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, 1998
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, 1998, there were 10,387,532 shares of Registrant's common stock
issued and outstanding exclusive of shares held by Registrant.
<PAGE>
Form 10-Q Index
For The Quarter Ended June 30, 1998
Page
Number
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 1998
(unaudited) and December 31, 1997 . . ..............................3
Unaudited Consolidated Statements of Earnings for the
Three and Six Months Ended June 30, 1998 and 1997 ................4-5
Unaudited Consolidated Statements of Stockholders'
Equity .............................................................6
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 ............................7
Condensed Notes to Unaudited Consolidated Financial
Statements .........................................................8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................9
PART 2 OTHER INFORMATION .................................................19
SIGNATURES ................................................................20
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
SYMONS INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
(unaudited)
<S> <C> <C>
Investments
Available for sale:
Fixed maturities, at market $179,041 $169,385
Equity securities, at market 39,957 35,542
Short-term investments, at amortized cost which approximates market 11,220 8,871
Real estate, at cost 448 450
Mortgage loans, at cost 2,160 2,220
Other 339 50
------- -------
TOTAL INVESTMENTS 233,165 216,518
Investment in and advances to related parties 4,387 839
Cash and cash equivalents 22,464 11,276
Receivables, net of allowance for doubtful accounts 238,532 91,730
Reinsurance recoverable on paid and unpaid losses, net 106,233 93,832
Prepaid reinsurance premiums 111,526 36,606
Federal income taxes recoverable 982 1,505
Deferred policy acquisition costs 17,618 10,740
Deferred income taxes 2,565 4,722
Property and equipment, net of accumulated depreciation 17,302 12,051
Intangible assets 42,742 43,756
Other assets 5,675 6,300
------- -------
TOTAL ASSETS $803,191 $529,875
======= =======
LIABILITIES
Losses and loss adjustment expenses $171,557 $136,772
Unearned premiums 226,388 114,635
Reinsurance payables 154,564 35,692
Notes payable 35 4,182
Distributions payable on preferred securities 4,783 4,801
Other 21,015 20,430
------- -------
TOTAL LIABILITIES 578,342 316,512
------- -------
Minority interest:
Preferred securities 135,000 135,000
------- -------
STOCKHOLDERS' EQUITY
Common stock 38,199 39,019
Additional paid-in capital 5,946 5,925
Unrealized gain on investments 3,912 1,908
Retained earnings 41,792 31,511
------- -------
TOTAL STOCKHOLDERS' EQUITY 89,849 78,363
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $803,191 $529,875
======= -------
</TABLE>
See notes to consolidated financial statements
-3-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1998 1997
<S> <C> <C>
Gross premiums written $173,094 $149,175
Less ceded premiums (68,380) (65,441)
------- -------
Net premiums written 104,714 83,734
Change in net unearned premiums (5,756) (10,837)
------- -------
Net premiums earned 98,958 72,897
Fee income 4,901 5,753
Net investment income 3,306 2,838
Net realized gain 843 742
------- ------
Total Revenues 108,008 82,230
------- ------
Loss and loss adjustment expenses 72,181 58,025
Policy acquisition and general and administrative expenses 23,088 17,514
Interest expense 49 1,080
Amortization of intangibles 510 164
------- ------
Total Expenses 95,828 76,783
------- ------
Earnings before income taxes and minority interest 12,180 5,447
Provision for income taxes 4,416 1,897
------- ------
Net earnings before minority interest 7,764 3,550
Minority interest:
Distributions on preferred securities, net of tax 2,096 --
Equity in earnings of subsidiary -- (127)
------- ------
Net Earnings $ 5,668 $ 3,677
======= ======
Net earnings per share - basic $0.55 $0.35
==== ====
Net earnings per share - fully diluted $0.53 $0.35
==== ====
Weighted average shares outstanding:
Basic 10,392 10,450
====== ======
Fully diluted 10,704 10,631
====== ======
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Gross premiums written $351,490 $279,065
Less ceded premiums (147,215) (128,541)
------- -------
Net premiums written 204,275 150,524
Change in net unearned premiums (36,833) (14,512)
------ ------
Net premiums earned 167,442 136,012
