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 June 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 June 30, 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
June 30, 1997
Page
Number
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements..................................
Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 1997 and
December 31, 1996.....................................
Consolidated Statements of Earnings for the Three
and Six Months Ended June 30, 1997 and 1996...........
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1997 and 1996.......
Consolidated Statements of Changes in Stockholders'
Equity................................................
Notes to Consolidated Financial Statements............
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................
PART 2 OTHER INFORMATION.....................................
SIGNATURES....................................................
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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 and six months ended June 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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SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, June 30,
1997 1996
ASSETS
Investments
Available for Sale:
Fixed Maturities, at market $143,905 $127,681
Equity Securities, at market 32,031 27,920
Short-term investments, at amortized cost 11,742 9,565
which approximates market
Real Estate, at cost 457 466
Mortgage Loans 2,290 2,430
Other 75 75
-------- -------
Total invested assets 190,500 168,137
Cash and cash equivalents 18,329 13,095
Receivables, net 176,045 65,194
Reinsurance recoverable on paid and unpaid
losses, net 70,694 48,294
Prepaid reinsurance premiums 73,927 14,983
Deferred policy acquisition costs 13,121 12,800
Deferred income taxes 2,899 3,329
Property and equipment 9,555 8,137
Federal income taxes recoverable --- 319
Investments in and advances to related parties 2,418 1,152
Other 10,153 9,239
------ -----
Total Assets $567,641 $344,679
======== =======
LIABILITIES
Losses and loss adjustment expenses $137,924 $101,719
Unearned premiums 160,741 87,285
Reinsurance payable 100,475 6,508
Federal income tax payable 1,594 ---
Term debt 44,872 48,000
Other 23,411 18,657
------ ------
Total Liabilities 469,017 262,169
------- -------
Minority Interest in Consolidated Subsidiary 26,724 21,610
------ ------
STOCKHOLDERS' EQUITY
Common stock 39,019 38,969
Additional paid-in capital 5,905 5,905
Unrealized gain on investments, net of 2,184 820
deferred taxes of $2,398 and $625
Retained earnings 24,792 15,206
------ ------
Total Stockholders' Equity 71,900 60,900
------ ------
Total Liabilities and Stockholders' Equity $567,641 $344,679
======== =======
See Notes to Consolidated Financial Statements
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SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands)
For the Three Months Ending:
June 30, June 30,
1997 1996
Gross premiums written $149,175 $105,528
Less ceded premiums (65,441) (47,216)
-------- --------
Net premiums written 83,734 58,312
Change in unearned premiums (10,837) (13,031)
-------- --------
Net premiums earned 72,897 45,281
Net investment income 2,838 975
Other income 5,753 3,085
Net realized capital gain 742 264
--- ---
Total Revenues 82,230 49,605
------ ------
Loss and loss adjustment expenses 58,025 36,312
Policy acquisition and general and 17,514 8,614
administrative expenses
Interest expense 1,244 1,012
----- -----
Total Expenses 76,783 45,938
------ ------
Income before income taxes and minority 5,447 3,667
interest
Provision for income taxes 1,897 1,037
Minority interest 127 88
--- --
Net Earnings $3,677 $2,718
====== =====
Primary Earnings Per Share $0.35 $0.39
===== ====
Fully Diluted Earning Per Share $0.35 $0.39
===== =====
Weighted Average Shares Outstanding
Primary 10,593 7,000
====== =====
Fully Diluted 10,631 7,000
====== =====
See notes to consolidated financial statements
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SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands)
For the Six Months Ending:
June 30, June 30,
1997 1996
Gross premiums written $279,065 $146,950
Less ceded premiums (128,541) (69,908)
--------- --------
Net premiums written 150,524 77,042
Change in unearned premiums (14,512) (17,976)
-------- --------
