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 March 31, 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 March 31, 1997, there were 10,450,000 shares of Registrant's common stock
issued and outstanding exclusive of shares held by Registrant.
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Form 10-Q Index
For The Quarter Ended March 31, 1997
Page
Number
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements..................................... 3
Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 1997 and
December 31, 1996..................................... 4
Consolidated Statements of Earnings for the Three
Months Ending March 31, 1997 and 1996.................... 6
Consolidated Statements of Cash Flows
for the Three Months Ending March 31, 1997 and 1996...... 7
Consolidated Statements of Stockholders' Equity....... 9
Notes to Consolidated Financial Statements............... 10
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 14
PART 2 OTHER INFORMATION........................................ 22
SIGNATURES....................................................... 23
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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 months ended March 31, 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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SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
ASSETS
Investments
Available for Sale:
Fixed Maturities, at market 146,518 127,681
Equity Securities, at market 23,918 27,920
Short-term investments, at amortized cost 6,193 9,565
which approximates market
Real Estate, at cost 461 466
Mortgage Loans 2,360 2,430
Other 75 75
Cash and cash equivalents 19,799 13,095
Receivables 114,910 65,194
Reinsurance recoverable on paid and unpaid 25,448 48,294
losses, net
Prepared reinsurance premiums 50,642 14,983
Deferred policy acquisition costs 12,324 12,800
Deferred income taxes 4,133 3,329
Property and equipment 8,782 8,137
Federal income taxes recoverable 0 319
Investments in and advances to related parties 1,267 1,152
Other 10,290 9,239
Total Assets 427,120 344,679
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March 31, December 31,
1997 1996
LIABILITIES
Losses and loss adjustment expenses 86,287 101,719
Unearned premiums 126,619 87,285
Reinsurance payable 49,481 6,508
Federal income tax payable 3,651 0
Term debt 48,000 48,000
Other 22,470 18,657
Total Liabilities 336,508 262,169
Minority Interest in Consolidated Subsidiary 24,746 21,610
STOCKHOLDERS' EQUITY
Common stock 38,969 38,969
Additional paid-in capital 5,905 5,905
Unrealized gain/(loss) on investments (123) 820
Retained earnings 21,115 15,206
Total Stockholders' Equity 65,866 60,900
Total Liabilities and Stockholders' Equity 427,120 344,679
See Notes to Consolidated Financial Statements
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SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDING:
March 31, March 31,
1997 1996
Gross premiums written 129,890 41,422
Less ceded premiums (63,101) (22,692)
Net premiums written 66,789 18,730
Change in unearned premiums (3,674) (4,945)
Net premiums earned 63,115 13,785
Net investment income 2,438 558
Other income 5,038 977
Net realized capital gain/(loss) 942 (36)
Total Revenues 71,533 15,284
Loss and loss adjustment expenses 45,268 8,963
Policy acquisition and general and 13,012 3,669
administrative expenses
Interest expense 1,371 249
Total Expenses 59,651 12,881
Income before income taxes and minority 11,882 2,403
interest
Provision for income taxes 4,286 817
Minority interest 1,687 0
Net Income 5,909 1,586
Primary Earnings Per Share $0.56 $0.23
Fully Diluted Earnings per Share $0.56 $0.23
See Notes to Consolidated Financial Statements
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SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDING:
March 31, March 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income/(Loss) For The Period 5,909 1,586
Adjustments to reconcile Net Income to Net
Cash provided from Operations:
Minority Interest 1,687 0
Depreciation and Amortization 487 143
Deferred income tax expense 226 63
Net realized capital loss/(gain) (942) 36
Net changes in operating assets and liabilities:
Receivables (49,716) (7,390)
Reinsurance recoverable on paid and unpaid 22,846 (5,435)
losses, net
Prepaid reinsurance premiums (35,659) (18,444)
Deferred policy acquisition costs 476 (706)
Other assets (1,175) 1,037
Losses and loss adjustment expenses (15,432) (9,412)
Unearned premiums 39,334 23,387
Reinsurance payables 42,973 16,675
Federal income taxes recoverable/(payable) 3,970 331
Other liabilities 4,179 (11,085)
Net Cash Provided From Operations 19,163 786
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Deferred income tax expense 226 63
Net realized capital loss/(gain) (942) 36
Net changes in operating assets and liabilities:
Receivables (49,716) (7,390)
Reinsurance recoverable on paid and unpaid 22,846 (5,435)
losses, net
Prepaid reinsurance premiums (35,659) (18,444)
Deferred policy acquisition costs 476 (706)
Other assets (1,175) 1,037
Losses and loss adjustment expenses (15,432) (9,412)
Unearned premiums 39,334 23,387
Reinsurance payables 42,973 16,675
Federal income taxes recoverable/(payable) 3,970 331
Other liabilities 4,179 (11,085)
March 31, March 31,
1997 1996
Cash Flow Used In Investing Activities:
Net (Purchases)/Sales of short-term 3,372 4,348
investments
Purchases of fixed maturities (22,892) (5,069)
Proceeds from sales, calls and maturities 1,232 6,457
of fixed maturities
Purchase of equity securities (3,998) (9,768)
Proceeds from sales of equity securities 8,937 2,370
Proceeds from repayment of mortgage loans 70 230
Purchases of property and equipment (1,003) (522)
Net Cash Provided Used In Investing (14,282) (1,954)
Activities
Cash Flow Provided From/(Used In) Financing
Activities:
Net proceeds from line of credit and notes 0 (5,561)
payable
Contribution from minority interest owner 2,304 0
Repayments from related parties (481) 4,418
Net Cash Provided From/(Used In) Financing 1,823 (1,143)
Activities
Increase/(Decrease) In Cash And Cash 6,704 (2,311)
Equivalents
Cash and Cash Equivalents, Beginning of 13,095 2,311
Period
Cash and Cash Equivalents, End of Period 19,799 0
See Notes to Consolidated Financial Statements
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SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Additional Unrealized Retained Total
Stock Paid-In Gain (Loss) Earnings Stock-
Capital on (Deficit) holders'
Investments Equity
Balance at 1,000 3,130 (45) 5,450 9,535
December 31,
1995
Change in --- --- (83) --- (83)
unrealized loss
on investments,
net of deferred
taxes
Net Earnings --- --- --- 1,586 1,586
Balance at March 1,000 3,130 (128) 7,036 11,038
31, 1996
Sale of --- 2,775 --- --- 2,775
subsidiary stock
Change in --- --- 948 --- 948
unrealized loss
on investments,
net of deferred
taxes
Issuance of 37,969 --- --- --- 37,969
common stock
Dividend to --- --- --- (3,500) (3,500)
parent
Net Earnings --- --- --- 11,670 11,670
Balance at 38,969 5,905 820 15,206 60,900
December 31,
1996
Change in --- --- (943) --- (943)
unrealized gain
on investments,
net of deferred
taxes
Net Earnings --- --- --- 5,909 5,909
Balance at March 38,969 5,905 (123) 21,115 65,866
31, 1997
See Notes to Consolidated Financial Statements
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SYMONS INTERNATIONAL GROUP, INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three Months Ended March 31, 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
subsidiary, IGF Insurance Company ("IGF"), as well as its 52% owned subsidiary,
GGS Management Holdings, Inc. ("GGSH"), which wholly owns Pafco General
Insurance Company ("Pafco") and Superior Insurance Company ("Superior"). The
Company is a 67% owned subsidiary of Goran Capital Inc. ("Goran"). The
consolidated condensed interim financial statements have been prepared in
accordance with Form 10-Q specifications and, therefore, do not include all
information and footnotes normally shown in full annual financial statements.