Fee income 11,390 10,791
Net investment income 6,264 5,276
Net realized gain 2,811 1,684
------- -------
Total Revenues 187,907 153,763
------- -------
Loss and loss adjustment expenses 125,386 103,293
Policy acquisition and general and administrative expenses 8,012 30,397
Interest expense 232 2,451
Amortization of intangibles 1,021 293
------- -------
Total Expenses 164,651 136,434
------- -------
Earnings before income taxes and minority interest 23,256 17,329
Provision for income taxes 8,438 6,183
------- -------
Net earnings before minority interest 14,818 11,146
Minority interest:
Distributions on preferred securities, net of tax 4,226 --
Equity in earnings of subsidiary -- 1,560
------- -------
Net Earnings $ 10,592 $ 9,586
======= =======
Net earnings per share - basic $1.02 $0.92
==== ====
Net earnings per share - fully diluted $0.99 $0.90
==== ====
Weighted average shares outstanding:
Basic 10,419 10,450
====== ======
Fully diluted 10,715 10,636
====== ======
</TABLE>
See notes to consolidated financial statements
-5-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except number of shares)
<TABLE>
<CAPTION>
Shares Total
Common Stockholders' Retained
Stock Equity Earnings
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 10,450,000 $60,900 $15,206
Comprehensive income:
Net earnings 9,586 9,586
Change in unrealized gains (losses) on securities 1,364 --
------
Comprehensive income 10,950 --
Adjustment of offering costs 50 --
------ -----
BALANCE AT JUNE 30, 1997 10,450,000 $71,900 $24,792
========== ====== ======
BALANCE AT DECEMBER 31, 1997 10,451,667 $78,363 $31,511
Comprehensive income:
Net earnings 10,592 10,592
Change in unrealized gains (losses) on securities 2,004
------
Comprehensive income 12,596
Exercise of stock options 1,665 20 --
Cost of shares acquired (65,800) (1,130) (311)
---------- ----- -----
BALANCE AT JUNE 30, 1998 10,387,532 $89,849 $41,792
========== ====== ======
</TABLE>
See notes to consolidated financial statements
-6-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings for the period $10,592 $9,586
Adjustments to reconcile net earnings to net cash provided from operations:
Equity in earnings of subsidiary -- 1,560
Depreciation and amortization 2,453 1,169
Deferred income tax expense 1,087 (1,068)
Net realized gain (2,811) (1,684)
Net changes in operating assets and liabilities:
Receivables (146,802) (110,851)
Reinsurance recoverable on paid and unpaid losses, net (12,401) (22,400)
Prepaid reinsurance premiums (74,919) 58,944)
Deferred policy acquisition costs (6,878) (321)
Other assets 624 (1,198)
Losses and loss adjustment expenses 34,785 36,205
Unearned premiums 111,753 73,456
Reinsurance payables 118,872 93,967
Distributions payable on preferred securities (18) --
Federal income taxes 523 1,913
Other liabilities 585 5,120
------ ------
NET CASH PROVIDED FROM OPERATIONS 37,445 26,510
------ ------
Cash flow used in investing activities:
Net (purchases) sales of short-term investments (2,349) (2,177)
Purchases of fixed maturities (94,207) (36,846)
Proceeds from sales, calls and maturities of fixed maturities 85,536 20,964
Purchase of equity securities (11,289) (15,188)
Proceeds from sales of equity securities 11,409 16,531
Purchase of real estate 223 140
Purchases of property and equipment (6,545) (2,294)
(Purchases) sales of other investments (229) --
------ -----
NET CASH USED IN INVESTING ACTIVITIES (17,451) (18,870)
------ ------
Cash flow provided from/(used in) financing activities:
Cost of shares acquired (1,132) --
Payments on notes payable (4,147) (3,128)
Contribution from minority interest owner -- 2,304
Repayments from related parties (3,548) (1,582)
Additional paid-in capital 21 --
------ ------
NET CASH PROVIDED FROM/(USED IN) FINANCING ACTIVITIES (8,806) (2,406)
------ ------
Increase in cash and cash equivalents 11,188 5,234
Cash and cash equivalents, beginning of period 11,276 13,095
------ ------
Cash and cash equivalents, end of period $22,464 $18,329
====== ======
</TABLE>
See notes to consolidated financial statements
-7-
<PAGE>
SYMONS INTERNATIONAL GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For The Three and Six Months Ended June 30, 1998
NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentation have
been included. Operating results for the interim periods are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1998. Interim financial statements should be read in
conjunction with the Company's annual audited financial statements.
