UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1997
Commission File Number: 1-12369
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
incorporation or organization) Identification No.)
4720 Kingsway Drive
Indianapolis, Indiana 46205
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (317) 259-6400 (U.S.)
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
As of November 12, 1997, there were 10,450,000 shares of Registrant's common
stock issued and outstanding exclusive of shares held by Registrant.
<PAGE>
Form 10-Q Index
September 30, 1997
Page
Number
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements................................................ 3
Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 1997 and
December 31, 1996................................................ 4
Consolidated Statements of Earnings for the Three
and Nine Months Ended September 30, 1997 and 1996................... 5
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1997 and 1996............... 7
Consolidated Statements of Changes in Stockholders'
Equity........................................................... 8
Notes to Consolidated Financial Statements.......................... 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 12
PART 2 OTHER INFORMATION................................................... 21
SIGNATURES.................................................................. 22
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
In the opinion of management, the financial information reflects all adjustments
(consisting only of normal recurring adjustments) which are necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods. The results for the three and nine months ended September
30, 1997 and 1996 are not necessarily indicative of the results to be expected
for the entire year.
These quarterly interim financial statements are unaudited.
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<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1997 1996
ASSETS
Investments
Available for Sale:
Fixed Maturities, at market $169,086 $127,681
Equity Securities, at market 39,022 27,920
Short-term investments, at amortized cost
which approximates market 18,298 9,565
Real Estate, at cost 455 466
Mortgage Loans 2,250 2,430
Other 133 75
--- --
Total invested assets 229,244 168,137
Cash and cash equivalents 9,155 13,095
Receivables, net 163,551 65,194
Reinsurance recoverable on paid and unpaid
losses, net 148,099 48,294
Prepaid reinsurance premiums 34,363 14,983
Deferred policy acquisition costs 11,769 12,800
Deferred income taxes 2,128 3,329
Property and equipment 11,100 8,137
Federal income taxes recoverable --- 319
Investments in and advances to related parties 1,984 1,152
Intangibles 44,042 4,881
Other 6,443 4,358
----- -----
Total Assets $661,878 $344,679
======== ========
LIABILITIES
Losses and loss adjustment expenses $193,643 $101,719
Unearned premiums 115,497 87,285
Reinsurance payable 109,804 6,508
Federal income tax payable 1,558 ---
Term debt --- 48,000
Other 24,758 18,657
------ ------
Total Liabilities 445,260 262,169
------- -------
Minority Interest:
Preferred Securities 135,000 ---
------- ---
Equity in net assets of subsidiary --- 21,610
--- ------
STOCKHOLDERS' EQUITY
Common stock 39,019 38,969
Additional paid-in capital 5,905 5,905
Unrealized gain on investments, net of
deferred taxes of $3,189 and $625 5,890 820
Retained earnings 30,804 15,206
------ ------
Total Stockholders' Equity 81,618 60,900
------ ------
Total Liabilities and Stockholders' Equity $661,878 $344,679
======== ========
See Notes to Consolidated Financial Statements
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SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
For the Three Months Ending:
September 30, September 30,
1997 1996
Gross premiums written $103,919 $71,813
Less ceded premiums (37,554) (7,383)
-------- -------
Net premiums written 66,365 64,430
Change in unearned premiums 5,679 4,664
----- -----
Net premiums earned 72,044 69,094
Fee income 4,199 1,608
Net investment income 2,900 2,844
Net realized capital gain/(loss) 3,782 (834)
----- -----
Total Revenues 82,925 72,712
------ ------
Loss and loss adjustment expenses 53,903 47,942
Policy acquisition and general and
administrative expenses 15,803 13,829
Amortization of intangibles 393 211
Interest expense 540 1,688
--- -----
Total Expenses 70,639 63,670
------ ------
Earnings before income taxes, minority
interest and extraordinary item 12,286 9,042
Provision for income taxes 4,271 3,133
----- -----
Earnings before minority interest and
extraordinary item 8,015 5,909
Minority Interest:
Distributions on preferred securities,
net of tax 1,025 ---
Equity in earnings of subsidiary 264 1,320
--- -----
Earnings before extraordinary item 6,726 4,589
Extraordinary item, net of tax ($0.07 per
share) 713 ---
--- ---
Net Earnings $6,013 $4,589
====== ======
Primary Earnings Per Share $0.56 $0.66
Fully Diluted Earnings Per Share $0.55 $0.66
Weighted Average Shares Outstanding
Primary 10,773 7,000
====== =====
Fully Diluted 10,843 7,000
====== =====
See notes to consolidated financial statements
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SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
For the Nine Months Ending:
September 30, September 30,
1997 1996
Gross premiums written $382,984 $218,763