These unaudited consolidated financial statements have been prepared by the
Company in accordance with generally accepted accounting principles. All
material intercompany amounts have been eliminated.
NOTE 2 - ACQUISITION, FORMATION OF SUBSIDIARY AND PUBLIC OFFERING
In January, 1996, Pafco adopted a Plan of Reorganization whereby it transferred
its wholly owned subsidiary, IGF, to Pafco's parent, SIG. After adoption of the
Plan of Reorganization in January, 1996, Pafco formed a wholly owed subsidiary,
IGF Holdings, Inc. ("IGF Holdings") and formally submitted the Plan of
Reorganization to the Indiana Department of Insurance for regulatory approval.
Once approval was obtained from the Indiana Department of Insurance on April 26,
1996, Pafco transferred the outstanding shares of the capital stock of IGF to
IGF Holdings. IGF Holdings, in turn, made a distribution to Pafco of $7.5
Million in cash and a subordinated promissory note in the principle amount of
$3.5 Million. Subsequent to that distribution, Pafco then completed the steps in
the Plan by transferring the outstanding capital stock of IGF Holdings to
Pafco's parent, SIG.
SIG purchased Superior from Interfinancial, Inc. on April 30, 1996 for a
purchase price of approximately $66 Million, resulting in goodwill on the
transaction of approximately $2.2 Million. Simultaneously with the execution of
the Superior purchase agreement, Goran, SIG, GGS Management Holdings, Inc.
("GGSH") and GS Capital Partners II, L.P., a Delaware limited partnership,
entered into an agreement (the "GSCP Agreement") to capitalize GGSH and to cause
GGSH to issue its capital stock to SIG and to various funds affiliated with
Goldman Sachs & Co. (collectively, "GS Funds"), so as to give SIG a 52%
ownership interest and the GS Funds a 48% ownership interest in GGSH. Pursuant
to the GSCP Agreement, (a) SIG contributed to GGSH (i) Pafco common stock with a
book value determined in accordance with US GAAP of $16.9 Million as reflected
on an Audited Post-Closing Balance Sheet of Pafco, (ii) its right to acquire
Superior pursuant to the Superior Purchase Agreement and (iii) certain fixed
assets, including office furniture and equipment, having a value of
approximately $350,000 and (b) the GS Funds contributed to GGSH $21.2 Million in
cash.
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The acquisition of Superior was accounted for under the purchase method and the
results of its operations have been included subsequent to April 30, 1996.
On November 5, 1996, SIG effectuated an initial public offering of 3,450,000
common stock shares at $12.50 per share. The proceeds of the offering were used
to increase the capitalization of IGF by $9,000,000, repay $7,500,000
indebtedness of SIG, primarily certain amounts owed to Goran and its
wholly-owned subsidiary, Granite Re, repay a bank debt of $7,500,000 and pay
Goran a dividend of $3,500,000. The remaining funds were retained for general
corporate purposes, including acquisitions.
NOTE 3 - 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 government Federal Crop Insurance Corporation ("FCIC")
program all of its Multi-Peril Crop Insurance ("MPCI") business which has a
back-end underwriting gain or loss feature. The Company reinsures stop-loss
protection to affiliates and third party reinsurers. Regarding the crop hail
line of business, the Company hasp placed a 40% quote share treaty, as well as
an excess of loss (stop-loss) protection, mailing with third party reinsurers.
Effective January 1, 1997, the Company ceded 20% of its new and renewal
nonstandard automobile business and 40% of its crop hail business under certain
quota share arrangements.
The effects of reinsurance are as follows:
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NOTE 3
SYMONS INTERNATIONAL GROUP, INC.