(2) In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information (SFAS 131), which is effective for years beginning
after December 15, 1997. SFAS 131 established standards for the way
that public business enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports. It also established standards for related
disclosures about products and services, geographic areas, and major
customers. SFAS 131 is effective for financial statements for fiscal
years beginning after December 15, 1997. The Company will adopt the new
requirements effective December 31, 1998. Management has not completed
its review of SFAS 131, but does not anticipate that the adoption of
this statement will have a significant effect on the Company's reported
segments.
On March 4, 1998, the AICPA Accounting Standards Executive Committee
issued Statement of Position No. 98-1 (SOP 98-1), Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use. SOP
98-1 was issued to address diversity in practice regarding whether and
under what conditions the costs of internal-use software should be
capitalized. SOP 98-1 is effective for financial statements for years
beginning after December 15, 1998. The Company will adopt the new
requirements of the SOP in 1999. Management has not completed its
review of SOP 98-1, but does not anticipate that the adoption of this
SOP will have significant effect on net earnings during 1999.
(3) On March 2, 1998, the Company announced that it had signed an agreement
with CNA to assume its multi-peril and crop hail operations. CNA wrote
approximately $110 million of multi-peril and crop hail insurance
business in 1997. The Company will reinsure 100% of all multi-peril and
crop hail premiums written by CNA during 1998 and cede a small portion
of the Company's total crop book of business (approximately 22% MPCI
and 15% crop hail) back to CNA. Starting in the year 2000, assuming no
event of change in control as defined in the agreement, the Company can
purchase the insurance premiums reinsured to CNA through a call
provision or CNA can require the Company to buy the insurance premiums
reinsured to CNA. Regardless of the method of takeout of CNA, CNA must
not compete in MPCI or crop hail for a period of time. There was no
purchase price. The formula for the buyout in the year 2000 is based on
a multiple of average pre-tax earnings that CNA received from
reinsuring
-8-
<PAGE>
the Company's book of business.
On July 8, 1998, the Company acquired North American Crop Underwriters
(NACU) a Henning, Minnesota based managing general agency which focuses
exclusively on crop insurance. The acquisition price was $4 million
with $3 million paid at closing and $1 million due July 1, 2000 without
interest. This acquisition captures 100% of the MPCI underwriting gain
and fees on approximately $27 million of premiums. Prior to this
transaction, NACU received all fees and 50% of the underwriting gain
with the balance going to the Company through the CNA transaction.
Basic and diluted net income per share are computed by dividing net
income as reported by the average number of shares outstanding as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic:
Weighted-average common shares
outstanding 10,392,000 10,450,000 10,419,000 10,450,000
========== ========== ========== ==========
Diluted:
Weighted-average common shares
outstanding 10,392,000 10,450,000 10,419,000 10,450,000
Dilutive effect of stock options 312,000 181,000 296,000 186,000
---------- ---------- ---------- ----------
Average common shares outstanding
assuming dilution 10,704,000 10,631,000 10,715,000 10,636,000
========== ========== ========== ==========
</TABLE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
The Company underwrites and markets nonstandard private passenger automobile
insurance and crop insurance.
Nonstandard Automobile Insurance Operations
The Company, through its wholly owned subsidiaries, Pafco and Superior, is
engaged in the writing of insurance coverage on automobile physical damage and
liability policies for "nonstandard risks". Nonstandard insureds are those
individuals who are unable to obtain insurance coverage through standard market
carriers due to factors such as poor premium payment history, driving
experience, record of prior accidents or driving violations, particular
occupation or type of vehicle. The Company offers several different policies
which are directed towards different classes of risk within the nonstandard
market. Premium rates for nonstandard risks are higher than for standard risks.