Less ceded premiums (166,096) (77,291)
--------- --------
Net premiums written 216,888 141,472
Change in unearned premiums (8,832) (13,312)
------- --------
Net premiums earned 208,056 128,160
Fee income 14,990 5,670
Net investment income 8,176 4,377
Net realized capital gain (loss) 5,466 (606)
----- -----
Total Revenues 236,688 137,601
------- -------
Loss and loss adjustment expenses 157,196 93,217
Policy acquisition and general and
administrative expenses 46,200 26,112
Amortization of intangibles 687 211
Interest expense 2,991 2,949
----- -----
Total Expenses 207,074 122,489
------- -------
Earnings before income taxes, minority
interest and extraordinary item 29,614 15,112
======
Provision for income taxes 10,454 4,987
------ -----
Earnings before minority interest and
extraordinary item 19,160 10,125
Minority Interest:
Distributions on preferred securities 1,025 ---
Equity on earnings of subsidiary 1,824 1,232
----- -----
Earnings before extraordinary item 16,311 8,893
Extraordinary item ($0.07 per share) 713 ---
------- ------
Net Earnings $15,598 $8,893
======= ======
Primary Earnings Per Share $1.46 $1.27
Fully Diluted Earnings Per Share $1.46 $1.27
Weighted Average Shares Outstanding
Primary 10,669 7,000
====== =====
Fully Diluted 10,705 7,000
====== =====
See notes to consolidated financial statements
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<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Nine Months Ending
September 30, September 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net Earnings For The Period $15,598 $8,893
Adjustments to reconcile Net Earnings to Net Cash
provided from Operations:
Equity in earnings of subsidiary 1,824 1,232
Depreciation and Amortization 1,192 257
Deferred income tax expense (1,074) (166)
Net realized capital(gain)/loss (5,466) 606
Net changes in operating assets and liabilities:
Receivables (98,357) (47,940)
Reinsurance recoverable on paid and unpaid
losses, net (99,805) (35,101)
Prepaid reinsurance premiums (19,380) (7,180)
Deferred policy acquisition costs 1,031 (1,982)
Other assets (276) (3,722)
Losses and loss adjustment expenses 91,924 28,255
Unearned premiums 28,212 18,449
Reinsurance payables 103,296 44,862
Federal income taxes recoverable/(payable) 1,877 1,626
Other liabilities 14 3,968
-- -----
Net Cash Provided From Operations 20,610 12,057
------ ------
Cash Flow Used In Investing Activities:
Cash paid for Superior, net of cash required --- (66,389)
Cash paid for Minority Interest (61,000) ---
Net (Purchases)/Sales of short-term investments (8,733) 5,953
Purchases of fixed maturities (198,314) 42,375
Proceeds from sales, calls and maturities 162,132
of fixed maturities 28,611
Purchase of equity securities (26,676) (72,562)
Proceeds from sales of equity securities 22,256 58,624
Proceeds from sale of real estate --- 15
Proceeds from repayment of mortgage loans 180 420
Purchases of property and equipment (3,807) (862)
------- -----
Net Cash Used In Investing Activities (113,962) (88,565)
--------- --------
Cash Flow Provided From Financing Activities:
Net proceeds from line of credit and notes payable 6,206 8,769
Proceeds/(payment) related to long-term debt (48,000) 48,000
Contribution from minority interest owner 2,304 21,200
Proceeds from preferred securities, net 130,100 ---
Loans to related parties (1,198) 1,821
------- -----
Net Cash Provided From Financing Activities 89,412 79,790
------ ------
Increase/(Decrease) In Cash And Cash Equivalents (3,940) 3,282
Cash and Cash Equivalents, Beginning of Period 13,095 2,311
------ -----
Cash and Cash Equivalents, End of Period $9,155 $5,593
====== ======
See Notes to Consolidated Financial Statements
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<TABLE>
<CAPTION>
SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<S> <C> <C> <C> <C> <C>
Common Additional Unrealized Retained Total
Stock Paid-In Gain (Loss) Earnings Stockholders'
Capital on Equity
Investments
Balance at $1,000 $3,130 $(45) $5,450 $9,535
December 31, 1995
Sale of subsidiary --- 2,788 --- --- 2,788
stock
Change in --- --- 433 --- 433
unrealized loss on
investments, net
of deferred taxes
Net Earnings --- --- --- 8,893 8,893
--- --- --- ----- -----
Balance at
September 30, 1996 $1,000 $5,918 $388 $14,343 $121,649
====== ====== ==== ======= ========
Balance at
December 31, 1995 $1,000 $3,130 $(45) $5,450 $9,535
Sale of subsidiary --- (614) --- --- (614)
stock
Change in --- --- 336 --- 336
unrealized loss on
investments, net
of deferred taxes
Issuance of common 37,969 --- --- --- 37,969
stock
Dividend to parent --- --- --- (3,500) (3,500)
Net Earnings --- --- --- 8,952 8,952
--- --- --- ----- -----
Balance at 38,969 5,905 820 15,206 60,900
December 31, 1996
Adjustment of
offering costs 50 --- --- --- 50
Change in
unrealized gain on
investments, net
of deferred taxes --- --- 5,070 --- 5,070
Net Earnings --- --- --- 15,598 15,598
--- --- --- ------ ------
Balance at $39,019 $ 5,905 $ 5,890 $30,804 $81,618
======= ======= ======= ======= =======
September 30, 1997
See Notes to Consolidated Financial Statements
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</TABLE>
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three and Nine Months Ended September 30, 1997
NOTE 1 - BASIS OF PRESENTATION
The foregoing consolidated condensed financial statements are unaudited.