Net premiums earned 136,012 59,066
Net investment income 5,276 1,533
Other income 10,791 4,062
Net realized capital gain 1,684 228
----- ---
Total Revenues 153,763 64,889
------- ------
Loss and loss adjustment expenses 103,293 45,275
Policy acquisition and general and 30,397 12,283
administrative expenses
Interest expense 2,744 1,261
----- -----
Total Expenses 136,434 58,819
------- ------
Income before income taxes and minority 17,329 6,070
interest
Provision for income taxes (6,183) (1,854)
Minority interest (1,560) 88
------- --
Net Earnings 9,586 $4,304
===== =====
Primary Earnings Per Share $ 0.90 $ 0.61
====== ======
Fully Diluted Earning Per Share $ 0.90 $ 0.61
====== ======
Weighted Average Shares Outstanding
Primary 10,617 7,000
====== =====
Fully Diluted 10,636 7,000
====== =====
See notes to consolidated financial statements
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SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Six Months Ending
June 30, June 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net Earnings For The Period $9,586 $4,304
Adjustments to reconcile Net Earnings to Net
Cash provided from Operations:
Minority Interest 1,560 (88)
Depreciation and Amortization 1,169 221
Deferred income tax expense (1,068) 664
Net realized capital gain (1,684) (228)
Net changes in operating assets and
liabilities:
Receivables (110,851) (48,085)
Reinsurance recoverable on paid and unpaid (22,400) (29,475)
losses, net
Prepaid reinsurance premiums (58,944) (3,824)
Deferred policy acquisition costs (321) (2,888)
Other assets (1,198) (3,264)
Losses and loss adjustment expenses 36,205 (10,216)
Unearned premiums 73,456 52,077
Reinsurance payables 93,967 46,349
Federal income taxes recoverable/(payable) 1,913 (490)
Other liabilities 5,120 2,925
------ -----
Net Cash Provided From Operations 26,510 7,982
------ -----
Cash Flow Used In Investing Activities:
Cash paid for Superior, net of cash --- (66,389)
required
Net (Purchases)/Sales of short-term (2,177) 11,342
investments
Purchases of fixed maturities (36,846) (24,976)
Proceeds from sales, calls and maturities 20,964 17,896
of fixed maturities
Purchase of equity securities (15,188) (86,177)
Proceeds from sales of equity securities 16,531 65,944
Proceeds from repayment of mortgage loans 140 360
Purchases of property and equipment (2,294) (579)
------- -----
Net Cash Used In Investing Activities (18,870) (82,579)
-------- --------
Cash Flow Provided From/(Used In) Financing
Activities:
Net proceeds from line of credit and notes --- 1,939
payable
Proceeds/(payment) related to long-term debt (3,128) 48,000
Contribution from minority interest owner 2,304 21,200
Loans to related parties (1,582) 1,147
------- -----
Net Cash Provided From/(Used In) Financing
Activities (2,406) 72,286
------- ------
Increase/(Decrease) In Cash And Cash Equivalents 5,234 (2,311)
Cash and Cash Equivalents, Beginning of Period 13,095 2,311
------ -----
Cash and Cash Equivalents, End of Period $ 18,329 $ ---
======== =======
See Notes to Consolidated Financial Statements
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SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
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 --- 3,389 --- --- 3,389
stock
Change in --- --- 529 --- 529
unrealized loss on
investments, net
of deferred taxes
Net Earnings --- --- --- 4,304 4,304
--- --- --- ----- -----
Balance at June 1,000 6,519 (484) 9,754 17,757
30, 1996
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 --- --- 1,364 --- 1,364
unrealized gain on
investments, net
of deferred taxes
Net Earnings --- --- --- 9,586 9,586
--- --- --- ----- -----
Balance at June $ 39,019 $ 5,905 $ 2,184 $24,792 $71,900
30, 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 and Six Months Ended June 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
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 - 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 on its MPCI 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 and 40% of its crop hail business and 50% of its crop named peril
business under certain quota share arrangements. Granite Re, an affiliate, is a
participant in the 20% quota share treaty, receiving 10% of the ceded
nonstandard automobile business.
The effects of reinsurance are as follows:
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NOTE 3
SYMONS INTERNATIONAL GROUP, INC.