Since it can be viewed as a residual market, the size of the nonstandard private
passenger automobile insurance market changes with the insurance environment and
grows when the standard coverage becomes more restrictive. Nonstandard policies
have relatively short policy periods and low limits of liability. Due to the low
limits of coverage, the period of time that elapses between the occurrence and
settlement of losses under nonstandard policies is shorter than many other types
of insurance. Also, since the nonstandard automobile insurance business
typically experiences lower rates of retention than standard automobile
insurance, the number of new policyholders underwritten by nonstandard
automobile insurance carriers each year is substantially greater than the number
of new policyholders underwritten by standard carriers.
-9-
<PAGE>
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. 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.
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 1,017 independent agencies in 42 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, 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.
The Company also receives from the FCIC (i) an expense reimbursement payment
equal to a percentage of gross premiums written for each Buy-Up Coverage policy
it writes ("Buy-Up Expense Reimbursement Payment"), (ii) an LAE reimbursement
payment equal to 13.0% of MPCI Imputed Premiums for each CAT Coverage policy it
writes (the "CAT LAE Reimbursement Payment"), and (iii) a small excess LAE
reimbursement payment of two hundredths of one percent (.02%) of MPCI Retention
(as defined herein) to the extent the Company's MPCI loss ratios on a per state
basis exceed certain levels (the "MPCI Excess LAE Reimbursement Payment"). For
1998 and 1997, the Buy-Up Expense Reimbursement Payment has been set at 27% and
29%, 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.
-10-
<PAGE>
In June 1998, the United States Congress passed legislation which provided
permanent funding for the crop insurance industry. However, beginning with the
1999 crop year, the Buy-Up Expense Reimbursement Payment was reduced to 24.5%,
the CAT LAE Reimbursement Payment was reduced to 11% and the $50 CAT coverage
fee will no longer go to the insurance companies.
The Company expects to more than offset these reductions through growth in fee
income from non-federally subsidized programs such as AgPI(R) and GEO Ag Plus(R)
initiated in 1998. The Company has also been working to reduce its internal
costs including agent's commissions. While the Company fully believes it can
more than offset these reductions, there is no assurance the Company will be
successful in its efforts or that further reductions in federal reimbursements
will not continue to occur.
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.
AgPI(R) protects businesses that depend upon a steady flow of a crop (or crops)
to stay in business. This protection is available to those involved in
agribusiness who are a step beyond the farm gate, such as elevator operators,
custom harvesters, cotton gins and businesses that are dependent upon a single
supplier of products, (i.e., popping corn).
These businesses have been able to buy normal business interruption insurance to
protect against on-site calamities such as a fire, wind storm or tornado. But
until now, they have been totally unprotected by the insurance industry if they
incorporate a production shortfall in their trade area which limited their
ability to bring raw materials to their operation. AgPI(R) allows the
agricultural business to protect against a disruption in the flow of the raw
materials it depends on. AgPI(R) was formally introduced at the beginning of the
1998 crop year.
Geo AgPLUS(TM) provides to the farmer the soil sampling results combined with
fertility maps and the software that is necessary to run their precision farming
program. Grid soil sampling, when combined with precision farming, allows the
farmer to apply just the right amount of fertilization, thus balancing the soil
for a maximum crop yield. Precision farming increases the yield to the farmer,
reduces the cost of unnecessary fertilization and enhances the environment by
reducing overflows of fertilization into the
-11-
<PAGE>
ecosystem. Geo AgPLUS(TM) is an IGF Insurance Company trademarked precision
farming division that is now marketing its fee based products to the farmer.
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 reinsurers. 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 various layers of stop-loss
reinsurance.
Certain other conditions of the Company's crop business may affect comparisons
of the Company's results and operating ratios with those of other insurers,
including: (i) the seasonal nature of the business whereby profits are generally
recognized predominantly in the second half of the year, (ii) the short-term
nature of crop business whereby losses are known within a short time period, and
(iii) the limited amount of investment income associated with crop business. In
addition, cash flows from the crop business differ from cash flows from certain
more traditional lines.
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 the
applicable rate 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.
-12-
<PAGE>
Results of Operations
For the three and six months ended June 30, 1998, the Company recorded net
earnings of $5,668,000 and $10,592,000 or $0.55 and $1.02 per share (basic).
This is approximately a 54.1% and 10.5% from 1997 comparable amounts of
$3,677,000 and $9,586,000 or $0.35 and $0.92 per share (basic).