However, in the opinion of management, all adjustments necessary for a fair
presentation of the results of the interim period presented have been included.
All adjustments are of a normal and recurring nature. Results for any interim
period are not necessarily indicative of results to be expected for the year.
The consolidated financial statements include the accounts of Symons
International Group, Inc., ("SIG" and the "Company")and its wholly-owned
subsidiaries, IGF Insurance Company ("IGF"), GGS Management Holdings, Inc.
("GGSH"), which owns 100% of Pafco General Insurance Company ("Pafco") and
Superior Insurance Company ("Superior"). Prior to August 12, 1997, GGSH was a
52% owned subsidiary of the Company. The Company is a 67% owned subsidiary of
Goran Capital Inc. ("Goran"). The consolidated condensed interim financial
statements have been prepared in accordance with Article 3 of Regulation S-X
and, therefore, do not include all information and footnotes normally shown in
full annual financial statements.
These unaudited consolidated condensed financial statements have been prepared
by the Company in accordance with generally accepted accounting principles. All
material intercompany amounts have been eliminated.
NOTE 2 - REINSURANCE
In order to reduce risk and increase its underwriting capacity, the Company
purchases reinsurance. Reinsurance does not relieve the Company of its ultimate
liability to its insureds for the risks ceded to reinsurers. As such, the
Company is subject to credit risk with respect to risks ceded to reinsurers
should a reinsurer fail. Effective January 1, 1996 reinsurance was placed as
follows: For the nonstandard automobile segment, the Company purchases excess of
loss and catastrophic protections which result in minimum ceded premium in
proportion to gross written premiums. For the crop segment, the Company
reinsures to the Federal Crop Insurance Corporation ("FCIC"), an agency of the
United States Department of Agriculture, all of its Multi- Peril Crop Insurance
("MPCI") business which has an underwriting gain or loss feature. The Company
reinsures stop-loss protection to affiliates and third party reinsurers on its
MPCI and crop hail business. Regarding the crop hail line of business, the
Company also carries an excess of loss (stop-loss) protection with third party
reinsurers. Effective January 1, 1997, the Company ceded 20% of its new and
renewal nonstandard automobile business, 40% of its crop hail business and 50%
of its crop named peril business under certain quota share arrangements. Third
party reinsurers receive 90% and Granite Re, an affiliate, is a participant in
the 20% quota share treaty, receiving 10% of the ceded nonstandard automobile
business. Effective October 1, 1997, the nonstandard automobile 20% quota share
treaty was reduced to 10% due to increased surplus and capital at Pafco and
Superior. Granite Reinsurance Company Ltd. is also a participant in the
stop-loss protection on MPCI and crop hail business.
The effects of reinsurance are as follows:
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<PAGE>
NOTE 2 (continued)
SYMONS INTERNATIONAL GROUP, INC.
Analysis of Effects of Reinsurance
(in thousands)
For the three months For the nine months
ended ended
Sept. 30, Sept. 30, Sept.30, Sept.30,
1997 1996 1997 1996
Premiums Written
Gross $103,919 $71,813 $382,984 $218,763
Ceded (37,554) (7,383) (166,096) (77,291)
-------- ------- --------- --------
Net $66,365 $64,430 $216,888 $141,472
======= ======= ======== ========
Premiums Earned
Gross $149,162 $80,409 $354,772 $207,186
Ceded (77,118) (11,315) (146,716) (79,026)
-------- -------- --------- --------
Net $72,044 $69,094 $208,056 $128,160
======= ======= ======== ========
Losses and LAE
Incurred
Gross $155,192 $60,090 $309,538 $127,253
Ceded (101,289) (12,148) (152,342) (34,036)
--------- -------- --------- --------
Net $53,903 $47,942 $157,196 $93,217
======= ======= ======== =======
September 30, 1997 December 31, 1996
Unearned Premiums
Gross $115,497 $87,285
Ceded (34,363) (14,983)
-------- --------
Net $81,134 $72,302
======= =======
Outstanding Claims
Gross $193,643 $101,719
Ceded (110,132) (29,459)
--------- --------
Net $83,511 $72,260
======= =======
NOTE 3 - CONTINGENT LIABILITY
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 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
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<PAGE>
for certain expenses. IGF alleges the FCIC wrongfully sought to hold IGF
responsible for these expenses. The FCIC counterclaimed for approximately $1.2
Million in claims payments for which the FCIC contends IGF is responsible for as
successor to the run-off book of business. On October 27, 1997, IGF reached an
agreement with the FCIC to settle the case, with both parties dismissing all
claims against one another which were subject to the litigation. The FCIC has
agreed to pay IGF a lump sum payment of $60,000.
