granite Re reinsured 15% of IGF's
multi-peril crop insurance stop loss protection ("MPCI")
underwriting losses to the extent that aggregate losses of its
insureds nationwide exceed 100% of MPCI Retention up to 125% of
MPCI Retention and 95% of IGF's MPCI underwriting losses to the
extent that aggregate losses of its insureds nationwide exceed
125% of MPCI Retention up to 150% of MPCI Retention. Further,
for 1996, Granite Re had a 5% participation in 95% of IGF's
crop-hail losses in excess of an 80% pure loss ratio up to a 100%
pure loss ratio and a 10% participation in 95% of IGF crop-hail
losses in excess of 100% pure loss ratio up to a 120% pure loss
ratio.
SHAREHOLDER PROPOSALS AND NOMINATIONS
Any shareholder of the Company wishing to have a proposal
considered for inclusion in the Company's 1998 proxy solicitation
materials must set forth such proposal in writing and file it
with the Secretary of the Company on or before December 11, 1997.
In order to be considered in the 1998 Annual Meeting, shareholder
proposals not included in the Company 1998 Proxy Solicitation
materials, as well as shareholder nominations for Directors, must
be submitted in writing to the Secretary of the Company at least
sixty (60) days before the date of the 1998 Annual Meeting, or,
if the 1998 Annual Meeting is held prior to March 31, 1998,
within ten (10) days after notice of the Annual Meeting as mailed
to shareholders. The Board of Directors of the Company will
review any shareholder proposals that are filed as required, and
will determine whether such proposals meet applicable criteria
for inclusion in its 1998 Proxy Solicitation materials or
consideration at the 1998 Annual Meeting.
OTHER MATTERS
Management is not aware of any business to come before the
Annual Meeting other than those matters described in the Proxy
Statement. However, if any other matters should properly come
before the Annual Meeting, it is intended that the proxies
solicited hereby will be voted with respect to those matters in
accordance with the judgment of the persons voting the proxies.
The cost of solicitation of proxies will be borne by the Company.
The Company will reimburse brokerage firms and other custodians,
nominees and fiduciaries for reasonable expenses incurred by them
in sending proxy material to the beneficial owners of common
stock of the Company. In addition to solicitation by mail,
Directors, Officers and employees of the Company may solicit
proxies personally or by telephone without additional
compensation.
Each Shareholder is urged to complete, date and sign the
proxy and return it promptly in the enclosed return envelope.
Insofar as any of the information in this Proxy Statement may
rest peculiarly within the knowledge of persons other than the
Company, the Company relies upon information furnished by others
for the accuracy and completeness thereof.
Signed by Order of the Board
of Directors
/s Alan G. Symons
Alan G. Symons
Chief Executive Officer
<PAGE>
[Graph Comparison of 2 month cumulative total return among
Symons International Group, Inc., the S & P 500 Index and the
S & P Insurance (Property-Casualty) Index]