Increased earnings reflect improved results from the nonstandard automobile
division due to improvements in both the loss and expense ratios. Prior year
results in the second quarter also included a one-time charge to earnings of
$5,300,000 for loss reserves. Crop results for the second quarter of 1998 were
up slightly over 1997 while year-to-date results for this division are virtually
flat with the prior year. This is due to volume gains offset by higher
commission expense, lower reimbursements and integration costs of the CNA
transaction.
-13-
<PAGE>
<TABLE>
<CAPTION>
For the three months
ended June 30,
1998 1997
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS:
<S> <C> <C>
Gross premiums written $79,530 $90,481
====== ======
Net premiums written $69,154 $74,255
====== ======
Net premiums earned $70,498 $65,139
Fee income 4,553 4,305
Net investment income 3,133 2,756
Net realized gain 673 742
------ ------
TOTAL REVENUES 78,857 72,942
------ ------
Losses and loss adjustment expenses 53,502 53,756
Policy acquisition and general and administrative expenses 18,681 18,368
Interest and amortization of intangibles -- --
------ -----
TOTAL EXPENSES 72,183 72,124
------ ------
Earnings before income taxes $ 6,674 $ 818
====== ======
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio 75.9% 82.5%
Expense ratio, net of billing fees 20.0 21.6
---- ----
Combined ratio 95.9% 104.1%
==== =====
CROP INSURANCE OPERATIONS:
Gross premiums written(2) $92,020 $56,647
====== ======
Net premiums written $35,560 $9,479
====== =====
Net premiums earned $28,460 $7,758
Fee income 350 1,448
Net investment income 112 43
Net realized capital gain 170 --
------ -----
TOTAL REVENUES 29,092 9,249
------ -----
Losses and loss adjustment expenses 18,679 4,269
Policy acquisition and general and administrative expenses(1) 3,897 (1,260)
Interest expense 50 13
------ -----
TOTAL EXPENSES 22,626 3,022
------ -----
Earnings before income taxes $ 6,466 $6,227
====== =====
</TABLE>
(1) Negative crop expenses are caused by inclusion of MPCI expense reimbursement
and underwriting gain. (2) Includes premiums assumed from CNA in accordance with
the Strategic Alliance Agreement.
-14-
<PAGE>
<TABLE>
<CAPTION>
For the six months
ended June 30,
1998 1997
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS:
<S> <C> <C>
Gross premiums written $169,506 $165,547
======= =======
Net premiums written $151,421 $133,843
======= =======
Net premiums earned $138,821 $128,244
Fee income 8,708 7,204
Net investment income 5,934 5,094
Net realized gain 2,641 1,684
------- -------
TOTAL REVENUES 156,104 142,226
------- -------
Losses and loss adjustment expenses 106,648 99,024
Policy acquisition and general and administrative expenses 36,804 35,492
Interest and amortization of intangibles -- --
------- ------
TOTAL EXPENSES 143,452 134,516
------- -------
Earnings before income taxes $ 12,652 $ 7,710
======= =======
GAAP RATIOS (Nonstandard Automobile Only):
Loss and LAE Ratio 76.8% 77.2%
Expense ratio, net of billing fees 20.2 22.1
---- ----
Combined ratio 97.0% 99.3%
==== ====
CROP INSURANCE OPERATIONS:
Gross premiums written(2) $178,195 $108,356
======= =======
Net premiums written $ 52,854 $16,680
======= ======
Net premiums earned $ 28,621 $7,768
Fee income 2,682 3,587
Net investment income 165 92
Net realized capital gain 170 --
------- -----
TOTAL REVENUES 31,638 11,447
------- ------
Losses and loss adjustment expenses 18,738 4,269
Policy acquisition and general and administrative expenses(1) 250 (6,026)
Interest expense 233 24
------- ------
TOTAL EXPENSES 19,221 (1,733)
------- ------
Earnings before income taxes $ 12,417 $13,180
======= ======
</TABLE>
(1) Negative crop expenses are caused by inclusion of MPCI expense reimbursement
and underwriting gain. (2) Includes premiums assumed from CNA in accordance with
the Strategic Alliance Agreement.
Consolidated gross premiums written increased 16.0% and 26.0% for the three and
six months ended June 30, 1998 compared to comparable periods in 1997 due to
growth in both the nonstandard auto and crop segments.