Analysis of Effects of Reinsurance
(in thousands)
For the three months ended For the six months ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
Premiums Written
Gross $149,175 $105,528 $279,065 $146,950
Ceded (65,440) (47,216) (128,541) (69,980)
-------- -------- --------- --------
Net $83,735 $58,312 $150,524 $77,042
======= ======= ======== =======
Premiums Earned
Gross $80,796 $81,252 $205,609 107,728
Ceded (7,899) (35,971) (69,597) (48,662)
------- -------- -------- --------
Net $72,897 $45,281 $136,012 $59,066
======= ======= ======== =======
Losses and LAE
Incurred
Gross $94,080 $63,913 $154,346 $77,884
Ceded (36,055) (27,601) (51,053) (32,609)
-------- -------- -------- --------
Net $58,025 $36,312 $103,293 $45,275
======= ======= ======== =======
June 30, 1997 December 31, 1996
Unearned Premiums
Gross $160,741 $87,285
Ceded (73,927) (14,983)
-------- --------
Net $86,814 $72,302
======== ========
Outstanding Claims
Gross $137,924 $101,719
Ceded (62,080) (29,459)
-------- --------
Net $75,844 $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.
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<PAGE>
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 4 - EARNINGS PER SHARE
Primary and fully diluted earnings per share for the three and six months ending
June 30, 1997 were computed using actual weighted average shares outstanding
during 1997 of 10,450,000 plus 143,000 and 167,000 assumed shares from stock
option proceeds calculated based upon the treasury stock method. Weighted
average shares outstanding for 1996 was based on 7,000,000 shares actually
outstanding.
NOTE 5 - SUBSEQUENT EVENTS
On August 12, 1997, the Company issued $ 135,000,000 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 the Company
will ultimately file a Form S-1 Registration Statement. 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. Expenses of
the issue will aggregate 4.9 million and will be amortized over the term of the
Preferred Securities (30 years). In the third quarter the Company will write-off
the remaining unamortized costs of the GGS Senior Credit Facility of
approximately $1.4 million pre-tax or approximately $0.09 per share.
The excess of the acquisition price over the minority interest liability
aggregated approximately $34,000,000 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 due at 9.50%. The Preferred Securities may be redeemed in whole or in
part after 10 years.
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 six
months ended is as follows:
June 30, 1997
Unaudited
Revenues $ 153,763
Net earnings $ 8,089
Net earnings per common share $ 0.76
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The aforementioned proforma results do not include the effects of the write-off
of the debt issuance cost to be 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
GGS Management Holdings, Inc. ("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
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<PAGE>
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 39 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
1997 and 1996, the Buy-up Expense Reimbursement Payment has been set at 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.
The Company is currently negotiating the 1998 Standard Reinsurance Agreement
with the FCIC. The current government proposal is to reduce the Buy-Up Expense
Reimbursement Payment to 27 to 28%. The negotiations are on-going and the
ultimate results cannot be determined at this time. There can be no assurance
that the Company will negotiate terms which are favorable to the Company.
On June 9, 1997, the Secretary of Agriculture announced that the USDA would no
longer provide CAT Coverage through USDA offices in any state for the 1998 crop
year. This is to be implemented by a transferring of CAT policies to the various
members of the crop insurance industry. At this time, the Company has been
preliminarily informed that it will receive approximately 17,000 policies that
were formerly written by USDA offices, although there can be no assurance that
the Company will receive this number of policies. Based on historical,
per-policy averages, the Company has preliminarily estimated that it will
receive approximately an additional $6 to $7 million in premiums from such
transferred policies, however, there can be no assurance that this number will
be realized. This estimate assumes that IGF will retain 100% of such premiums.
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<PAGE>
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 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,
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<PAGE>
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 and six months ended June 30, 1997, the Company recorded net
earnings of $3,677,000 and $ 9,586,000 or $0.35 and $0.90 per share. This is
approximately a 35.3% and 123% increase from 1996 comparable amounts of
$2,718,000 and $4,304,000 or $0.39 and $0.61 per share. The improved earnings
for the six months ended were attributable to continued premium growth and
improved expense ratios of the nonstandard automobile segment and continued
growth and profit in the crop segment. The improvement for the three months
ended relates to the growth and profitability of the crop segment. The crop
segment demonstrated enhanced profitability due to higher volume as well as
normal crop underwriting expectations.