NOTE 4 - EARNINGS PER SHARE
Primary and fully diluted earnings per share for the three and nine months
ending September 30, 1997 were computed using weighted average shares
outstanding, which are based upon actual outstanding shares during 1997 of
10,450,000. Weighted average shares outstanding for 1996 was based on 7,000,000
shares actually outstanding.
NOTE 5 - PREFERRED SECURITY OFFERING
On August 12, 1997, the Company issued $135 million in Trust Originated
Preferred Securities ("Preferred Securities"). These Preferred Securities were
offered through a wholly-owned trust subsidiary of the Company and are backed by
Senior Subordinated Notes to the Trust from the Company. These Preferred
Securities were offered under Rule 144A of the SEC ("Offering") and, pursuant to
the Registration Rights Agreement executed at closing, the Company filed a Form
S-4 Registration Statement with the SEC on September 16, 1997 to effect the
Exchange Offer. The S-4 Registration Statement was declared effective on
September 30, 1997 and the Exchange Offer successfully closed on October 31,
1997. The proceeds of the Offering were used to repurchase the remaining
minority interest in GGSH for $61 million, repay the balance of the GGS Senior
Credit Facility of $44.9 million and the Company expects to contribute the
balance, after expenses, of approximately $24 million to the nonstandard
automobile insurers of which $10.5 million was contributed in the third quarter.
Expenses of the issue aggregated 4.9 million and will be amortized over the term
of the Preferred Securities (30 years). In the third quarter the Company wrote
off the remaining unamortized costs of the GGS Senior Credit Facility of
approximately $1.1 million pre-tax or approximately $0.07 per share.
The excess of the acquisition price over the minority interest liability
aggregated approximately $37,896,000 and was assigned to goodwill as the fair
market value of acquired assets approximating their carrying value. Goodwill
will be amortized over 25 years to match management's expectations of the
expected benefit period.
The Preferred Securities have a term of 30 years with semi-annual interest
payments commencing February 15, 1998. The Preferred Securities may be redeemed
in whole or in part after 10 years.
The Company shall not, and shall not permit any subsidiary, to incur directly or
indirectly, any indebtedness unless, on the date of such Incurrence (and after
giving effect thereto), the Consolidated Coverage Ratio exceeds 2.5 to 1. The
Coverage Ratio is the aggregate of net earnings, plus interest expense, income
taxes, depreciation, and amortization divided by interest expense for the same
period.
Assuming this offering took place at January 1, 1997, the proforma effect of
this offering on the Company's consolidated statement of earnings for the nine
months ended is as follows: September 30, 1997
Unaudited
(In thousands)
Revenues $ 236,688
Net earnings $ 13,645
Net earnings per common share $ 1.28
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The aforementioned proforma results do not include the effects of the write-off
of the debt issuance cost recorded in the third quarter. The aforementioned
proforma amounts are dilutive because of the additional reserve adjustment to
the non-standard auto operations in the second quarter and the non-inclusion of
investment income on the additional proceeds from the offering. The Company
expects based on projected premium volumes and results of operations for the
non-standard division that this transaction will be accretive to earnings in
future years.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
The Company underwrites and markets nonstandard private passenger automobile
insurance and crop insurance.
Nonstandard Automobile Insurance Operations
The Company, through its wholly owned subsidiaries, Pafco and Superior, is
engaged in the writing of insurance coverage on automobile physical damage and
liability policies for "nonstandard risks". Nonstandard insureds are those
individuals who are unable to obtain insurance coverage 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. The Company offers several different policies
which are directed towards different classes of risk within the nonstandard
market. Premium rates for nonstandard risks are higher than for standard risks.
Since it can be viewed as a residual market, the size of the nonstandard private
passenger automobile insurance market changes with the insurance environment and
grows when the standard coverage becomes more restrictive. Nonstandard policies
have relatively short policy periods and low limits of liability. Due to the low
limits of coverage, the period of time that elapses between the occurrence and
settlement of losses under nonstandard policies is shorter than many other types
of insurance. Also, since the nonstandard automobile insurance business
typically experiences lower rates of retention than standard automobile
insurance, the number of new policyholders underwritten by nonstandard
automobile insurance carriers each year is substantially greater than the number
of new policyholders underwritten by standard carriers.
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. 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 therefore, can meet
their obligations to the Company under the terms of the reinsurance treaties.