-15-
<PAGE>
Gross premiums written for the nonstandard auto segment decreased 12.1% for the
three months ended June 30, 1998 and increased 2.4% for the six months ended
June 30, 1998 compared to comparable periods in 1997. The decrease in the second
quarter primarily reflects certain program changes and rate increases taken in
Florida to improve loss experience.
Gross premiums written for the crop segment increased 62.4% and 64.5% for the
three and six months ended June 30, 1998 compared to comparable periods in 1997.
Such increase was due to the transaction with CNA, internal growth and new
products such as AgPI. Premium increases were noted in all lines of crop
insurance. Crop premiums for the three and six months ended June 30 are as
follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
CAT imputed $16,319 $13,031 $32,638 $26,063
MPCI 46,654 39,239 107,297 79,016
Crop hail and named perils 37,873 17,408 63,365 29,340
AgPI 7,493 -- 7,533 --
------- ------ ------- ------
108,339 69,678 210,833 134,419
Less: CAT imputed (16,319) (13,031) (32,638) (26,063)
------- ------ ------- -------
$92,020 $56,647 $178,195 $108,356
====== ====== ======= =======
</TABLE>
Remaining gross written premiums represent commercial business which is ceded
100% to an affiliate, Granite Reinsurance Company Ltd.
MPCI premiums are considered to be 100% ceded to the federal government for
accounting purposes. Quota share cession rates for other lines of insurance for
the three and six months ended June 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Nonstandard automobile 10% 20%
Crop hail 25% 40%
Named peril 50% 50%
</TABLE>
Fee income decreased 14.8% for the three months ended June 30, 1998 and
increased 5.6% for the six months ended June 30, 1998 as compared to the
corresponding periods of the prior year. The decrease in the second quarter of
1998 results from the Company's practice of offsetting CAT fees with crop LAE
costs. Such offset was greater in 1998. However, overall fees continue to
increase. Such increase was due to greater installment billings on nonstandard
automobile policies, which averaged 5.14% and 4.35% of gross written premiums in
1998 and 1997, respectively, and additional CAT fees on crop business due to
growth in volume.
Net investment income increased 16.5% and 18.7% for the three and six months
ended June 30, 1998 as compared to the corresponding periods of the prior year.
Such increase was due primarily to greater invested assets offset somewhat by a
declining yield due to market conditions.
The loss ratio for the nonstandard automobile segment for the three and six
months ended June 30, 1998 was 75.9% and 76.8% as compared to 82.5% and 77.2% in
1997. The loss ratio for the nonstandard automobile segment for the three and
six months ended June 30, 1997, excluding the $5.3 million reserve adjustment in
the second quarter of 1997 was 74.4% and 73.1%, respectively.
-16-
<PAGE>
The increase in the loss ratio in 1998 from 1997, excluding the effects of the
reserve adjustment in 1997, reflects increased severity costs and the effects of
certain pending rate increases. However, this loss ratio has improved from the
first quarter of 1998 which was 77.8%, due to the effects of recent rate
increases. The crop hail loss ratio in 1998 was 53.5% compared to 54.2% in 1997.
Policy acquisition and general and administrative expenses have increased as a
result of the increased volume of business produced by the Company. Policy
acquisition and general and administrative expenses rose to $23,088,000 and
$38,012,000 or 23.3% and 22.7% of net premium earned for the three and six
months ended June 30, 1998 compared to $17,514,000 and $30,317,000 or 24.0% and
22.3% of net premium earned in the corresponding periods of 1997. The expense
ratio, for the nonstandard segment improved to 20.0% and 20.2% for the second
quarter and year-to-date in 1998 as compared to 21.6% and 22.1% in 1997, due
primarily to reduced expenses from the Indianapolis operations (Pafco General
Insurance Company) resulting from lower commissions on multi-tiered products and
other efficiency implementations as well as higher billing fee rates.
Crop segment expenses include agent commissions, stop loss reinsurance costs and
operating expenses which are offset by MPCI Expense Reimbursements and MPCI
Underwriting Gain. The increase in expenses results primarily from a 2% lower
MPCI Expense Reimbursement for 1998 versus 1997, higher commissions due to
competition and integration costs of the CNA transaction offset by a higher MPCI
Underwriting Gain due to volume. This gain is an estimate until later in the
year when crops are harvested and losses are known. The estimated gain ratio in
1998 was consistent with 1997 at 10%.