-15-
<PAGE>
For the three months ended
June 30,
1997 1996
Nonstandard-Automobile Insurance
Operations:
Gross premiums written $90,481 $44,368
======= ======
Net premiums written $74,255 $41,922
======= ======
Net premiums earned $65,139 $39,218
Net investment income 2,756 1,039
Other income, principally billing 4,305 1,742
fees
Net realized capital gain 742 264
--- ---
TOTAL REVENUES 72,942 42,263
------ ------
Losses and loss adjustment expenses 53,756 30,266
Policy acquisition and general and 18,368 10,600
administrative expenses
Interest and amortization of 1,227 696
----- ---
intangibles
TOTAL EXPENSES 73,351 41,562
------ ------
Earnings/(loss) before income taxes $ (409) $701
====== ====
GAAP Ratios
(Nonstandard Automobile Only):
Loss and LAE Ratio 82.5% 77.2%
Expense ratio, net of billing fees 21.6% 22.6%
----- -----
Combined ratio 104.1% 99.8%
====== =====
Without the $ 5.3 million reserve increase, the ratios would have been as
follows:
Loss and LAE Ratio 74.4% 77.2%
Expense ratio, net of billing fees 21.6% 22.6%
----- -----
Combined ratio 96.0% 99.8%
===== =====
Crop Insurance Operations:
Gross premiums written $56,647 $59,133
======= =======
Net premiums written $9,479 $14,690
====== =======
Net premiums earned $7,758 $6,063
Net investment income 43 (66)
Other income 1,448 775
Net realized capital gain (loss) --- ---
--- ---
TOTAL REVENUES 9,249 6,772
----- -----
Losses and loss adjustment expenses 4,269 6,047
===== =====
Policy acquisition and general and (1,260) (2,433)
administrative expenses
Interest expense 13 25
-- --
TOTAL EXPENSES 3,022 3,639
----- -----
Earnings before income taxes $6,227 $3,133
====== ======
-16-
<PAGE>
For the six months ended
June 30,
1997 1996
Nonstandard-Automobile Insurance
Operations:
Gross premiums written $165,547 $62,290
======== =======
Net premiums written $133,843 $62,089
======== =======
Net premiums earned $128,244 $52,844
Net investment income 5,094 1,435
Other income, principally billing 7,204 2,333
fees
Net realized capital gain 1,684 212
----- ---
TOTAL REVENUES 142,226 56,824
------- ------
Losses and loss adjustment expenses 99,024 38,831
Policy acquisition and general and 35,492 15,774
administrative expenses
Interest and amortization of 2,711 696
----- ---
intangibles
TOTAL EXPENSES 137,227 55,301
------- ------
Earnings before income taxes $4,999 $1,523
====== ======
GAAP Ratios
(Nonstandard Automobile Only):
Loss and LAE Ratio 77.2% 73.5%
Expense ratio, net of billing fees 22.1% 25.4%
----- -----
Combined ratio 99.3% 98.9%
===== -----
Without the reserve increase of $5.3 million, the ratios would have been as
follows:
Loss and LAE Ratio 73.1% 73.5%
Expense ratio, net of billing fees 22.1% 25.4%
----- -----
Combined ratio 95.2% 98.9%
===== =====
Crop Insurance Operations:
Gross premiums written $108,356 $80,537
======== =======
Net premiums written $16,680 $14,953
======= =======
Net premiums earned $7,768 $6,222
Net investment income 92 96
Other income 3,587 1,148
Net realized capital gain -- 16
-- --
TOTAL REVENUES 11,447 7,482
------ -----
Losses and loss adjustment expenses 4,269 6,444
Policy acquisition and general and (6,026) (4,266)
administrative expenses
Interest expense 24 120
---
TOTAL EXPENSES (1,733) 2,298
------- -----
Earnings before income taxes $13,180 $5,184
======= ======
Statutory Capital and Surplus:
Pafco 17,273 $14,872
====== =======
IGF 36,760 $11,559
====== =======
Superior 65,018 $48,036
====== =======
Consolidated Gross Premiums Written increased 41.4% in the second quarter and
89.9% year-to-date due to growth in both the nonstandard auto and crop segments.