Crop Insurance Operations
The two principal components of the Company's crop insurance business are
Multi-Peril Crop Insurance ("MPCI") and private named peril, primarily crop hail
insurance. The majority of the Company's crop insurance business consists of
MPCI. Crop insurance is purchased by farmers to reduce the risk of crop loss
from adverse weather and other uncontrollable events. Farms are subject to
drought, floods and other natural disasters that can cause widespread crop
losses and, in severe cases, force farmers out of business. Historically, one
out of every twelve acres planted by farmers has not been harvested because of
adverse weather or other natural disasters. Because many farmers rely on credit
to finance their purchases of such agricultural inputs as seed, fertilizer,
machinery and fuel, the loss of a crop to a natural disaster can reduce their
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ability to repay these loans and to find sources of funding for the
following year's operating expenses.
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 writes MPCI and crop
hail insurance through approximately 1,300 independent agencies in 40 states.
MPCI is a government-sponsored program with accounting treatment which differs
in certain respects from the more traditional property and casualty insurance
lines. For income statement purposes under Generally Accepted Accounting
Principles (GAAP), Gross Premiums Written consist of the aggregate amount of
MPCI 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
MPCI premium on CAT Coverage (the minimum available level of MPCI Coverage). By
contrast, Net Premiums Written does not include any MPCI Premiums or subsidies,
all of which are deemed to be ceded to the FCIC as a reinsurer. The Company's
profit or loss from its MPCI business is determined after the crop season ends
on the basis of a complex profit sharing formula established by law and the
FCIC. For GAAP income statement purposes, any such profit or loss sharing earned
or payable by the Company is treated as an adjustment to commission expense and
is included in policy acquisition and general and administrative expenses.
The Company 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 ("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
1998, 1997 and 1996, the Buy-up Expense Reimbursement Payment has been set at
27%, 29% and 31%, respectively, of the MPCI Premium. For GAAP income statement
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.
On June 9, 1997, the Secretary of Agriculture announced that the USDA would
transfer to the private sector CAT coverage. At this time, the Company has
received approximately 17,000 policies that were formerly written by USDA
offices. Based on historical FSA CAT transfer per-policy averages, the Company
has preliminarily estimated that it will receive approximately an additional $2
to $3 million in premiums from such transferred policies, however, there can be
no assurance that this number will be realized.
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 product which
combines the application and underwriting process for MPCI and hail coverages.
This 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
half of the Company's hail policies are written in combination with MPCI.
Although both crop hail and MPCI provide coverage against hail damage, under
crop hail coverages farmers can receive payments for hail damage which
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<PAGE>
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
policies than it otherwise would.
In addition to crop hail insurance, the Company also sells Named Peril
Coverages. These products cover specific crops 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 policies primarily to large producers through certain select agents.
In order to reduce the Company's potential loss exposure under the MPCI program,
in addition to Reinsurance obtained from the FCIC, the Company purchases
stop-loss Reinsurance from other private insurers. Such 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 protects itself with quota share Reinsurance and various
layers of stop-loss Reinsurance. 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.
Certain other conditions of the Company's crop business may effect comparisons
of the Company's results and operating ratios with that of other insurers,
including: (i) the seasonal nature of the business whereby profits are generally
recognized predominantly in the second half of the year, (ii) the short-term
nature of crop business whereby losses are known within a short time period, and
(iii) the limited amount of investment income associated with crop business. In
addition, cash flows from the crop business differ from cash flows from certain
more traditional lines.
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, 20% for
the third quarter and 10% for the fourth quarter (all winter wheat type policies
are recognized in the fourth quarter), (ii) commission expense at a rate of 16%
of MPCI Gross Premiums Written recognized and (iii) Buy-up Expense Reimbursement
at the applicable rate 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 which
takes into account actual gross premiums processed. If an insufficient volume of
policies has been processed, the Company'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. The Company also recognizes the MPCI underwriting gain or loss
during each 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
third and fourth quarters, a reconciliation amount is recognized for the
underwriting gain or loss based on final premium and loss information.
Regulation
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
-14-
<PAGE>
claimants. 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 insolvency, (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.
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.
Results of Operations
For the three and nine months ended September 30, 1997, the Company recorded net
earnings of $6,013,000 and $15,598,000 or $0.56 and $1.46 per share,
respectively. This is approximately a 31.0% and 75.4% increase from 1996
comparable amounts of $4,589,000 and $8,893,000 or $0.66 and $1.27 per share.
The non-standard automobile insurance segment demonstrated improved earnings for
the three and nine months ended due to continued premium growth and improved
expense ratios. The improvement in crop insurance earnings for the nine months
ended relates to growth in market share and favorable underwriting results.
Lower earnings in the crop segment in the third quarter reflects timing of
recognizing underwriting results. In 1996, early concerns in winter wheat
coupled with a late planting and concerns of early frost delayed profit
recognition until the third and fourth quarters.