Amortization of intangibles includes goodwill from the acquisition of Superior,
additional goodwill from the acquisition of the minority interest position in
GGSH, debt or preferred security issuance costs and organizational costs. The
increase in 1998 reflects the effects of the Preferred Securities Offering in
late 1997.
Interest expense primarily represents interest incurred since April 30, 1996 on
the GGS Senior Credit Facility. The GGS Senior Credit Facility was repaid with
the proceeds from the Preferred Securities Offering.
Income tax expense was 36.3% of pre-tax income for the three and six months
ended June 30, 1998 compared to 34.8% and 35.7% in 1997. The increased rate is
due to higher goodwill amortization.
Distributions on Preferred Securities are calculated at a rate of 9.5% net of
federal income taxes.
-17-
<PAGE>
Financial Condition
The Company's total assets of $803,191,000 at June 30, 1998 increased
$273,353,000 from $529,838,000 as of December 31, 1997. The primary reasons for
this increase was an increase in cash and invested assets due to continued
growth in premiums, normal receipt of crop funds from the FCIC, increases in
receivables from insureds and reinsurers due to continued growth in volume and
growth in prepaid reinsurance in crop operations due to the accounting for MPCI
with the FCIC.
Net cash provided by operating activities improved to $37,445,000 in 1998 from
$26,510,000 in 1997 due to continued premium growth and normal receipt of crop
funds from the FCIC. This additional cash flow was used to increase invested
assets. Financing activities included normal activities on the Company's line of
credit for crop operations. Loans to related parties is primarily a $3.3 million
loan to an affiliate, Granite Re, for reinsurance activities and certain
short-term officer loans. During 1998, the Company bought back 65,800 treasury
shares as part of an announced buy back program.
-18-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's insurance subsidiaries are parties to litigation arising
in the ordinary course of business. The Company believes that the ultimate
resolution of these lawsuits will not have a material adverse effect on its
financial condition or results of operations. The Company, through its claims
reserves, reserves for both the amount of estimated damages attributable to
these lawsuits and the estimated costs of litigation.
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
-19-
<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, 1998 By:______________________
Alan G. Symons
Chief Executive Officer
Dated: August 12, 1998 By:______________________
Gary P. Hutchcraft
Vice President, Treasurer and
Chief Financial Officer
Dated: August 12, 1998 By:______________________
James J. Lund
Vice President and
Chief Accounting Officer
-20-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001013698
<NAME> Symons International Group
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 179,041,000
<DEBT-MARKET-VALUE> 179,041,000
<EQUITIES> 39,957,000
<MORTGAGE> 2,160,000
<REAL-ESTATE> 448,000
<TOTAL-INVEST> 233,165,000
<CASH> 22,464,000
<RECOVER-REINSURE> 106,233,000
<DEFERRED-ACQUISITION> 17,618,000
<TOTAL-ASSETS> 803,191,000
<POLICY-LOSSES> 171,557,000
<UNEARNED-PREMIUMS> 226,388,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 35,000
0
135,000,000
<COMMON> 38,199,000
<OTHER-SE> 51,650,000
<TOTAL-LIABILITY-AND-EQUITY> 803,191,000
167,442,000
<INVESTMENT-INCOME> 6,264,000
<INVESTMENT-GAINS> 2,811,000
<OTHER-INCOME> 11,390,000
<BENEFITS> 125,386,000
<UNDERWRITING-AMORTIZATION> 1,021,000
<UNDERWRITING-OTHER> 38,012,000
<INCOME-PRETAX> 23,256,000
<INCOME-TAX> 8,438,000
<INCOME-CONTINUING> 14,818,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,592,000
<EPS-PRIMARY> 1.02
<EPS-DILUTED> .99
<RESERVE-OPEN> 136,772,000
<PROVISION-CURRENT> 122,496,000
<PROVISION-PRIOR> 2,890,000
<PAYMENTS-CURRENT> 64,016,000
<PAYMENTS-PRIOR> 43,677,000
<RESERVE-CLOSE> 17,557,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