Analysis of Effects of Reinsurance
March 31, March 31,
1997 1996
Premiums Written
Gross 129,890 41,422
Ceded 63,101 22,692
Net 66,789 18,730
Premiums Earned
Gross 124,813 26,476
Ceded 61,698 12,691
Net 63,115 13,785
Losses and LAE Incurred
Gross 60,266 13,971
Ceded 14,998 5,008
Net 45,268 8,963
March 31, December 31,
1997 1996
Unearned Premiums
Gross 126,619 87,285
Ceded 55,048 14,984
Net 71,571 72,301
Outstanding Claims
Gross 86,287 101,719
Ceded 16,307 29,459
Net 69,980 72,260
NOTE 4 - 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.
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One of the Company's subsidiaries, 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 the FCIC contends IGF is
responsible for as successor to the run-off book of business. While the final
result 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.
NOTE 5 - EARNINGS PER SHARE
Primary and fully diluted earnings per share were computed using actual weighted
average shares outstanding during the first quarter of 1997 of $10,450,000 plus
191,000 assumed shares from stock option proceeds calculated based upon the
treasury stock method. Weighted average shares outstanding for the first quarter
of 1996 was based on 7,000,000 shares actually outstanding.
NOTE 6 - SUBSEQUENT EVENT
IGF has agreed to purchase the business of Southwest Crop Managing General
Agency ("Southwest"), a subsidiary of Southwest Crop Insurance Company of Honey
Grove, Texas. The Southwest book of business has a premium volume of
approximately $15 Million.
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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 owns 52% of GGS Management Holdings, Inc. ("GGSH") with the
remainder owned by certain funds affiliated with Goldman, Sachs & Co. GGSH,
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 that they 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
ability to repay these loans and to find sources of funding for the following
year's operating expenses.
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Since 1990, Congress has considered major reform of its crop insurance and
disaster assistance policies, resulting in the enactment of the 1994 and 1996
Reform Acts. 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. However, the 1996 Reform
Act 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. 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. As a
result of this limitation, 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 has not experienced any material negative impact in
1997 from the delinkage mandated by the 1996 Reform Act. 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) many lending
institutions will likely continue to require this coverage as a condition to
crop lending, and (ii) many of the farmers who entered the MPCI program as a
result of the 1994 Reform Act have come to appreciate the reasonable price of
the protection afforded by CAT Coverage and will remain with the program
regardless of delinkage. There can, however, be no assurance as to the ultimate
effect which the 1996 Reform Act may have on the business or operations of the
Company.
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 1,200 independent agencies in 31 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 US generally accepted accounting
principles, 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 do 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 generally accepted accounting principles 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.
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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
1997 and 1996, the Buy-Up Expense Reimbursement Payment has been set at 29% and
31%, respectively, of the MPCI Premium. For generally accepted account
principles 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.
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 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 a small volume of
insurance against crop damage from other specific named perils. 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 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 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
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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, (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 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 months ended March 31, 1997, the Company recorded net earnings of
$5,909,000 or $0.56 per share. This is approximately a 273% increase from 1996
comparable amounts of $1,586,000 or $0.23 per share. The improved
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<PAGE>
earnings were attributable to continued improvement in the results of the
nonstandard automobile segment and continued growth and profit in the crop
segment. The nonstandard automobile segment demonstrated significant improvement
due to significantly higher volume and an improved expense ratio from the
acquisition of Superior. The crop segment also demonstrated strong premium
growth and enhanced profitability due to higher volume as well as better loss
experience in winter wheat.