-15-
<PAGE>
For the three months ended
September 30,
(in thousands)
1997 1996
Nonstandard-Automobile Insurance
Operations:
Gross premiums written $77,505 $56,836
======= =======
Net premiums written $61,789 $56,489
======= =======
Net premiums earned $61,059 $54,701
Fee income 4,380 2,486
Net investment income 2,702 2,780
Net realized capital gain/(loss) 3,837 (834)
----- -----
TOTAL REVENUES 71,978 59,133
------ ------
Losses and loss adjustment expenses 44,873 38,300
Policy acquisition and general and
administrative expenses 18,170 15,922
------ ------
TOTAL EXPENSES 63,043 54,222
------ ------
Earnings before income taxes 8,935 $4,911
===== ------
GAAP Ratios
(Nonstandard Automobile Only):
Loss and LAE Ratio 73.5% 70.0%
Expense ratio, net of billing fees 22.6% 24.6%
----- -----
Combined ratio 96.1% 94.6%
===== =====
Crop Insurance Operations:
Gross premiums written $23,997 $14,796
======= =======
Net premiums written $4,576 $7,941
====== ======
Net premiums earned $10,985 $14,393
Net investment income 52 46
Other income (181) (895)
Net realized capital gain (loss) (55) ---
---- ---
TOTAL REVENUES 10,801 13,544
------ ------
Losses and loss adjustment expenses 9,030 9,642
Policy acquisition and general and
administrative expenses (2,609) (1,741)
Interest expense 40 242
-- ---
TOTAL EXPENSES 6,461 8,143
----- -----
Earnings before income taxes $4,340 $5,401
====== ======
-16-
<PAGE>
For the nine months ended
September 30,
(in thousands)
1997 1996
Nonstandard-Automobile Insurance
Operations:
Gross premiums written $243,052 $119,126
======== ========
Net premiums written $195,632 $118,578
======== ========
Net premiums earned $189,303 $107,545
Fee income 11,584 4,819
Net investment income 7,796 4,215
Net realized capital gain/(loss) 5,521 (622)
----- -----
TOTAL REVENUES 214,204 115,957
------- -------
Losses and loss adjustment expenses 143,897 77,131
Policy acquisition and general and
administrative expenses 53,662 31,617
------ ------
TOTAL EXPENSES 197,559 108,748
------- -------
Earnings before income taxes $16,645 $7,209
======= ======
GAAP Ratios
(Nonstandard Automobile Only):
Loss and LAE Ratio 76.0% 71.7%
Expense ratio, net of billing fees 22.2% 24.9%
----- -----
Combined ratio 98.2% 96.6%
===== =====
Crop Insurance Operations:
Gross premiums written $132,353 $95,332
======== =======
Net premiums written $21,256 $22,894
======= =======
Net premiums earned $18,753 $20,615
Net investment income 144 142
Other income 3,406 253
Net realized capital gain (55) 16
------- ------
TOTAL REVENUES 22,248 21,026
------ ------
Losses and loss adjustment expenses 13,299 16,086
Policy acquisition and general and
administrative expenses (8,635) (6,114)
Interest expense 1 469
--- ---
TOTAL EXPENSES 4,729 10,441
----- ------
Earnings before income taxes $17,519 $10,585
======= =======
Statutory Capital and Surplus:
Pafco $23,418
=======
IGF $40,552
=======
Superior $71,455
=======
-17-
<PAGE>
Consolidated Gross Premiums Written increased 44.7% in the third quarter and
75.1% year-to-date due to growth in both the nonstandard auto and crop segments.
Gross Premiums Written for the nonstandard auto segment increased 36.4% in the
third quarter and 104% year-to-date. While a portion of this increase relates to
four additional months of premium in 1997 of Superior, additional premium growth
relates to internal growth due to improved service, certain product
improvements, tougher uninsured motorist laws in states such as California and
Florida and entrance into new states such as Nevada and Oregon. Such increase
was primarily due to volume rather than rate increases, although the Company
adjusts rates on an ongoing basis. Gross Premiums Written for the crop segment
increased 62.2% in the third quarter and increased 38.8% year-to-date. Such
increases were due to continued industry privatization and aggressive marketing
efforts, resulting in continued increase in market share. Remaining gross
written premiums represent commercial business which was ceded 100% effective
January 1, 1996 to an affiliate, Granite Reinsurance Company Ltd.
Net Premiums Written increased in the third quarter and year-to-date for 1997 as
compared to 1996 due to the growth in Gross Premiums Written offset by quota
share reinsurance.
In 1997, the Company ceded $15,716,000 and $47,420,000 of nonstandard automobile
premiums during the third quarter and year-to-date as part of a 20% quota share
treaty instituted January 1, 1997. No such treaty was in effect during 1996. In
1997, the Company ceded $3,610,000 and $15,415,000 of crop hail premiums during
the third quarter and year-to-date as part of a 40% quota share treaty
instituted January 1, 1997. In 1996, crop hail premiums were ceded at a rate of
10%. The nonstandard automobile quota share reinsurance treaty was reduced to
10% effective October 1, 1997 following additional capital contributions to the
insurance companies from the proceeds of the Preferred Securities Offering.