Gross Premiums Written for the nonstandard auto segment increased 104% in the
second quarter and 166% year-to-date. Such increase was due primarily to Gross
Premiums Written from Superior of $71,921,000 and $128,846,000 for the three and
six months ended June 30, 1997, as compared to $25,202,000 in 1996 subsequent to
its acquisition on April 30, 1996. 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
and tougher uninsured motorist laws in states such as California and Florida.
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 decreased 4.2% in the second quarter and increase 34.5%
year-to-date. The year-to-date increase was due to continued industry
privatization and aggressive marketing efforts, while the decrease in the second
quarter is a reflection of timing of processing of acreage reports. 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 second 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 $15,876,000 and $31,363,000 of nonstandard automobile
premiums during the second 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 $6,903,00 and $11,805,000 of crop hail premiums during
the second 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 is not expected
to continue in effect subsequent to the Offering of the Preferred Securities.
Net Premiums Earned increased for the three and six months ended June 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.
Net investment income increased $1,863,000 and $3,743,000 for the three and six
months ended June 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.
Other income increased $2,668,000 and $6,729,000 for the three and six months
ended June 30, 1997 as compared to the corresponding periods of the prior year.
Such increases were due to billing fee income on nonstandard automobile business
at Superior 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 $1,684,000 in 1997 were due primarily to a change in equity
managers and a repositioning of the portfolio.
The Loss and LAE Ratio for the nonstandard automobile segment was 82.5% and
77.2% for the three and six months ended June 30, 1997 as compared to 77.2% and
73.5% for the corresponding periods in 1996. The Company, as part of
management's actions to reduce costs and combine operations of the nonstandard
automobile division, combined the claims management as well as the reserving
philosophies of Superior Insurance Company with Pafco General Insurance Company,
the two nonstandard automobile insurance companies in the Group. In order to
align the different reserving philosophies of its two subsidiaries, the Company
adopted the more conservative methodology for the
-17-
<PAGE>
combined business which required an increase of reserves of $5.3 million. This
adjustment increased the second quarter and year-to-date 1997 loss ratio by 8.1%
and 4.1%. While the Company believes those actions were necessary, the
establishment and monitoring of reserve levels are a highly subjective process
involving numerous estimates and assumptions. Therefore, actual results may
differ from current estimates. The Crop Hail Loss Ratio in 1997 is 54.2%
compared to 61.0% in 1996.
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 $17,514,000 and $30,397,000 or 24.0% and 22.4% of Net Premium
Earned for the three and six months ended June 30, 1997 compared to $8,614,000
and $12,283,000 or 19.0% and 20.8% 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 21.6% and 22.1% for the three
and six months ended June 30, 1997 as compared to 22.6% and 25.4% for the
corresponding periods in 1996, due to technological and operational
efficiencies, economies of scale and tighter expense controls.
Due to the accounting for the crop insurance segment, operating expenses for the
three and six months ended June 30, 1997 includes a contribution to earnings of
$1,260,000 and $6,026,000, as compared to comparable amounts of $2,433,000 and
$4,266,000 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.
The nonstandard automobile quota share treaty reduced premiums earned, losses
and LAE incurred and policy acquisition and general administrative expenses by
$12,442,000, $8,631,000 and $3,501,000, and $15,812,000, $10,912,000, and
$4,505,000, respectively, for the three and six months ending June 30, 1997, for
a net pre-tax earnings reduction of $310,000 and $395,000 in the three and six
months ending June 30, 1997. Reduction in expenses reflects ceding commission
income net of a deferred acquisition cost adjustment.
Interest expense increased $232,000 and $1,483,000 for the three and six months
ended June 30, 1997 as compared to the corresponding periods in the prior year
due primarily to interest incurred since April 30, 1996 on the GGS Senior Credit
Facility. The GGS Senior Credit Facility will be repaid with the proceeds from
the Offering of the Preferred Securities.