For The Period Ended March 31,
1997 1996
Nonstandard-Automobile Insurance
Operations:
Gross premiums written 75,066 17,922
Net premiums written 59,588 20,167
Net premiums earned 63,105 13,626
Net investment income 2,338 396
Other income, principally billing fees 2,899 591
Net realized capital gain (loss) 942 (52)
TOTAL REVENUES 69,284 14,561
Losses and loss adjustment expenses 45,268 8,565
Policy acquisition and general and 17,124 5,174
administrative expenses
Interest and amortization of 1,484 0
intangibles
TOTAL EXPENSES 63,876 13,739
Earnings before income taxes 5,408 822
GAAP Ratios
(Nonstandard Automobile Only):
Loss and LAE Ratio 71.7% 62.9%
Expense ratio, net of billing fees 22.5% 33.6%
Combined ratio 94.2% 96.5%
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<PAGE>
For The Period Ended March 31,
1997 1996
Crop Insurance Operations:
Gross premiums written 51,709 21,404
Net premiums written 7,201 263
Net premiums earned 10 159
Net investment income 49 162
Other income 2,139 373
Net realized capital gain (loss) 0 16
TOTAL REVENUES 2,198 710
Losses and loss adjustment expenses 0 397
Policy acquisition and general and (4,766) (1,833)
administrative expenses
Interest expense 11 95
TOTAL EXPENSES (4,755) (1,341)
Earnings before income taxes 6,953 2,051
Statutory Capital and Surplus:
Pafco 18,674 13,423
IGF 33,003 10,488
Superior 58,023 51,681
Consolidated gross premiums written increased 213.6% due to growth in both the
nonstandard auto and crop segments.
Gross premiums written for the nonstandard auto segment increased 318.8%. Such
increase was due primarily to gross premiums written from Superior of
$56,925,000 for the three months ended March 31, 1997, internal growth due to
improved service, certain product improvements and tougher uninsured motorist
laws in states such as California and Florida.
Gross premiums written for the crop segment increased 141.6%. Such increase was
due continued industry privatization and aggressive marketing efforts. Premiums
reported in the first three months of each year generally do not include
significant crop hail premiums since most of the policies are written in the
second quarter. In the first quarter of 1997, the Company recorded approximately
$12,000,000 of crop hail gross premiums written as acreage reports were
processed faster than in prior years. However, very little of these premiums
have been earned.
Remaining gross written premiums represent commercial business which was ceded
100% effective January 1, 1996 to an affiliate, Granite Reinsurance Company Ltd.
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<PAGE>
In 1997, the Company ceded $15,477,000 of nonstandard automobile premiums as
part of a 20% quota share treaty instituted January 1, 1997. No such treaty was
in effect during 1996. Due to the growth in premiums and the corresponding lag
in statutory earnings, the Company's subsidiaries needed to cede premiums in
excess of a ratio to statutory surplus of 3.15:1 in order to maintain compliance
with debt covenants. The Company was in compliance with all debt covenants as of
March 31, 1997. It is expected that such cession will continue as the Company
explores alternative financing plans.
Increases in net premiums earned for the three months ended March 31, 1997 as
compared to the corresponding period of the prior year reflects the strong
growth in written premiums offset by the effects of the nonstandard automobile
quota share.
Net investment income increased $1,880,000 for the three months ended March 31,
1997 as compared to the corresponding period of the prior year. Such increase
was due primarily to investment income from Superior of $1,838,000. The
remaining increase was due to greater invested assets.
Other income increased $4,061,000 for the three months ended March 31, 1997 as
compared to the corresponding period of the prior year. Such increase was due to
billing fee income on nonstandard automobile business at Superior of $2,111,000
and due to an increase in the 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.
Realized gains of $942,000 in the first quarter of 1997 was due primarily to a
change in equity managers and a repositioning of the portfolio.
The loss ratio for the nonstandard automobile segment in 1997 was 71.7% as
compared to 62.9% in 1996. The increase in the loss ratio primarily reflects the
significant growth in volume since the first quarter of 1996 and has decreased
from 77.2% in the fourth quarter of 1996 and 73.7% for all of 1996. Crop hail
loss ratios in the first quarter do not have significant impact on consolidated
earnings.
Policy acquisition and general and administrative expenses have increased as a
result of the increased volume of business produced by the Company combined with
a higher percentage of net premiums retained and offset by increases in
reinsurance commission income. Policy acquisition and general and administrative
expenses rose to $13,012,000 or 20.6% of net premium earned for the three months
ended March 31, 1997 compared to $3,669,000 or 26.6% of net premium earned in
the corresponding period of 1996. There is a disproportionate relationship
between increased operating expenses and increased net retention of business.