Net Premiums Earned increased for the three and nine months ended September 30,
1997 as compared to the corresponding periods of the prior year, reflecting the
strong growth in Gross Written Premiums offset by the effects of the nonstandard
automobile and crop hail quota share treaties.
Fee income increased $2,591,000 and $9,320,000 for the three and nine months
ended September 30, 1997 as compared to the corresponding periods of the prior
year. Such increases were due to billing fee income on nonstandard automobile
business from an increase in in-force policy count. There was also an increase
in the receipt of CAT Coverage Fees and CAT LAE Reimbursement Payments due to
higher premium volume.
Net investment income increased $56,000 and $3,799,000 for the three and nine
months ended September 30, 1997 as compared to the corresponding periods of the
prior year. Such increases were due primarily to investment income from Superior
and greater invested assets.
Realized gains of $5,466,000 in 1997 were due primarily to a change in equity
managers and a repositioning of the portfolio. Realized gains were particularly
strong in the third quarter on the strength of the equity markets and
corresponding sales of securities that had reached targeted pricing levels.
The Loss and LAE Ratio for the nonstandard automobile segment was 73.5% and
76.0% for the three and nine months ended September 30, 1997 as compared to
70.0% and 71.7% for the corresponding periods in 1996. The Crop Hail Loss Ratio
in 1997 is 67.1% compared to 51.3% in 1996. The increase in the Loss and LAE
Ratio for the nonstandard automobile segment reflects the recent growth in
premium volume in an effort to increase market share and improve economics of
scale. The $5.3 million reserve adjustment in the second quarter increases the
nine month Loss and LAE Ratio 2.8%. The increase was also due to increased
severity in certain coverages. The increase in the crop hail loss ratio is the
result of storm damage in the third quarter in certain eastern states.
-18-
<PAGE>
Policy acquisition and general and administrative expenses have increased as a
result of the increased volume of business produced by the Company. Policy
acquisition and general and administrative expenses rose to $15,803,000 and
$46,200,000 or 21.9% and 22.2% of Net Premium Earned for the three and nine
months ended September 30, 1997 compared to $13,829,000 and $26,022,000 or 20.0%
and 20.3% of Net Premium Earned in the corresponding periods of 1996. Such
increase was due to a higher mix of nonstandard automobile premiums in 1997 as
compared to 1996. The Expense Ratio, net of billing fees, for the nonstandard
automobile segment improved to 22.6% and 22.2% for the three and nine months
ended September 30, 1997 as compared to 24.6% and 24.9% for the corresponding
periods in 1996, due to technological and operational efficiencies, and
continued economies of scale.
Due to the accounting for the crop insurance segment, operating expenses for the
three and nine months ended September 30, 1997 includes a contribution to
earnings of $2,609,000 and $8,035,000 as compared to comparable amounts of
$1,741,000 and $6,114,000 for the corresponding periods in 1996. Such increase
was due to greater Buy-up Expense Reimbursement Payments and MPCI underwriting
gain due to increased premium volumes and more favorable underwriting results.
The nonstandard automobile quota share treaty reduced premiums earned, losses
and LAE incurred and policy acquisition and general administrative expenses by
$14,912,000, $9,943,000 and $4,596,000, and $30,724,000, $20,855,000, and
$9,101,000, respectively, for the three and nine months ending September 30,
1997, for a net pre-tax earnings reduction of $373,000 and $768,000 in the three
and nine months ending September 30, 1997. Reduction in expenses reflects ceding
commission income net of a deferred acquisition cost adjustment.
Amortization of intangibles includes goodwill from the acquisition of Superior,
additional goodwill from the acquisition of the minority interest position in
GGSH, debt or preferred security issuance costs and organizational costs. The
increase in the third quarter of 1997 reflects the effects of the Preferred
Securities Offering.
Interest expense primarily represents interest incurred since April 30, 1996 on
the GGS Senior Credit Facility. The GGS Senior Credit Facility was repaid with
the proceeds from the Preferred Securities Offering.
Income tax expense was 34.7% and 35.3% of pre-tax income for the three and nine
months ended September 30, 1997 as compared to 34.7% and 33.0% in 1996.
Distributions on Preferred Securities are calculated at a rate of 9.5% net of
federal income taxes.
Financial Condition and Capital Reserves and Liquidity
The Company's total assets of $661,878,000 at September 30, 1997 increased
$317,199,000 from $344,679,000 as of December 31, 1996. The primary reasons for
this increase were an increase of $ 57,167,000 in cash and invested assets and
increases in receivables and reinsurance assets due to growth in premium volume
and premium due on installment sales, which generate billing fee income, and
timing of crop operations and an increase in goodwill due to the acquisition of
the minority interest portion of GGSH. The increase in cash and invested assets
was due to the increase in cash flow from operations and proceeds from the
Preferred Securities Offering. The Company did not significantly change its
investment mix or philosophy in 1997.