Income tax expense was 34.8% and 35.7% of pre-tax income for the three and six
months ended June 30, 1997 as compared to 28.3% and 30.5% in 1996. The increase
was due to the Company's selling of its tax exempt investments in the second
half of 1996 as part of its restructuring of the investment portfolios.
Financial Condition and Capital Reserves and Liquidity
The Company's total assets of $567,641,000 at June 30, 1997 increased
$222,962,000 from $ 344,679,000 as of December 31, 1996. The primary reasons for
this increase were an increase of $27,597,000 in cash and invested assets and
increases in receivables and reinsurance assets due to growth in premium volume.
The increase in cash and invested assets was due to the increase in cash flow
from operations. 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,
GGS Management will have no dividend restrictions. 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
and reinsurance.
-18-
<PAGE>
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 is also in the process of preparing 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 1996, IGF continued the practice of borrowing funds under a revolving
line of credit to finance premium payables to the FCIC on amounts not yet
received from farmers (the "IGF Revolver"). The maximum borrowing amount under
the IGF Revolver is $7,000,000. IGF has not borrowed on this line in 1997.
Net cash provided by operating activities in 1997 aggregated $26,510,000
compared to $7,982,000 in 1996. This increase in funds provided was caused by
additional cash of $4,690,000 from net earnings adjusted for non-cash expenses
and realized gains or losses, continued premium growth and the normal receipt of
funds from the FCIC in the first quarter on the crop insurance operations.
Net cash used in investing activities decreased from $82,579,000 in 1996 to
$18,870,00 in the first quarter of 1997 reflecting the acquisition of Superior
in 1996 offset in part by the application of funds received from operating
activities. The proceeds from sales of equity securities of $16,531,000 in 1997
reflects a change in investment managers and a restructuring of the portfolio
rather than a liquidation for operating cash needs.
In 1997, financing activities used cash of $2,406,000 compared to cash provided
of $72,286,000 in 1996. The Company paid principal of $3,128,000 on its Term
Debt as scheduled. The contribution from the GS Funds of $2,304,000 represents a
contribution to GGS Holdings that was ultimately contributed to the insurance
subsidiaries for
-19-
<PAGE>
surplus. The Company also contributed cash to maintain its 52% share. The crop
insurance segment had no need to borrow funds on its revolver in 1997 due to the
proceeds it received from the initial public offering and continued growth and
profitable operations.
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
-20-
<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: August 12, 1997 By:__/s/ Alan G. Symons____________________
Alan G. Symons
Chief Executive Officer
Dated: August 12, 1997 By:__/s/ Gary P. Hutchcraft________________
Gary P. Hutchcraft
Vice President, Treasurer and
Chief Financial Officer
-21-
<PAGE>
<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 June 30, 1997 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0001013698
<NAME> Symons International Group, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 143,528,000
<DEBT-MARKET-VALUE> 143,905,000
<EQUITIES> 32,031,000
<MORTGAGE> 2,290,000
<REAL-ESTATE> 457,000
<TOTAL-INVEST> 190,500,000
<CASH> 18,329,000
<RECOVER-REINSURE> 70,694,000
<DEFERRED-ACQUISITION> 13,121,000
<TOTAL-ASSETS> 567,641,000
<POLICY-LOSSES> 137,924,000
<UNEARNED-PREMIUMS> 160,953,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 44,872,000
0
0
<COMMON> 39,019,000
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<TOTAL-LIABILITY-AND-EQUITY> 567,641,000
279,065,000
<INVESTMENT-INCOME> 5,276,000
<INVESTMENT-GAINS> 1,684,000
<OTHER-INCOME> 10,791,000
<BENEFITS> 153,763,000
<UNDERWRITING-AMORTIZATION> (256,000)
<UNDERWRITING-OTHER> 30,653,000
<INCOME-PRETAX> 17,329,000
<INCOME-TAX> 6,183,000
<INCOME-CONTINUING> 11,146,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,586,000
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
<RESERVE-OPEN> 101,719,000
<PROVISION-CURRENT> 77,987,000
<PROVISION-PRIOR> 15,732,000
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<PAYMENTS-PRIOR> 37,786,000
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</TABLE>