The expense ratio, gross of billing fees, for the nonstandard segment improved
to 27.1% in 1997 as compared to 38.0% in 1996, due to technological and
operational efficiencies, economies of scale and tighter expense controls.
Due to the unique accounting for the crop insurance segment, operating expenses
for the three months ended March 31, 1997 includes a contribution to earnings of
$4,766,000, as compared to a comparable amount of $1,833,000 for 1996. Such
increase was due to greater Buy-up Expense Reimbursement Payments and MPCI
underwriting gain due to increased premium volumes. The MPCI underwriting gain
was also increased by improved loss experience on winter wheat.
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<PAGE>
Interest expense increased $1,122,000 for the three months ended March 31, 1997
as compared to the corresponding period in the prior year due primarily to
interest incurred since April 30, 1996 on the $48 Million of debt incurred to
purchase Superior.
The Superior acquisition debt is effectively fixed at 8.85% through January
1997, 9.08% through April 1997, 9.24% through July 1997, and 8.80% through
October 1999 through an interest rate swap agreement.
The nonstandard automobile quota share treaty reduced premiums earned, losses
and LAE incurred and policy acquisition and general administrative expenses by
$3,370,000, $2,281,000 and $1,004,000, respectively, for a net pre-tax earnings
reduction of $85,000 in the first quarter of 1997. Reduction in expenses
reflects ceding commission income net of deferred acquisition cost adjustment.
Such impact was relatively immaterial to earnings due to the low ratio of earned
to written premiums. There was no significant impact to pre-tax earnings for the
crop insurance quota share as no significant premiums were earned in the first
quarter.
Income tax expense was 36.1% of pre-tax income in 1997 as compared to 34.0% in
1996. The increase was due to a deferred tax provision of $128,000 for the
unremitted earnings of GGSH to SIG. Such tax is provided at the tax effected
dividends received rate of 7% of GGSH net earnings less minority interest and
will continue unless SIG obtains greater than 80% control of GGSH or GGSH is
distributed in a tax-free reorganization.
Financial Condition
The Company's total assets of $427,120,000 at March 31, 1997 increased
$82,441,000 from $344,679,000 as of December 31, 1996. Cash and invested assets
increased to 199,234,000 at March 31, 1997 from 181,232,000 at December 31, 1996
due to improved cash flow from operations.
The Company's shareholders' equity increased from $60,900,000 at December 31,
1996 to $65,866,000 at March 31, 1997. Long term debt to equity was .41 to 1 at
December 31, 1996 and .38 to 1 at March 31, 1997. Both ratios exclude the
minority interest portion of long-term debt.
Net cash provided by operating activities improved to $19,163,000 in 1997 from
$786,000 in 1996 due to improved earnings and premium growth. This additional
cash flow was used to increase invested assets. The contribution from the
minority interest owner in 1997 was made to increase the capitalization of GGSH
and the Company who contributed its 52% share.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
One of the Company's subsidiaries, IGF Insurance Company ("IGF"),
is the administrator of a run-off book of business. The Federal
Crop Insurance Corporation ("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 (US) as reimbursement for these expenses. The
FCIC has counterclaimed for approximately $1.2 million (U.S.) in
claims payments for which the FCIC contends IGF is responsible for
as successor to the run-off book of business. While the final
result of this litigation 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 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
None
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<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: March 31, 1997 By:__/s/ Alan G. Symons_________
Alan G. Symons
Chief Executive Officer
Dated: March 31, 1997 By:___/s/ Gary P. Hutchcraft_____
Gary P. Hutchcraft
Vice President, Treasurer and
Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's unaudited consolidated financial statements for the three
months ended March 31, 1997 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0001013698
<NAME> Symons International Group, Inc.
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
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