The primary source of funds available to the Company as a holding company are
dividends from its primary subsidiaries, IGF, IGF Holdings and GGS Management.
Subsequent to the Offering of the Preferred Securities and the repayment of the
GGS Senior Credit Facility and purchase of the remaining 48% minority interest.
The Company also receives $150,000 quarterly pursuant to an administration
agreement with IGF to cover the costs of executive management, accounting,
investing, marketing, data processing
-19-
<PAGE>
and reinsurance.
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 approved the acquisition of
Superior by GGS Holdings, it prohibited Superior from paying any dividends
(whether extraordinary or not) for four years from the date of Acquisition
without the prior written approval of the Florida Department, and extraordinary
dividends, within the meaning of the Indiana Insurance Code, cannot be paid by
Pafco without the prior approval of the Indiana Commissioner. The management
fees charged to Pafco ad Superior by GGS Management are subject to review by the
Indiana and Florida Departments.
The nonstandard automobile insurance subsidiaries' primary source of funds are
premiums, investment income and proceeds from the maturity or sale of invested
assets. Such funds are used principally for the payment of claims, operating
expenses (primarily management fees), 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 has experienced an increase in its investment portfolio and has not
experienced any problems with meeting its obligations for claims payments or
management fees.
The Company has prepared a management agreement between IGF and IGF Holdings
similar to that for the nonstandard automobile operations in which IGF will pay
IGF Holdings certain management fees for services rendered by IGF Holdings for
IGF. IGF Holdings has no limitations on dividends to the Company thus providing
a cash flow stream other than dividends from IGF for amounts in excess of IGF
Holding's expenses. As of December 31, 1996, IGF has the ability to pay
$12,122,000 in dividends without prior regulatory approval.
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.
During 1997, 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 is $7,000,000.
Net cash provided by operating activities in 1997 aggregated $20,610,000
compared to $12,057,000 in 1996. This increase in funds provided was caused by
additional cash of $1,252,000 from net earnings adjusted for non-cash expenses
and realized gains or losses and continued premium growth which results in
increased cash flow as loss payments lag receipt of premiums.
Net cash used in investing activities increased from $88,565,000 in 1996 to
$113,962,000 in 1997 reflecting investment of remaining proceeds from the
Preferred Securities Offering and cash flow from operations.
In 1997, financing activities provided cash of $89,412,000 compared to cash
provided of $79,790,000 in 1996, with funds in 1997 being primarily from the
Preferred Securities Offering while 1996 funds were provided from the financing
of the acquisition of Superior.
-20-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
certain expenses. IGF alleges the FCIC wrongfully sought to
hold IGF responsible for those expenses. The FCIC
counterclaimed for approximately $1.2 Million in claims
payments for which the FCIC contends IGF is responsible for
as successor to the run-off book of business. On October 27,
1997, IGF reached an agreement with the FCIC to settle the
case, with both parties dismissing all claims against one
another which were subject to the litigation. The FCIC has
agreed to pay IGF a lump sum payment of $60,000.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K filed on August 26, 1997 regarding issuance of
Preferred Securities and acquisition of remaining 48%
minority interest in GGSH.
Form 8-KA filed on October 3, 1997 regarding issuance of
Preferred Securities and acquisition of the remaining 48%
minority interest in GGSH.
-21-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: November 12, 1997 By: /s/ Alan G. Symons
Alan G. Symons
Chief Executive Officer
Dated: November 12, 1997 By: /s/ Gary P. Hutchcraft
Gary P. Hutchcraft
Vice President, Treasurer and
Chief Financial Officer
-22-
<PAGE>
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<ARTICLE> 7
<LEGEND>
(Replace this text with the legend)
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<CIK> 0001013698
<NAME> Symons International Group, Inc.
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<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 168,168,000
<DEBT-MARKET-VALUE> 169,086,000
<EQUITIES> 39,022,000
<MORTGAGE> 2,250,000
<REAL-ESTATE> 455,000
<TOTAL-INVEST> 229,244,000
<CASH> 9,155,000
<RECOVER-REINSURE> 148,099,000
<DEFERRED-ACQUISITION> 11,769,000
<TOTAL-ASSETS> 661,878,000
<POLICY-LOSSES> 193,643,000
<UNEARNED-PREMIUMS> 115,497,000
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0
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<COMMON> 39,019,000
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<INVESTMENT-INCOME> 8,176,000
<INVESTMENT-GAINS> 5,466,000
<OTHER-INCOME> 14,990,000
<BENEFITS> 236,688,000
<UNDERWRITING-AMORTIZATION> 687,000
<UNDERWRITING-OTHER> 46,200,000
<INCOME-PRETAX> 29,614,000
<INCOME-TAX> 10,454,000
<INCOME-CONTINUING> 19,160,000
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<EXTRAORDINARY> 713,000
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